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Published: January 27, 2012

 
 

The “Third Team” Approach to Board Effectiveness

Gains are seen when a subset of directors and senior executives share knowledge and ideas.

Title: How Boards Impact Organisational Performance — What Role Does Leader–Member Exchange Theory Play?

Authors: Denis Mowbray and Coral Ingley (both from Auckland University of Technology)

Publisher: Management Culture in the 21st Century Conference, Estonian Business School

Date Published: June 2011

High-performing firms benefit from organizing and supporting a “third team” of select board members and senior executives whose interactions at both formal and informal gatherings keep vital information flowing between the top tiers of the company, this paper finds.

In attempts to pinpoint how boards of directors can affect performance and add value to their firms, many researchers, pundits, and business leaders have focused on the theory of “leader–member exchange.” First developed in 1975 and refined in dozens of studies since, the theory suggests that relationships evolve between leaders (directors) and members (the executive team), fostering the exchange of information.

Significant levels of leader–member exchange have been shown in previous studies to have a number of positive benefits. The strengthened relationships and better information flow at the top have effects that trickle down through a company, resulting in greater productivity and organizational commitment among all employees.

But most of that research has focused on the board as one team and the executive ranks as another, with the CEO or managing director seen as playing the role of moderator between the two disparate and often conflicting groups. This study — part of a larger project examining how boards affect performance — challenges that approach, with evidence that the highest-performing firms use a third team composed of a mixed subset of directors and executives who share and enhance knowledge and ideas.

This team gathers both formally, in meetings and strategy development sessions, for example, and informally, in social settings, which are key to the development of interpersonal relationships. Although the third team meets episodically, it occupies a structured and defined place within a firm, the authors write.

To determine whether leader–member exchange is, in fact, facilitated through this third team, and whether this approach is beneficial to firm performance, the authors studied 64 organizations (43 corporate and 21 not for profit) in New Zealand and Australia, including several in the top 50 on the stock exchange indices of those countries. To be included, a not-for-profit organization was required to be registered as an incorporated entity; a corporation must have been listed on an exchange for more than 10 years.

The authors measured the performance of non-profits by examining their fiscal activity and level of public support, in line with the methodology of several previous studies. For corporations, the key performance indicators were return on assets, earnings per share, and dividend yield. The organizations were tracked from January 1999 through December 2009, and average performance indicators were developed for both corporations and non-profits.

The authors then identified which organizations consistently outperformed the sample’s average performance over the entire 10-year period (these were labeled high-performing firms). This process eliminated “ ‘one-hit-wonders,’ or results that occur through financial manipulation or other single event occurrences (e.g. new product release),” the authors write.

Questionnaires were sent to the chairperson, CEO, or managing director, as well as board and executive members of the firms, asking them to use a five-point scale to answer a series of questions about the relationships at the top of their organization. Executives were included if they attended at least one board meeting per year and had contact with the board at either social or formal events.

Follow-up interviews were then conducted. A total of 321 people took part, 98 in the high-performing group of firms and 223 in the lesser-performing subset. The study revealed that in both types of organization, corporate and not-for-profit, high levels of leader–member exchange within a third team, showing evidence of trust, loyalty, and respect, were a sign of high-performing organizations but not of lower-performing organizations (which had either ignored the concept or failed to implement it effectively).

 
 
 
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