The appointment process of a NED is specific to both the external and internal context within which the recruiting organisation operates. External contextual factors, such as:
the corporate governance regulatory framework, the legal framework and the demands of the specific sector influence initial discussions on a NED appointment. This finding supports the literature, which suggests that boards and their functioning can only be understood in the context within which they operate (Nicholson and Kiel, 2004; Pye and Pettigrew, 2005; Huse, 2005). The internal context relates to: the lifecycle of the
organisation, strategic direction, culture and values of the organisation and specifically the internal board dynamics.
The data support Pettigrew’s (1987: 649) call for ‘a distinction between inner and outer context’. Where ‘inner’ refers to factors inside the organisation such as: culture, power and board dynamics. And ‘outer’ refers to factors external to the organisation such as:
industry sector, economic, political and social context. Each of these factors is important. When taken as a dynamic mix, they complement each other and provide a colourful contextual background for one of the most important decisions a board makes - i.e. the appointment of a new member. The importance of context gives further credence to the view that we need to move ‘beyond the ‘one-size fits-all’ approach (Pye and Camm, 2003: 52). Once initial discussions have taken place within the external context conversations regarding an appointment move onto internal factors such as company culture and values, board dynamics and fit. Establishing fit with the board revolves around the dynamics of a relatively large group of elite individuals with myriad backgrounds and personalities. Board directors are executives at the height of their careers, with limited time and information in a non-executive role which requires a complex mix of both monitoring and supporting behaviours.
Although literature on boards of directors is still overwhelmingly positivist, working from data one step removed from the actual workings of a board, a consistent theme emerges from this work. Understanding boards and their functioning requires knowledge and understanding of board processes and the board dynamics that drive these processes (Pettigrew, 1992; Hermalin and Weisbach, 2003; Letendre, 2004;
Roberts, McNulty and Stiles, 2005;). The findings of this study evidence a candidate’s credentials as threshold criteria for a NED. Once these criteria have been fulfilled the emphasis shifts to a focus on a candidate’s behaviour and interpersonal style and their fit with the existing board. The search for behavioural fit is reflective of the notion of boards of directors as small groups. As such, boards are subject to the same social and psychological influences as similar groups. These include: balance between homogeneity and diversity, task/cognitive conflict and group cohesiveness, and ultimately the ability of the group to function (Forbes and Milliken, 1999; Conger, Lawler and Finegold, 2001; Cascio, 2004; Finkelstein and Mooney, 2003).
In the appointment process of a NED, of paramount significance and due consideration is a candidate’s ability to provide a balance of behaviours between cognitive conflict
and group cohesion. A candidate needs to demonstrate an ability to deal with the duality inherent in the NED role and be able to ‘behave appropriately’. A corporate board functions on the principles of collegiality and consensus. This evidence supports Hill’s (1995) view, where he describes the board as a social institution, with members who are colleagues in the elite networks and who have collective responsibility for the direction of their organisation. The language of teamwork, collegiality and consensus was pervasive in his research findings and interestingly it was most pronounced in discussions about the selection of a new director. One Chairman indicated that an inability to gain consensus around a key decision could be as detrimental as him having to resign. Sonnenfeld (2004b) goes further and argues that one cannot consider direction selection without considering these board dynamics. Boards are social systems where interpersonal attraction in each other’s judgement and expertise is important for board functioning (Cascio, 2004; Pye and Pettigrew, 2005; Stevenson and Radin, 2009). Board dynamics of working norms, associated behaviours and underpinning values, provide the canvas within which new directors will fit.
The Chairman shapes the dynamics of the board and a board descending into dysfunctional dynamics exposes the Chairman to reputational risks. Therefore it is unsurprising that this study in line with extant literature finds the Chairman dominating the selection of new members onto the board (O’Neal and Thomas, 1996; Davis, 1993;
Dixon, Milton and Woodland, 2005; O’ Higgins, 2002). Further, despite formalities being introduced into the appointment process (Roberts, McNulty and Stiles, 2005;
Maharaj, 2008), The Chairman’s search and selection through informal, backstage and off the record processes in his elite networks is consistent with board functioning and the dynamics that drive it.
When assessing candidates for fit with the dynamics of an elite group, conversations are personal in nature and frank. With reputations at stake, there needs to be great discretion and respect (Pye and Pettigrew, 2005; Hill, 1995; Pettigrew, 1992; Davis, 1993; Useem, 1984; Useem, 2006). Board members have an ideology of unity, where disagreements and difficult conversations are voiced privately. This study is consistent with the sociology literature on corporate elites, which suggests that boards are a critical mechanism by which the solidarity of the corporate elite and the interests of its members are served (Mills, 1956; Domhoff, 1970; Useem, 1984; Palmer and Barber, 2001). At the apex of FTSE 100 companies, reputation and status in the corporate elite is highly prized. Deviant behaviour is punished and high status individuals are
rewarded with more directorships. In the corporate elite, directors are bounded by the scope of their connections either known directly or indirectly (Hill, 1995; Palmer and Friedland, 1986; Westphal and Khanna, 2003; Westphal and Zajac, 1995; Davis, 1993;
Pye, 2002).
In the search and selection for a NED, the Chairman seeks out direct and indirect corporate elite connections to reference an individual’s reputation and their inherent values. It is these inherent values that need to fit with the values of the Chairman as the ‘culture carrier’ of the board. First-time NED appointments onto a FTSE 100 board will have established a personal reputation and built a network of connections that will vouch for that reputation in the eyes of the Chairman. The greater the connectedness of a candidate in the corporate networks, and the closer these connections are to the Chairman’s own, the easier it is to establish the alignment of values. The less connected an individual is, and the further away they are from the Chairman’s connections, the more difficult it is to reference an individual’s reputation and values.
The litmus test of alignment between the Chairman’s values and those of a candidate’s is the social interviewing process.. It is here that the final decision on fit is made. The referencing data and the fit established in the social interviewing process needs to
‘stack up’ and leave the Chairman in no doubt, that his reputation and by association the board’s reputation will benefit from the appointment of the selected candidate.
This study sought to understand the appointment process of first-time FTSE 100 NED appointees. Candidates, who come through the referencing process for the first-time, need to have connections in the corporate elite world that can vouch for their reputation and inherent values. The more influential the connections and the more congruent the candidate’s values are with those of the board, as judged by the Chairman, the more likely a candidate is to be short-listed. This finding is consistent with extant literature which suggests that success in the market for directors is driven by an individual’s reputation in the networks of the corporate elite.
However, when the appointment process is for a first-time NED, an individual’s reputation has yet to be established in the corporate elite networks. Further, individuals being appointed for the first-time have fewer connections in the corporate elite to vouch for their reputation. The Chairman makes an appointment, having referenced individuals with respect to their reputation, the values therein and their fit with the board in question, as judged by him. As a first-time NED is less embedded in the corporate
elite, individuals have a more protracted referencing process and an onerous interviewing stage to establish personal fit with the role.