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Hiring directors – how to get it right

14 June 2017

The article at a glance

Good experience, or the right experience? Why it pays to be picky when picking your board, says new research from Professor Yasemin …

Good experience, or the right experience? Why it pays to be picky when picking your board, says new research from Professor Yasemin Kor of Cambridge Judge.

Why it pays to be picky when picking your board

Professor Yasemin Kor
Professor Yasemin Kor

When you’re looking for your next board member, it’s easy to be dazzled by a glittering CV. After all, it’s a high-profile position and you want the person with the most impressive experience, right?

Maybe. But new research suggests that longer CVs don’t necessarily make for a better board. Hiring directors with the wrong type of experience can actually have a negative impact on governance.

Yasemin Kor, Beckwith Professor of Management at Cambridge Judge Business School, looked at how directors’ past appointments influenced the growth of companies in an emerging market, the US wireless communications service industry. Her team looked both at startups and at existing companies that were diversifying into the sector, between 1983 and 1998. She says: “There were definitely some surprises for us. Three main messages came out of the paper: the value of experience in one’s own company; the potentially inhibiting effect of experience elsewhere; and the benefit of true outsiders.”

The first insight concerned the value of directors’ experience within the company itself. The study showed that entirely new startups tended to scale up their operations faster when their directors had accumulated more time on the board, gaining “firm-specific experience”.

Professor Kor says: “The longer they serve, the more they get to know about the specific company – so they can produce specific governance prescriptions that incorporate the unique aspects of its strategy, its capabilities, its main weaknesses and challenges, and so on.”

There was one proviso: these benefits reached a plateau when a director achieved around six years’ experience. “Over time, we see a group-think phenomenon develop,” says Professor Kor. “The whole point of the board of directors is that they provide checks and balances on management. So if the board becomes too cosy and uniform in its thinking – and too comfortable with the managers – it can result in staleness.

“It’s good to have some longer-serving directors, who perhaps have been there since the initiation of the company, because you want continuity. But if you have a high number of board members who have been there for a very long time, there are multiple negative consequences.”

A different picture emerged for established companies diversifying into a new market. If a director already had experience on the board of the parent company, this had a negative impact on the new subsidiary’s ability to generate growth.

She says: “We attribute this primarily to the fact that these directors are entrenched in the parent board operations. It’s almost as if there’s competition for the startup operation to get some board space and board time; and the longer the directors have served on the parent board, the less attention the startup seems to be getting.”

She believes the upshot of this is that companies should set up an entirely new board when starting a venture to compete in an emerging market.

An obvious place to seek directors is from competitor firms, given that they have managerial experience in the same industry sector – but the study found that those who have already been directors of competitor firms turn out to inhibit growth rather than stimulate it.

The authors have several ideas why this might be so. Professor Kor says: “It could be that it exposes the firm to too much of its competitors’ business models, and it pushes the company to follow strategies that are too similar to what everybody else is doing.

“Managerial experience may be useful because it allows directors to connect with the new company’s managers, as they have gone through similar experiences themselves. But when it comes to directorial experience, perhaps this means they have a more superficial understanding of the industry – they’re prescribing what they’ve seen to have worked without fully understanding the ramifications. That’s our ad hoc explanation; but it’s still a puzzle.”

The third message is that true outsiders – directors drawn from other industries – had a strongly positive effect on growth. She says: “These are people with no experience in the focal industry. They can do the outside-the-box thinking, without entrenchment in the current business models within that industry. If too much knowledge is poisoning the ability of the firm to do strategic renewal or build unique strategy, these true outsiders are the cure.”

However, an over-reliance on outside talent brings its own set of problems, and they can be catastrophic. As a case study, Professor Kor cites one of the most infamous corporate failures of modern times: Enron.

She says: “You see these large corporations where there’s an overwhelming majority of non-executive directors on the board. They assume that they’ve solved the problem of independence and objectivity; that the board’s in tip-top shape and providing fantastic governance.

“But if they’ve been serving too long, they lose that outsider status; they start behaving like insiders, because they’ve become socialised among themselves and with the management. Governance is compromised.”

The take-away, when it comes to hiring directors, is that it’s vital to pay as much heed to the quality of their experience as the quantity. “These three types of experience are all important: the first being specific to the company, the second within the industry, and the third being this diverse knowledge of other industries,” says Professor Kor.

“They all have a role to play. But you have to combine them correctly – otherwise each can become toxic. The magic only works when they come together in the right combination.”