What is ‘best practice’?

It is intuitively appealing that the concept of board ‘best practice’ has value: value to directors and their boards, value to shareholders, and to broader stakeholder groups. The term ‘best practice’ implies there is a suite of reasonably static transferable practices and procedures that, if adopted, position the board as being a best practitioner.

No doubt there are some practices that all boards should employ, and there may even be value to be had in attempting the practices of other supposedly successful boards. Consequently, the adoption of best practice implies the board has arrived, at least temporarily at some effective end-point.

However, it is time to stop and question what actually is ‘best’, and not simply accept it as being something currently promoted. Surely good boards, those that strive to achieve the best practices for themselves that actually contribute to organisational performance, create an environment that may be relatively stable but not necessarily static. The concept of arriving at some point being an anathema to them. Therefore, at risk with the concept of best practice is that board development and learning ceases to be necessary.

The full extent of this way of thinking is that our boards could reach an end point where we can be deceived into thinking we don’t need to learn or develop any more. Simply adopt best practice. If best is to include continuous learning and development, then static practice it is not. For effective board practice cannot be constant, it emerges from continuous learning and hence is subject to change.

Best practice exemplars may be useful, but are not an end in themselves. They appear to be just the beginning. Reliance upon, or the quest for, board best practice may introduce more, not less risk to the board. More so, if it is not also learning and developing to produce better responses to new circumstances that it both creates and to which it responds.

Boards ought to embed learning as one of their key attributes, if not the single key attribute. Yet the idea of embedding learning in board practices is not well- developed in practitioner material, the research literature or associated commentary. Hence, in the absence of deliberate learning and/or development practices, the encouragement of best practice ought to be undertaken with caution. A contrast to that which is being openly promoted. For how long will best remain good enough? A month, a quarter, or a year? More or less?

Some boards appear to be immune from the omnipresent fall from grace. These boards have grown, sheltered, nurtured, developed, and sustained their respective organisations for decades and decades, sometimes centuries. To do so they must either be actively learning, or being grossly overindulged with good luck.

We suspect the former. They are not just adopting the ubiquitous off-the-shelf battery of best board practices but must be responding to, and creating opportunities for, their respective organisations that are then passed among directors through both individual and deliberate collective learning.

Boards have a fiduciary responsibility to the organisations they serve. The meaning of fiduciary, from which fiduciary duties arise, requires the fiduciaries themselves have an obligation to be first learning in order to be able to act. The actions of fiduciaries then require new learning from which to observe and understand the impacts of their decision-making.

The etymology of the word governance, from the Greek word kubernetes, also has a more sophisticated meaning. It is firstly, to steer, direct and guide; and secondly, albeit implicitly, to learn. A yachting analogy is useful. Learning is implicit in steering – taking the helm. To keep steering, the person at the helm must continuously learn of the environmental changes requiring synchronous course adjustments. The very moment someone moves the helm of a yacht requires immediate reflection on that steering’s impact.

Understanding and subsequently being able to predict causality is central to boards’ decision-making. The rarely mentioned process between decision- making and establishing causality is board learning – both that of the individual director and that of the board as a whole, namely, the collective experience of corporate governance.

The Cadbury definition of governance, namely a “system by which companies are directed and controlled”, requires that directors learn in order to continually better direct and control. All common theories of governance, including agency theory, stakeholder theory, the resource- based view and network theory, require directors learn in order to act. Which is a significantly different proposition to that of adopting ‘best practice’, unless of course best practice is board learning: A deliberate and orchestrated collective experience using both crystalline and fluid intellect.

Governance is typically enacted in cycles, which includes but are not limited to committee cycles; the board meeting cycle; an annual planning and review cycle; and, a longer term strategic cycle.

The boardroom meeting cycle – the collective – whether it is recognised or not, should be a learning cycle. Being part of a wider organisational system, governance must constantly change to meet and create the complex and evolving array of internal and external factors that challenge every organisation.

