Role of the board for organisational resilience
How does the board of directors contribute to organisational resilience? FRS researchers assessed the relative importance of its advisory and monitoring roles in times of crisis in a working paper.
In most corporations, the board of directors plays crucial roles of monitoring the management and providing high-level counsel. While directors need to take on these two main roles at the same time, the advisory and monitoring functions unfortunately compete for a director’s time and focus. Future Resilient Systems (FRS) researchers have completed a study to assess the relative importance of directors’ advisory and monitoring roles in times of crisis.
Prof. Ettore Croci, Prof. Gerard Hertig, Dr Layla Khoja, and Prof. Luh Luh Lan looked into how board members contribute to the corporation’s resilience in a working paper external page The Advisory and Monitoring Roles of the Board - Evidence from Disruptive Events published by the European Corporate Governance Institute.
As the board’s effectiveness depends on the board’s structure, composition, and characteristics, as well as the directors’ background and expertise, the study focuses on board characteristics as proxies for the board’s monitoring and advisory roles.
Based on manually collected data in the United States, the findings show that four board-related variables affect market reactions when corporations experience disruptive events: board independence, industry expertise, how busy the directors are, and board size.
Specifically, the study shows that board independence and the presence of directors with industry expertise exacerbate the negative effect on share price during disruptive events, whereas the converse is true for busy director and larger boards.
These reactions imply that, in times of crisis, advice-oriented boards fare better than monitoring-oriented boards. For full details, please download the working paper external page The Advisory and Monitoring Roles of the Board: Evidence from Disruptive Events
Prof. Luh Luh Lan was interviewed in the Financial Times in relation to findings of this working paper in the article external page What coronavirus tells company boards about the next crisis