Why fair process makes for better boards

The imperative of fairness in governance is key for keeping corporations, their directors, executives, shareholders and many stakeholders ‘glued’ together in a common spirit of trust and commitment, explains Ludo van der Heyden, The INSEAD Chaired Professor of Corporate Governance.

Over time, the sustained practice of fair process leads to greater value creation for a corporation’s stakeholders and increases the trust that society awards the business. Fairness is not an option: it is fairness for board and ultimately business performance.

Fair Process vs Fair Share

The determination of ‘fair share’ is the object of a field called ‘distributive justice.’ Philosophers have argued about fairness for more than 2,000 years and have identified three principles for a fair division of ‘the pie’: a) merit – where a person’s share is proportional to that individual’s contribution to the making of the pie; b) equality – where shares are equal regardless of contribution; and c) needs – where an individual’s share is proportional to that individual’s need.

Not for-profit organisations and also families are largely driven by the goal of meeting needs. Democratic societies are governed by the principle of equality, most forcefully stated as ‘one person, one vote’. Public shareholders insist on equality of information and dividends (per share); mothers distribute their time and love unequally, the most needy children receiving most of the mother’s attention.

The major argument against the ‘fair share’ principle is that it requires the determination of a clear collective goal, to which individuals contribute. But that is a big requirement – most shareholders do not automatically agree on goals, CEOs and boards do not immediately agree on a ‘fair remuneration principles’, most individuals in a family do not agree on what are legitimate needs, and even in society, giving everyone an equal vote, does not necessarily lead to a collective optimum. That is why ‘fair process’ is a necessary antecedent to ‘fair division’.

In fact, differences in outcomes will become acceptable if they are the result of a fair process; they will be heavily counteracted otherwise. An important clarification is to operationalise what might be a ‘fair process’.

How to ensure ‘fair play’ (the 5 Cs)?

Longstanding debates have led to the identification of five complementary and mutually reinforcing characteristics of fair play:

• Consistency – or uniformity in the treatment of people, issues and across time;
  
• Clarity – or transparency;
• Communication – or the ability to give all a voice which – and this is key – they can exercise without fear of retaliation of what is being said;
• Changeability – or the ability to change course as a function of new facts or new evidence; and, finally,
• Culture – or the commitment to aim to ‘do the fair thing’ not only superficially, but deeply and authentically.

The virtues of fair play are most easily argued by invoking cases of non-fair play. Bias for short term, against certain people or for certain issues, always leads to friction. So does a lack of transparency, censured speech, rigidity of stance (ideology), and finally, a suspicion of hidden or personal agendas. All these impede a board’s effectiveness.

Fair play attracts and commits people to constructive board confrontations that help the shared establishment of the decision while unfair play puts stress into the process, resulting in defensive reactions and ultimately disengagement.

The theoretical contribution of fair play is that it is not just a good idea, it is a scientific social fact: fair play groups (including boards) tend to be more performing, fair play boards and companies attract and ultimately retain better directors, executives, and employees.

Disciplining the Board: The Process (the 5 Es)

It is well known that any group, to be performing, needs good process. My work with colleagues, informed by the decision-making literature, proposes a 5-step process:

• Engaging, Seeing and Framing: Nothing is as critical as defining the right question submitted for consideration and decision. Many disasters result from framing the question incorrectly. In fact, the surest path to value destruction consists in forcefully executing the right answer to the wrong question. Doing this step in ‘fair play’ fashion allows individuals concerned with or impacted by the process to be engaged at an early stage.
  
• Generating, Exploring and Elimination Options: The quality of planning is a function of both the creative ability to generate better answers to the questions identified at the previous stage, and the group’s ability to explore these answers and reject the inferior ones. The confrontational debate of ‘pros’ and ‘cons’ allows a thorough exploration of the options generated. Board competence and diversity are of the essence here.
• Deciding, Explaining and Setting Expectations: Being presented with a finite and distinct set of options, the leadership can now focus on decision making, with full knowledge of the pros and cons of each option.
• Executing, Realising and Rewarding: Execution of decisions can now start with the concerned people being clear on what all actors are supposed to do. Execution being well prepared, results are being realised at this stage. The step ends with rewards or sanctions, whatever may apply, as announced at the decision step.
• Evaluating, Learning and Adapting: ‘Post-mortem’ evaluations can now start both on the results achieved and on the process that generated these outcomes. Lessons are learned and the organisation adapts as a consequence.

Benefits and Implications for Board Effectiveness

The value of such a formalised approach to fair process is to ensure that board members understand the way their input will be sought and used, making them co-creators of the decision, together with other stakeholders. Self-determination theory asserts that people will forcefully contribute to decisions they have co-created, whereas they tend to resist decisions that are imposed upon them.

When one examines board work, one can validate that board effectiveness is often the result of fair process, whereas bad decision-making is associated with fair process failures.

Benefits and Implications for the chair

Finally the fair process model provides a clear operational template for the chair. No process survives a bad leader, and for fair process to be sustainable, it requires the continued guidance of a fair play leader. On the board, the chair is typically the fair process leader with a certain detachment regarding outcomes – and be open to input from board colleagues.

Conclusion

It is important to conclude with a point on compliance. Compliance is not solely a matter of following a prescribed set of rules or procedures. Chairs and their boards are well advised to comply with a value-based practice that has been well tested in society, namely that of due or fair process leadership. This is not merely a virtuous wish. There is a large amount of scientific evidence to back up the conclusion that boards and their Chairs who follow and apply this prescription – taking into account contextual factors such as time and culture – will serve their organisations better.

This is an edited version of an article that originally appeared on leading business school INSEAD’s website.

Ludo Van der Heyden is the INSEAD Chaired Professor of Corporate Governance and Academic Director of the INSEAD Corporate Governance Initiative. He co-directs the International Directors Programme, and the Value Creation for Owners and Directors Programme, two of INSEAD’s Board Development Programmes.