Toronto – A new study by governance scholars from the University of Toronto’s Rotman School of Management and INSEAD indicates a disparity in the ability of European board directors to match their North American counterparts. According to a benchmarking survey of nearly 300 European directors from 20 countries conducted by the Rotman School’s Clarkson Centre for Business Ethics and Board Effectiveness (CCBE), and the INSEAD Corporate Governance Initiative, European directors lag their Canadian and U.S. peers in terms of governance practice.
The survey’s primary conclusions are that European directors demonstrate a lack of understanding of their company’s industry. In addition, directors act too much like managers rather than board members and fail to devote sufficient time to their director duties. Canadian directors seem to place greater importance on key governance areas—such as industry expertise—than do their European counterparts. In all, the survey examined nearly a dozen factors deemed to be impeding director performance.
The annual survey, initiated this year, draws upon the thought leadership of Prof. Tim Rowley of the Rotman School, who is currently a visiting professor at INSEAD and Prof. Ludo Van der Heyden, The Mubadala Chaired Professor in Corporate Governance and Strategy at INSEAD and Academic Director of the INSEAD Corporate Governance Initiative.
One area where Canadian boards strongly distinguished themselves was in the importance given to executive sessions—forums where directors can express themselves freely and privately. By a 3-to-1 ratio, Canadian boards believed this forum more important than did their European peers.
The study also offers several recommendations for how European directors might improve their performance. Improvements at the board level include educating directors to gain a greater understanding of “duty of care” toward the organization itself, rather than acting to directly please its shareholders. In addition, directors might gain greater industry knowledge while paying more attention to “process skills,” including board and director evaluation practices.
The survey also highlights a disparity in terms of gender diversity on European boards. “The picture is a bleak one,” says the study. “Nearly one out of every two EU boards has no women directors, which is quite shocking, given all the discussion … on the value of women in improving board process and collective discussion.” Here, too, Canadian boards perform better, but only slightly, with nearly 40% of their boards having no women directors.
A related issue uncovered by the survey is the general lack of formality in terms of board nominations. About two-third of all European directors gain their governance role through personal contacts rather than through management recommendations for search firms. As a result of such informality, top talent may be being overlooked. One of the key factors behind board effectiveness is the effectiveness of the board nomination process.
Overall, the benchmarking survey’s findings indicate the need for European directors to advance their formal governance education.
The CCBE is well known in corporate governance circles for their work on measuring and setting standards for Canadian governance best practices, including their annual Board Shareholder Confidence Index, which is featured prominently in The Globe & Mail’s Board Games series. The ratings measure the adoption of effective practices by Canada’s top 250 public issuers and since their creation have contributed to significantly improved the standards of corporate governance in Canada and hence the attractiveness of Canadian capital markets.
Rotman Executive Education offers a full suite of governance programs including the Directors Education Program which was jointly developed by the Institute of Corporate Directors and the Rotman School to help directors strengthen their skills, expand their knowledge and be more effective in creating and protecting value for the organizations and corporations they serve. The DEP is taught by leading business faculty, experienced directors and governance experts at seven of Canada’s top business schools. Since the launch of the DEP, over 3,000 directors have completed the program. Further information is available at www.rotmanexecutive.com.
The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world’s most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. For more information, visit www.rotman.utoronto.ca.
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