The scandals that occurred at Enron, Worldcom, and Tyco, and bankruptcies such as the Allegheny Health, Education, and Research Foundation’s, placed a spotlight on how boards govern and their potential lack of understanding of the companies they govern. As a result, the Sarbanes-Oxley Act was created to require publicly-owned corporations to disclose whether their boards include directors with financial expertise, and to increase the oversight role of boards of directors. Some states, such as New Jersey and New York, have even implemented state-mandated education requirements for board members. This scrutiny has prompted a growing trend away from the traditional board model toward competency-based governance.
The traditional board model has some inherent flaws that affect its ability to be a fully successful one. These boards tend to present a richness of certain professional backgrounds, but a dearth of others; in many cases, directors lack the training, experience, or simply the time to master the high-level, complex issues they are tasked with addressing. Someti
mes viewed as “good old boy” networks, traditional boards may not be fully representative of the diversity of their shareholders – not only ethnic diversity, but representation from women and individuals at varying career levels. Perhaps most concerning, this model may open the door for representatives from
local boards to protect their “back home” interests at the expense of their fiduciary responsibility to the overall organization.
By contrast, the competency-based model represents a combination of several components – knowledge, skills, personal characteristics, and individual and social behaviors – that are required for effective board performance, and have been shown to increase both personal and organizational success.
Behavior is a lens through which competence can be evaluated, as competencies are linked to deep, enduring aspects of an individual’s personality and can predict or cause behavior and performance. Competencies indicate how people will think and generalize across situations, focusing on intentional behavior, rather than simply on a person’s knowledge, skills, or other personal characteristics and abilities, and will impact how individuals work together with others to reach decisions or meet goals.
There are two different types of competencies – threshold and differentiating. Threshold competencies are defined as the generic knowledge, skills, characteristics, and behaviors essential to job performance, but not causally related to superior performance; in other words, the minimum necessary for performance on the job, applicable to the same job industry-wide. By contrast, differentiating competencies relate to superior job performance for a specific type of organization or job – these are the competencies boards must focus on to excel.
It is becoming more and more important to address the composition and qualifications of boards of directors. As a result of board mismanagement coming to light, major donors are now paying more attention to the governance of the organizations they fund; state attorneys general are looking at board practices related to CEO compensation, use of charitable assets, and billing and collection practices; and bond rating agencies are reviewing the quality of governance in assessing creditworthiness.
Contributed by Holly Valovick -QLK