There is a corporate governance talent gap in European boards compared to their North American, especially Canadian, counterparts, according to a new survey from the University of Toronto’s Rotman School of Management and INSEAD.
The main conclusion of this 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, was that Europe lags in governance practice behind the Canadians and US board directors.
Canada is a good benchmark, as the well respected ISS Governance ratings puts it at the very top in terms of best practice adoption, with the US placed second, and then the European countries. The researchers also compare their survey results with those of the US directors in the annual PwC Governance Survey and by Global Directors in the McKinsey Annual Survey.
Commenting on the survey the researchers offer several recommendations as to how European boards might improve their performance:
Board level directors should be educated to gain a greater understanding of ‘duty of care’ toward the organization itself, rather than acting to directly please its shareholders
Directors should also gain greater up-to-date knowledge of the industry their business operates in and the markets it serves
There should be a greater distinction between the actions of directors and those of the company’s executives
The survey found insufficient time was devoted to director duties, with directors being too busy with outside matters.
Board processes need to be more effective and robust. This includes board evaluation, the holding of executive sessions — forums where directors can express themselves freely and privately, and, of course, CEO and senior executive remuneration. Use of board informal sessions.
The lack of effective board evaluation (the processes for individual director evaluation and collective board evaluation being distinct) was troubling, for it indicates that board practices may be insufficiently evaluated, or evaluated without enough due diligence. The conclusion being that poorer governance practices are inadequately corrected and improvement is either absent or too slow.
Europeans appear to do marginally better than their Canadian peers in the area of gender diversity. Canadians show more ‘tokenism’ than the relatively more genuine effort that is developing in gender diversity at European board level — a change that originated in Norway about a decade ago and has now spread through other parts of Europe. However the EU picture is still 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.” Better board effectiveness in an increasingly global context, unequivocally calls for greater diversity amongst directors.
A related issue uncovered by the survey is the general lack of formality in terms of board nominations. About two-thirds of all European directors gain their governance role through personal contacts rather than through management recommendations or 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.
Another conclusion that emanates from the study is that better education and training of directors and boards on the topic of board effectiveness would contribute to remedying current gaps. Overall, the benchmarking survey’s findings indicate the need for European directors to advance their formal governance education.
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.