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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).

However, “to simply say that having high levels of [leader–member exchange] is sufficient for high performance would be misleading,” the authors write. Their broader study is examining a number of other factors — team effectiveness, knowledge gathering, and the use of intellectual capital — that also seem to play a role in how boards affect organizational performance through the third-team approach.

That said, two questions in the survey pinpointed key elements in information flow and team behavior that were consistently evident in high-performing organizations. Crucially, the elements described in both questions were required to be in play simultaneously to help produce high performance.

The first question asked both executives and directors if they had enough confidence in their team that they would defend the decisions of members who were absent. Essentially, the question “describes the level of confidence, loyalty and professional respect that [third-team] members have in the decision capability of the other members,” according to the authors. From this perspective, loyalty is seen as a public display of support, and professional respect and confidence in other team members go hand in hand.

The second question asked those surveyed to characterize their working relationship with other members of their team. This question was meant to reveal the general level of affection between individuals, which can manifest itself through unsolicited support or expressions of empathy. High-performing third teams in the study displayed significant levels of social integration, a measure of team cooperation and cohesiveness. Previous studies have linked return on investment and sales growth to social integration.

The identification and examination of information exchange in third teams “has shed a glimmer of light on what is often described as the ‘black box’ of governance and how it impacts organisational performance,” the authors conclude. “The results show that across sectors, NFP and corporate, [and across] all participants including chairpersons, directors and executive team members, and across different industry types including banking, construction, insurance, brewing, telecommunications, sport and social services, the elements of confidence, trust, respect, loyalty and obligation…are consistent within the [third teams] of high-performing organisations” and are inconsistent at lesser-performing companies that either don’t utilize third teams or employ them ineffectively.

Bottom Line:
A so-called third team, comprising both board members and executives at the top of an organization’s structure, can facilitate the kind of information flow and interpersonal respect that results in better firm performance.

 
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