The introduction in chapter one of this research indicates that corporate governance is a concept that covers many aspects related to the distribution of rights, wealth and power between corporations, directors, regulatory agencies, legislators, employees, suppliers, and other corporate stakeholders. Central to most corporate governance definitions are the roles directors have in the governance and the decision making processes of corporations. The literature suggests that ideas about boards’ roles in decision making have changed over time. Initially, the roles of corporate boards were mainly understood in the tradition of the agency theory and its emphasis on the control of power and authority in organizations.
More recent definitions of corporate governance and boards’ roles reflect on changes in expectations about the roles of corporations in modern society. Stakeholders from a wide array of internal and external interest groups have launched initiatives to make corporations more responsive to stakeholders' rights and wishes. These initiatives range from enhancing shareholder participation in corporate decision making and the alignment of interests of management with the interests of shareholders, to the opposing stakeholder view on industrial democracy, sustainability and corporate social responsibility. As such, constituency groups are continuously challenging the assumption that shareholders are the sole legitimate claimants of (listed) corporations. Green activists mobilize the general public to make corporations aware of the environmental risks associated with corporate activities. Human rights organizations defend guidelines on corporate social standards and corporate investments in politically unstable regions.
Employees increasingly demand a bigger voice in corporate decision making. Consequently, stakeholders - and not only shareholders - claim to have legitimate rights to affect corporate outcomes. Corporate boards of directors are responding to these external pressures by the way they are involved in the decision making processes of the corporation and the way they organize their work. As suggested by Steiner (1988:28), “boards are far more involved in company strategic planning, are concerned about how the company is affecting its environment, and how management is reacting to all important environmental forces.” The next sections of this paragraph further explore the roles boards of directors can have in the top decision making structure of corporations.
Board Roles in Decision Making
Through the identification of problems and opportunities, the development of alternatives and the execution of corrective actions, boards of directors can respond to pressures from various stakeholders. To formalize boards’ involvement in these activities, theoretical models on corporate decision making processes generally identify a sequence of decision making steps. In general, these steps concentrate on the formulation, the implementation and the evaluation/monitoring of decisions (Judge, 1989). The widely applied model of Fama and Jensen (1983) recognizes the following four steps in decision making:
- initiation - the generation of proposals for resource utilization and structuring of contracts;
- ratification - the choice of the decision initiatives to be implemented;
- implementation - the execution of ratified decisions, and;
- monitoring - the measurement of the performance of decision agents and implementation of rewards.
Source: Fama and Jensen (1983:278).
Fama and Jensen (1983) use the term decision management to refer to the combination of the initiation and implementation steps in decision making (steps one and three). The authors use the term decision control to describe the combination of the ratification and monitoring steps in the process of decision making (steps two and four). The recognition that these steps in decision making can be combined into decision management and decision control is of particular interest to this study. Not only does the model recognize that these four steps are particularly found in the formal decision making processes of large listed corporations (Mintzberg, 1973; Fama and Jensen, 1983; Boal and Bryson, 1987). The model is also useful to describe the formal independence of corporate boards of directors. Basically, design strategies that are applied to enhance the formal independence of corporate boards seek to separate decision management from decision control in decision making.
The Formal Separation and Integration of Decision Making Steps in Board Model Prototypes
The introduction in chapter one of this research suggests that the two-tier board model is based on a structure that separates these steps in decision making. Decision management is delegated to the managing directors in the executive management board. Decision control lies in the hands of the non-executive supervisory directors in the supervisory board. One-tier boards are formally based on a structure that integrates the four steps in decision making. In other words, one-tier boards formally combine decision management with decision control (see also figure 2.1). Moreover, the distinction between decision management and decision control is useful to understand the roles of boards in decision making. Both the formal independence of boards and the roles of boards of directors are explored in more detail in this chapter.
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