- A survey of 62 non-executive directors from various industries explored the relationship between board activities and an organization's ability to adapt to changing environments and innovate. - The results suggest that directors engage in activities beyond traditional monitoring, such as interacting with clients and employees to gather information, and participating in strategy development. - However, activities related to identifying new opportunities and threats were performed least frequently on average. Increased engagement in these "sensing" activities may benefit organizations facing unpredictable change.

1. REPORT ON A SURVEY OF BOARD DIRECTOR ACTIVITY RELEVANT TO MANAGING STRATEGIC RISK
(CHANGES IN THE BUSINESS ENVIRONMENT AND INNOVATION)
Investigators: Conan Hom, Prof. Daniel Samson, Dr. Peter Cebon, Prof. Christina Cregan
The University of Melbourne
Human Ethics Research Project ID: 1339279
November 2, 2015
EXECUTIVE SUMMARY
This report demonstrates a way to study board activity (with a focus on non-executive director activity) in
relation to strategic issues facing the organization rather than specific functions of boards (e.g., monitoring,
providing resources). We conducted a quantitative survey to explore non-executive director activities that
may potentially contribute to creating or maintaining a dynamically capable organization that can respond
to uncertain, changing, or novel environments or can engage in innovation. The results suggest that:
• There are several relevant categories of activities that directors may perform and their perceptions
of their duties and of their organizations may influence their choice and intensities of such
activities,
• Director activities may go beyond traditional notions of monitoring and providing counsel, and
• Based on the activities measured, directors may have the potential to contribute positively to the
capabilities of their organizations.
Furthermore the results may indicate ways in which directors can prepare for and perform their traditional
roles.
INTRODUCTION AND OBJECTIVES OF THE PROJECT
The purpose of this research was to develop a better understanding of board activities in a relevant
strategic setting. The project sought to measure non-executive director activities that might contribute to
the dynamically capable organization. A dynamically capable organization is able to adequately address
(either proactively or reactively) changes in business the environment, especially changes that are
unfamiliar to the organization or that may require innovative responses. In this setting, the project focused
on a level of director activities that are not organization specific so as to try to produce findings that could
be a base for the future development of best practices for directors and boards.
The project centered on two main questions:
• What activities do directors do at the individual or group level that may contribute to dynamic
capability?
• What director beliefs (about their duties, their organizations and their organizations' business
environment) may be related to the activities they do?
Because of survey length considerations, only secondary attention could be given to developing potential
measure of the effectiveness of the activities.
BACKGROUND
Long Term Organization Survival and the Dynamically Capable Organization
The increasingly interconnected, fast paced and changing world can put a premium on the organization's
ability to detect emerging threats and opportunities from the business environment (the changes) and to
deal with them in an appropriate and timely manner. This ability may be a critical factor to the
organization's strategy and may speak to the important issue of what should the organization do for long
run survival and prosperity.
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2. Contemporary discussions of boards and directors may be subordinate to the strategic issue above. Two
significant discussions are on directors as (1) monitors of the organization, in particular, of the executives;
and as (2) providers of resources. The first focuses on the board’s duty to know what is going on within the
organization (monitoring). In this area there is much practical advice on how to properly incentivize
managers, ratify strategy (including rules on who can vote), and, in the wake of failures such as Enron,
oversee accounting and organization disclosures. In the second area, there is broad recommendation that
directors should serve as counsel or as sounding boards to management.
These approaches assume that somehow either management or the board know what the right strategy
should be. However, when threats and opportunities are novel to the organization (such as a technological
breakthrough) or when the organization may need innovative solutions, determining the correct strategy,
or even recognizing that there may be an issue, can be a paramount challenge since there may be elements
beyond the experience and knowledge of management, the non-executive directors or both. These may
have important implications. For example, it might not be advisable for directors to solely rely upon
information that comes from management as even the well-meaning manager cannot know everything. At
the same time, discovering these novel changes and creating successful and innovative solutions may
require a collaborative process with multiple viewpoints on issues (sensemaking).
Our approach takes the view that a comprehensive investigation into how boards approach a strategic
problem (a problem originating from the environment) is necessary. Our theoretical view is that
organization activities that are related to:
• Sensing threats and opportunities in the business environment
• Seizing them (discussing, creating, ratifying, and modifying strategy), and
• Transforming the organization as necessary in order to carry out the strategy,
are key to a dynamically capable organization that can address novel and innovative challenges in a timely
and effective manner (Teece, 2007; Wheelwright & Clark, 1992). These may include some of the activities
of monitoring and resource provisions that have been previously discussed above.
