The Nicholson and Kiel Framework

Nicholson and Kiel (2004) developed a framework (Figure 4.1) for diagnosing board effectiveness which has not been tested empirically. It is based on the concept of board intellectual capital and the aim is to have a basis for examining how boards of directors affect corporate outcomes. The framework, which conceptualises the board as part of a governance system, employs the construct of intellectual capital and seeks to explain how a board‘s intellectual capital informs board behaviours and how this pattern of behaviour ultimately links to corporate performance.

It proposes a series of inputs (organisation type, company‘ legislative and societal framework, company history, organisation‘s constitution, and company strategy) that lead to a particular mix of board intellectual capital. The first input, organization type, recognises the nature and purpose of the organisation which have a powerful impact on board composition, board roles and board performance (Pearce and Zahra, 1992; Johnson et al., 1996). Organisation type also determines the constituency base of the ownership or membership of the company, for example for-profit and not-for-profit organisations will have different objectives and different governance structures.

The second input is the company‘s legislative and societal framework. They argue that all companies operate with a set of rules or laws established in the countries they

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operate. In Nigeria this set of laws is the Company and Allied Matters Act (CAMA) and such laws set out clearly the responsibilities of boards and other governance matters. In addition to these legal requirements, expectations of stakeholders and societal customs have impact on board operation.

The third major input is the organisation‘s constitution, which is an internal document that states policies and processes that shape the relationships between owners, directors and managers. These will have a substantial impact on how the board is constituted and run and also on its effectiveness.

Company history is the fourth input and this will influence who gets on the board. The history of the company consists of its past performance, its corporate culture, values and the board‘s composition and this will affect how the board functions. The final input is the organisation‘s strategy, which is defined as how a company uses its resources (Judge and Zeithaml, 1992). A company‘s strategy will determine the roles the board will need to perform. They argue that these five fundamental inputs into board system discussed above determine the intellectual capital requirements and roles of the board. The board intellectual capital is what is used in performing the various roles of the board output is dependent on how well these roles are performed.

Nicholson and Kiel model uses individual-level outputs and group-level outputs of a board as a measure of the board‘s effectiveness rather using corporate performance. To them understanding how boards add value to organisations requires an understanding of how boards contribute to organisational, group-level and individual-level outputs. Corporate performance is dependent on both board effectiveness and senior management effectiveness.

They see a board as a bundle of intellectual capital that enables it to enact a role set and they contend that the balance of the different elements of board intellectual capital will lead to a series of board behaviours. They argue that board intellectual capital is fundamental to transforming inputs into organisational performance. The components of board intellectual capital as defined by them include human capital, social capital, structural capital (policies and procedures), and cultural capital (values and norms).

According to Nicholson and Kiel (2004), board human capital, which is the first component, is the individual knowledge, skills and abilities possessed by directors that are

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relevant to the organization. Boards carry out their roles effectively when individual directors apply their knowledge, skills and abilities to the tasks they have to perform.

The second component, board social capital refers to the implicit and tangible set of resources available to the board by virtue of social relationships (adapted from Gabbay and Leenders, 1999, p. 3). There are three dimensions to board social capital; the goodwill that exists between board members, the goodwill that exists between members of the board and senior managers, and the relationship between board members and external parties. Social capital can lead to better board productivity, effective exchanges between the board and management and supply of appropriate resources by external parties.

The third component, board structural capital includes the various procedures, policies, processes and methods the board has developed for its smooth operation (Bontis, 1998, p. 65). Structural capital will influence the quality and timeliness of board materials, board behavioural/ethical expectations and board culture.

The final component, cultural capital, deals with the degree to which board members share norms, values and rules that guide their behaviour (Lin, 2001; Schein, 1992). These values would include expectations of transparency, honesty and accountability.

They have conceptualised boards as a set of five components – the human, social and cultural capital of individual directors and the social and structural capital of the board as a whole. They argue that it is important to identify the nature of interaction between these components and the resultant dynamics and relationships between them. This interplay between the various components of intellectual capital has impact on the board‘s performance.

According to the framework the effectiveness of the board is dependent on how well the board performs the roles of controlling the organisation and monitoring management, providing advice to management, and providing access to resources. The ability of the board to execute these roles will determine how effectively the company is governed. They also proposed that the board‘s effectiveness will depend on the alignment between the various board capitals and its required role set. To them the challenge in governance is to understand the roles required of the board and then to match the intellectual capital of the board to those roles. To the best knowledge of the researcher this framework has not yet been tested empirically.

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Figure 4.1: The Board Intellectual Capital Framework (Nicholson and Kiel, 2004)