For each director, governance emerges as a deliberate dance between learning and contributing simultaneously. And, for the board this synchronicity ought to occur both during decision-making and its subsequent review. Therefore, learning and directing are indistinguishably wedded. Yet, of board activities, learning appears to be the silent partner for many directors, and consequently the boards within which they contribute. But we suspect that collective learning is not just the silent partner but is curiously absent from much board activity. If learning is not an explicit attribute of boards, its absence could well thwart a reasonable attempt at enhancing board effectiveness.

The problem is not that directors are uneducated. Directors are often highly educated and have been successful in their education. Directors use that education and are typically successful in their other realms of work. Many have acquired qualifications and expect that to be a ticket to a good job (of which the MBA has long become the classic talisman). But many have not been educated enough to question what they have been taught; to question their own reasoning and assumptions; to distinguish between their own and others’ assumptions and assertions; and, to embrace critical reflection.

As we may have all seen, directors fail to question the information they have been provided. Worse, as directors, we often become defensive when our reasoning is challenged. Boards do not appear to openly reflect on the decision-making that led them to make certain decisions, and seldom engage in double-loop learning.

Boards repeat mistakes – recent notable failures such as Carillion (FTSE), Mainzeal (NZ), and Wirecard (DAX) – are all characterised not by one mistake, but the same or similar mistake being repeated over and over again.

The abundance of hubris and lack of humility results in the assertion that past successes apply in new situations. Directors’ use of crystalline intelligence, predominantly the knowledge of facts and procedures, influenced by personality and temperamental factors, appears to be a significant part of the problem.

Why do we as directors not learn from our mistakes? Is it because we find learning tiring and have limited time for it? Do we get trapped in a cycle of hubris?

Yet, emerging literature suggests that wisdom is the sole – for the time being anyway – characteristic of board success. Wisdom is a specific form of experienced- driven, highly advanced cognitive and emotional development, the basis of which is the deliberate application of collective fluid intellect.

In contrast to crystalline intelligence, fluid intelligence is a novel problem identification and solving capacity deliberately applied when crystalline intelligence is considered to be of little if any use. Board learning, the collective experience, appears to emerge then from the deliberate use of fluid intellect – as opposed to the application of routine processes and procedures.

Consequently, what is it that really matters when directors are selected? What are the correct indicators of effective contribution? Is it their qualifications? Their knowledge and experience? Or is there something more? Is it not the ability to critically reflect, learn, and learn quickly?

There are two interdependent learning functions of boards. Learning by the individual director, occurring independently of others (in or outside the board), and learning by the board as a collective. Learning as a skill appears to conform to the four stages of skill development: unconscious incompetence, conscious incompetence, conscious competence, and unconscious competence. Unconscious competence is seen as the pinnacle of skill development and describes mastery.

In the context of boards, and learning by individual directors, its effective proxy appears to be wisdom. However, whether or not that same level of mastery can be achieved for collective learning remains moot. It is more likely to be expected in the form of conscious competence, a deliberate activity undertaken by the board while in session. Otherwise, the activity is mere coincidence.

The results of directors that learn and their boards that learn can be observed. Inherent biases, held both individually or collectively, are openly challenged. Hubris, too, is challenged and transformed into a positive contribution.

Directors can expect that learning and development as an embedded attribute will be transformational both personally and corporately. Learning at the individual director level becomes an unconscious competence. While that of the board, as a collective of directors, is embraced as being consciously competent.

For these directors, learning and development is anticipated as being exhilarating, of which they are unlikely to get enough. As a consequence their boards dynamically change in tune with their organisation’s needs and opportunities that they wish to create. The frame offered by current best practice that does not embed learning and development is seen as a constraint, as opposed to an opportunity.

Consequently, best practice cannot be static, it must be dynamic. Not malleable as to its standards, but dynamic enough to be constantly applying wisdom to new circumstances to find a yet better practice.

This is necessary because the macroenvironment is unstable, so boards must learn at a rate faster than the rate of change or their organisations will face the consequences: An outcome to which no board appears immune. 

Research on corporate governance at the Massey Business School over the past two decades has produced a stream of practitioner articles, academic papers and doctoral and masters theses. This article has emerged from the study of board learning by Peter Allen.