To understand what directors may do in relation to these activities, we developed an approach that
attempted to address the weaknesses of the predominant research methods used to study boards.
A New Approach to Board Research Methods
Much of the academic research on boards has taken two paths:
Board Demography: There have been rigorous studies focusing on the composition of the board (board
demographics) with conjectures as to what directors may be doing because of the presence of certain types
of directors on the board. The advantage of this method is that it avoids privacy and confidentiality
problems and can be used to study a broad number of organizations. However its main disadvantage is
that, from a boardroom activity aspect, composition recommendations are limited in how they can help
individual directors or boards become more effective based what they do. We believe that director activity
could be a possible explanation as to why organizations with similarly constructed boards may perform
differently.
Case study: Other research on board activity has consisted of case studies and anecdotes. These studies
are limited in how they can contribute since their findings on director activities may be specific to a
particular organization. Furthermore this type of research may bring difficulty in spotting general trends.
In an attempt overcome some of the deficiencies of either approach, our project developed a quantitative
way to directly measure director activity.
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3. Survey Method
Our study, being a quantitative measurement of board activities and duties, is one of the first of its kind in
academic research on boards. To develop the survey for this study, we interviewed and held focus groups
with directors in Australia and the US and reviewed the questions with specialists. After preliminary field
testing, we released the survey through a combination of methods such as mail to non-executive directors
in ASX companies and Australian health organizations; and announcements (email, posting to websites) to
individual directors and director professional practice groups which had members across the world. As
control measures we focused on non-executive directors from Anglo-American corporations.
The survey focused on director activities at the individual and board level, and NED perspectives bout
themselves, the board, the business environment and the rest of the organization. Because the survey is
one of the first of its kind, considerable effort and allocation of survey space was devoted to the potential
questions on director activities and their perspectives. Only limited attention could be given to the
development of suitable performance measures.
The list of the activities that were measured is in Appendix A. The list of director perceptions is in Appendix
B.
Survey Findings
The Respondents (numbers, industries, countries etc.)
• 62 Non-Executive directors
o 55 from Anglo-American organizations (AUS (36), UK (3), NZ (4), IRL (1), USA (10), SA (1))
o 7 unknown
• Most represented industry: Health care and social assistance (30.2%)
While the number of responses was sufficient for statistical analysis, the non-randomness of the survey and
the representation significant representation of a particular industry suggest caution in the generalizability
of the results.
For findings 1 to 5:
• µ = average frequency of the specified activity.
• 1 = never, 2 = rarely, 3 = sometimes, 4 = often, 5 = very often.
Finding 1: Activities associated with sensing
Activities Performed by Individual Directors
• IA08: Attend trade shows and conferences (µ = 2.63).
• IA09: Interact with (e.g., meetings, site visits, phone calls) the organization's clients with prior
executive management approval to do so (µ = 2.40).
• IA10: Interact with the organization's clients without prior executive management approval to do
so (µ = 1.68).
• IA11: Interact with non-Top-Management employees with prior executive management approval to
do so (µ = 2.87).
• IA12: Interact with non-Top-Management employees without prior executive management
approval to do so (µ = 2.05).
• IA13: Interact with the organization's suppliers with prior executive management approval to do so
(µ = 1.88).
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4. • IA14: Interact with the organization's suppliers without prior executive management approval to do
so (µ = 1.46).
• IA16: Interact with key stakeholders and/or large investors without prior executive management
approval to do so (µ = 2.35).
The average frequencies these activities were performed ranged between “rarely” (1) and “sometimes” (3)
Sensing related director activity was:
• Positively predicted by the perception of the importance of the board’s duty to provide resources:
some of these activities may thus be linked with directors’ efforts to prepare to provide resources,
such as gathering information from the outside or from sources other than management;
• Negatively predicted by the perception of the importance of the board’s duty to prevent downside
risks / events.
Finding 2. Activities associated with seizing (strategy)
Activities Performed by Individual Directors
• IA03: Engage in informal discussion (outside of meetings) with each other (µ = 3.79).
• IA04: Engage in informal discussion with the MD/CEO or other top executives when asked by such
top executives (µ = 4.05).
• IA05: Initiate informal discussion with the MD/CEO or other top executives (µ = 3.73).
• IA06: Bring issues and/or strategies to the MD/CEO or other top executives (µ = 3.77).
The average frequencies of the activities (individual directors) were “often” (4) or slightly less than that.
These types of activities, while associated with providing counsel to management and each other, may also
support sensemaking efforts to understand emergent and novel issues.
Activities Performed By Formal Board Group(s):
• GA05: Create courses of action (µ = 3.63).
