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Behind the numbers: Directors, networks & productivity

10 Aug 2018
Artwork depicting people networking with various productivity symbols in thought bubbles

For businesses ‘thinking differently’ is often the fine line between success and failure. Introducing new ideas, products and processes is key to building resilience and staying ahead of the competition.

Managers, however, spend a disproportionate amount of their time working in their organisation, rather than on their organisation. Change can become an afterthought, and businesses risk being left behind. That’s exactly why attracting and developing board-level talent, who have a ‘big picture’ mind-set, is absolutely essential for growth-seeking firms.

How do directors maintain this wider perspective on the business landscape? How do they manage to keep challenging their own opinions and assumptions? One of the most effective and straightforward ways of doing so is by meeting and engaging with fellow business leaders.

New research by the Bank of England spells out the potential gains of this approach, and also shows just how focal the boardroom can be in raising the UK’s lagging productivity game.

The study – outlined by the Bank’s Chief Economist Andy Haldane in a recent speech – reiterates the vital part executives play in bringing new ideas and innovations to businesses. But it also underlines the fact that well-connected leaders in particular have a significant positive impact on how well a company operates.

The research analyses the effect of ‘director connectivity’, measured as the number of co-directors a director has at other companies. The findings reveal that a firm ranking in the top 10% for director connectivity has, all other things equal, an average annual productivity growth 1 percentage point higher than a firm in the bottom 10%.

This result gives statistical backing to something most UK directors know instinctively – that a strong professional network can have a tangible positive effect for both directors and the companies they oversee.

With their cumulative exposure to different challenges and working styles across sectors and geographies, directors with large networks are able to draw upon a wealth of experience to bring new thinking into businesses. Unsurprisingly, over 3 in 4 start-ups consider networking to be vital to entrepreneurial success.

With that said, it’s not just about who directors know, it’s also about what they know. A U.S. analysis finds that the board is pivotal in tempering the often near term objectives of managers with long-term oversight. As such, the presence of independent directors leads to significantly higher investments in innovation – which again drives productivity growth.

The board plays a vital role in shaping strategy, horizon-scanning for risks, and in embedding a forward-thinking culture throughout an organisation. With the pace of technological change increasing, and constantly shifting the playing field, quality executives look set to become ever more important.

Simply put, strong networks and effective leadership make a difference. This goes right to the heart of what the Institute of Directors is all about: providing a community to diffuse best business practice and transfer knowledge, as well as developing directors’ skills through Professional Development.  

It also speaks to one of the UK’s foremost economic challenges: the productivity puzzle. The effects of this issue are far more readily appreciated than its causes. But the Bank of England’s research underlines that directors have a vital part to play in solving the problem.

Just as important, the findings dispel any notion that networking with fellow business leaders is just a luxury to be indulged in when all the hard work is done. Instead, it constitutes a central driver of success for directors, not only advancing their own careers, but also the prospects of the firms they lead.

Tej Parikh, Senior Economist, IoDTej Parikh

Tej holds a Bachelor’s degree in Economics from University College London, and a Master’s degree in International and Development Economics from Yale University.

Prior to joining the IoD, he worked as an economic analyst at the Bank of England in roles across monetary and financial policy. Subsequently, he moved to Cambodia where he was a journalist focusing on economic and private sector development for a national newspaper. He has since been a freelance political risk consultant and journalist, covering Europe and Asia in particular.

He has published for numerous international media outlets including Foreign Affairs, the Guardian, and The Diplomat, and is currently an active member of London’s Great Debaters Club.

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