• GA06: Plan scenarios (µ = 3.10).
• GA07: Create strategic vision (top down) (µ = 3.61).
• GA08: Use portfolio management techniques (µ = 2.63).
• GA11: Utilize outside consultants (µ = 2.81).
• GA12: Develop situation specific performance measures (µ = 3.08).
• GA13: Review service/product development efforts to ensure that they are in line with what
customers want (or need) (µ = 3.02).
The average frequencies of the seizing activities (group) were generally above “rarely” (2) and less than
“often.” (4)
Seizing related director activity (individuals) was:
• Positively correlated with the perceptions of (1) the board’s duty to provide resources and (2) the
safe to fail environment of the organization, and
• Negatively correlated with the perception of the board’s duty to prevent downside events.
The correlation of the board’s duty to provide resources and the individual activities may indicate that a
significant way directors try to contribute may occur informally and outside of the boardroom.
Seizing related director activity (group) was:
• Positively predicted by the perceptions of (1) the ability of the NEDs, (2) the importance of the
board’s duty to create upside, and (3) the importance of the board’s duty to prevent downside.
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5. Finding 3. Activities associated with transformation.
Activities Performed by Individual Directors – Passive:
• IA01: Review management reports (µ = 4.27).
• IA02: Review quarterly and annual reports before filing (outside of audit committee) (µ = 4.16).
Activities Performed by Individual Directors – Active:
• IA07: Assist with managerial (operational) duties in the organization (µ = 2.15).
The average frequencies for the passive individual activities were above “often” (4) but below “very often”
(5). The average frequency for the active individual activity was slightly above “rarely” (2).
Activities Performed By Formal Board Group(s):
• GA01: Use outcomes to measure the performance of the MD/CEO or other top executives (µ =
3.77).
• GA02: Use process milestones to assess the performance of the MD/CEO or other top executives (µ
= 3.74).
• GA03: Assess MD/CEO or other top executives against a structured plan (strategy) (µ = 3.77).
• GA04: Decide upon the proposals of the MD/CEO or other top executives (µ = 4.15).
The average frequencies of the group activities were generally slightly below “often” (4).
Individual passive activity was:
• Negatively predicted by the perception of the organization’s overall ability.
Individual active activity was
• Positively predicted by the perception of (1) risk tolerance in the organization, (2) the safe to fail
environment of the organization, and (3) the importance of the board’s duty to provide resources
to the organization: this may mean that in an organization which supports taking strategic risks,
directors may be more involved – perhaps this may allow them to better understand the nature of
the external problems and uncertainties facing the organization.
• Negatively predicted by perception of NED trust in the managing director/CEO and, (2) the
importance of the board’s duty to create upside for the organization.
Group activity was:
• Positively predicted by the perception of the importance of the duty of the board to prevent
downside risks.
Finding 4. Organization Performance
The activity groupings above did not correlate with the organization performance measures in this survey.
Because the bulk of the survey was devoted to developing measures of activity groups, an in depth
investigation into exploring performance measures was not possible. The questions asked for information
that new NEDs might easily know such as 1-3 year financial performance of the organization. However our
measures may have been inappropriate if evidencing of dynamic capability may have a longer time frame.
Time horizons may vary per industry, and furthermore, at any point in time, change may involve only a
small part of organization (though cumulatively over time the change may be large). Finally dynamic
capability may not necessarily create benefits that can be represented financially.
Discussion and Conclusion
In the sample, individual director activity may be a significant source for obtaining information on the
environment that is not provided by the executives. These activities may be important for directors to
develop their own points of view and to gather additional information, and may help the directors go
beyond the role of monitor of the organization. However, these activities to sense developments in the
business environment seemed to be performed the least frequent on average. From a practice perspective,
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6. if detecting and appreciating threats and opportunities are important - such as may be the case in dynamic
or fast paced industries - it may be beneficial for non-executive directors to engage in more of these
activities. Furthermore, better knowledge of the business environment may prepare directors to better
support or guide the executives.
As the board is a strategic entity, it may be no surprise that director involvement in strategy development
(seizing) is generally often in this sample. In the sample, the directors do not appear to be limited to the
role of ratifying management proposed strategy and thus may be more involved in strategy formulation.
This might support organizational efforts to overcome inertia and change, especially when there is high
uncertainty such as when innovation related strategies may be needed. Non-executive director
participation in strategy formulation may be important for absorbing the risk in such a setting.
Director involvement in organization transformation efforts appeared to consist of many of the monitoring
type of activities that have been previously recommended or prescribed in the legal duty of care of
directors. In this sample, directors may not simply be reliant on project outcomes, Usage of milestones may
be supportive of innovation which may require regular winnowing of projects that appear less likely to
succeed in order to redirect resources to the projects which have most likelihood of success.
The findings in this sample also suggest that approaches to directorship duties and perceptions of the
organization may have roles as to whether dynamic capability related board activity occurs. Boards which
are more concerned with providing resources, promoting a safe to fail environment that is tolerant of risk
are more likely to perform these activities: the directors may be more involved than what the duties in their
traditional roles may imply. This greater involvement may help directors better understand the risks of
organizations facing strategic uncertainty.
On the other hand board concern with downside risks may dampen relevant director activity at the
individual level but increase formal NED group involvement. For example, sensing activities may decrease
as concerns about downside (which include concerns about executive motivations) increase. As some
activities appear to be performed regardless of approaches used, it may be useful in a future study to
examine how those activities are performed change as a result of different approaches and perceptions of
the directors.
Finally, the findings suggest that some director contribution may occur informally and outside of the board
meeting. There has been previous focus on the independence of directors as a way to prevent special
interest of management. Independence of directors in this aspect may have great influence on formal
voting procedures and oversight. However, consultation and sensemaking activities, may present a
different method in which non-executive directors may contribute. That is, they may be able to contribute
to strategy formulation and sensemaking. This may run counter to assumptions that non-executive
directors cannot know enough about the organization’s business to be legitimate participants in
organization strategy. Future studies could be directed towards determining the effectiveness of the
informal, outside of the boardroom activities of the non-executive directors.
Appendix A. Activities Measured
Scale: 1=Never, 2=Rarely, 3=Sometimes, 4=Often, 5=Very Often
Individual Activities
• IA01: Review management reports.
• IA02: Review quarterly and annual reports before filing (outside of audit committee).
• IA03: Engage in informal discussion (outside of meetings) with each other.
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7. • IA04: Engage in informal discussion with the MD/CEO or other top executives when asked by such
top executives.
• IA05: Initiate informal discussion with the MD/CEO or other top executives.
• IA06: Bring issues and/or strategies to the MD/CEO or other top executives.
• IA07: Assist with managerial (operational) duties in the organization.
• IA08: Attend trade shows and conferences.
• IA09: Interact with (e.g., meetings, site visits, phone calls) the organization's clients with prior
executive management approval to do so.
• IA10: Interact with the organization's clients without prior executive management approval to do
so.
• IA11: Interact with non-Top-Management employees with prior executive management approval to
do so.
• IA12: Interact with non-Top-Management employees without prior executive management
approval to do so.
• IA13: Interact with the organization's suppliers with prior executive management approval to do so.
• IA14: Interact with the organization's suppliers without prior executive management approval to do
so.
• IA15: Interact with key stakeholders and/or large investors with prior executive management
approval to do so.
• IA16: Interact with key stakeholders and/or large investors without prior executive management
approval to do so.
Group Activities
• GA01: Use outcomes to measure the performance of the MD/CEO or other top executives.
• GA02: Use process milestones to assess the performance of the MD/CEO or other top executives.
• GA03: Assess MD/CEO or other top executives against a structured plan (strategy).
• GA04: Decide upon the proposals of the MD/CEO or other top executives.
• GA05: Create courses of action.
• GA06: Plan scenarios.
• GA07: Create strategic vision (top down).
• GA08: Use portfolio management techniques.
• GA09: Discuss MD/CEO related issues without the MD/CEO present.
• GA10: Discuss non-MD/CEO-related issues without the MD/CEO present (e.g., strategy).
• GA11: Utilize outside consultants.
• GA12: Develop situation specific performance measures.
• GA13: Review service/product development efforts to ensure that they are in line with what
customers want (or need).
Appendix A. Director Perceptions Measured:
• The importance of the board’s duty to ensure the creation of organization upside (potential)
• The importance of the board’s duty to prevent downside (losses)
• The importance of the board’s duty to provide resources
• Hostility of the business environment
• Uncertainty of the business environment
• Dynamism of the business environment
• Proactiveness of the organization
• Risk tolerance of the organization
• Innovative culture of the organization
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8. • Safe to fail culture of the organization
• Ability of the top management team, NEDs and rest of organization
• Trust between the NEDs
• Trust in the CEO
References:
Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable)
enterprise performance. Strategic Management Journal, 28, 1319–1350.
http://doi.org/10.1002/smj.640
Wheelwright, S. C., & Clark, K. B. (1992). Revolutionizing product development. New York, NY USA: The Free
Press.
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