HomeChapter 2: Literature Review of Board Involvement2.4 General Models of Board Involvement in Strategic Decision Making

2.4 General Models of Board Involvement in Strategic Decision Making

A rich body of literature exists in which board attributes, like the composition and the structure of corporate boards, are related to the roles of directors and ultimately the financial performance of corporations. Zahra and Pearce (1989) developed a model based on four theoretical perspectives that integrate board attributes, board roles, contingencies and indicators of firm performance. Judge (1989) developed a multidisciplinary model based on contextual antecedents like the institutional context, process predictors (board size and CEO decision style) and several interrelated outcome variables. Jonnergård and Svensson (1995) and Jonnergård et al. (1997) have introduced a model in which several “influences” (input), “lines of reasoning” (process) and output variables (firm performance, etc.) are identified.

Through the use of multiple theoretical perspectives, these models have in common the integration of four components or so-called building blocs. (1) First, the models recognize board attributes such as the composition and the structure of corporate boards of directors. (2) Not surprisingly, the models also recognize board roles such as the service, control and strategic roles. (3) In addition, the models recognize external pressures or so-called contingencies (Boal and Bryson, 1987; Judge, 1989) and (4) output variables to measure the financial performance of corporations. According to Zahra and Pearce (1989:306): “In combination, internal and external contingen­cies determine the mix of the board attributes and, in turn, a board's performance of its three roles and, ultimately, on company performance. ” Figure 2.3 at the end of this chapter summarizes the four building blocs. In addition to the analyses of board roles in paragraph 2.3, the next sections of this paragraph briefly review the building blocs of the general models of board involvement in decision making.

 

Board Attributes

The first category of variables in general models of board involvement are board attributes. Board attributes include variables on the composition, the characteristics and the structure of corporate boards (Zahra and Pearce, 1989). Research on board composition variables mainly concentrates on the size of the board, the distinction between executive and non-executive directors and the degree of affiliations directors have with their corporations. Board characteristics refer to the background, the gender and the age of directors. Other characteristics of directors are their social and educational backgrounds, tenure and work experience. Board structure refers to board committees, the role of subsidiary boards in holding corporations, the formal independence of one-tier and two-tier boards, the leadership of boards and the flow of information between board structures. In addition, board process variables are related to the decision making activities and styles of the board, the frequency and length of board meetings, the formality of board proceedings and boards’ culture on the evaluation of directors’ performance. Studies on the association between board attributes and the formal independence of corporate boards are reviewed in more detail in chapters three and four of this study.

 

Firm Performance

Another component of general models of board involvement relates to the measurement of firm performance. According to Judge (1989), research on the association between board attributes and the performance of corporations is generally based on two methodological approaches. First, a majority of the literature examines direct relationships between board attributes and firm performance. These studies are based on the assumption that board attributes such as the composition, the structure and other variables directly influence firm performance criteria. According to Judge (1989:24), board behavior is often treated as a “black box” in these studies and researches can only “ . . . speculate on actual board behavior.” Zahra and Pearce (1989) state: ” . . . without sufficient attention to board process variables, little progress can be made in understanding how boards affect corporate performance [. . . ] There are countless lists of what boards should do. Yet, evidence on what boards actually do is not well documented.” These authors also indicate that structure research widely ignores contextual forces on board variables, that research samples are not always adequately composed and that structure research has failed to operationalize board variables in a consistent manner. Studies that relate the formal organization of corporate boards to output variables are reviewed in more detail in chapters three and four of this study.

The second category of research collects and analyzes data on actual board structures and behavior through surveys, observations, action research and interviews. These so-called process studies are descriptive in nature and do not directly associate board attributes with firm performance criteria. Board behavior in these studies is conceptualized through board roles and board attributes, and contingencies are understood as influential factors that shape the composition and structure of corporate boards. Surveys and interviews are predominantly used to collect information in these studies. Examples of process studies are Pettigrew’s (1985a) case study on ICI and Thurman’s (1990) doctoral study of corporate governance processes behind boardroom doors. In line with these studies, this research does not seek to reveal a direct association between board model attributes and financial performance criteria. As such, it does respect the criticism on structure research that the web of causalities is too complex to reveal unidirectional causal relationships between board model attributes and financial performance criteria (Pearce and Zahra, 1992). Seen from this point of view, this research can be classified as an explorative study on the formal independence of one-tier and two-tier board models. This research also follows the rationale that first there is a need to document what boards actually do and how they have organized their structures under different jurisdictions, market regulations and other external pressures.

 

Board Contingencies

According to Judge (1989:29), board contingencies are “ . . . fundamental or initiating influences on the strategic role of the board, and includes relevant factors in the task environment (e.g., social pressures) and organizational performance.” According to Zahra and Pearce (1989), contingencies influence board attributes, the way corporate boards of directors conduct their roles and contingencies can ultimately influence the contribution of boards of directors to the performance of corporations. The authors recognize environmental variables, the types of industries and legal requirements as external contingencies. Judge and Zeithaml (1992) also distinguish institutional forces that may influence the involvement of corporate boards of directors in decision making. The authors distinguish court systems and legislation, pressures from institutional investors (shareholder activism) and the market for corporate control in financial regions as important institutional forces that may have an impact on the performance of corporate boards and the way directors organize their boards. Demb and Neubauer (1992a, 1992b) found that societal pressures, regulatory systems and ownership patterns are important elements of national governance systems. Lo (1994) identifies that these patterns of corporate governance and control differ significantly across countries because of the national differences in structures of ownership and the composition of boards of directors. An example of differt patterns of corporate governance has been indicated by Sheridan and Kendall (1992). These authors distinguish insider bank-based and outsider market-based financial systems (see also table 2.2).

 

 

Table 2.2

An Example of External Board Contingencies:

The Distinction Between Insider and Outsider Systems

 

  • outsider system (Anglo-Saxon countries);
  • insider system (continental Europe and Japan);

 

  • dispersed ownership and control;
  • concentrated ownership;

 

  • separation of ownership from control;
  • the association of ownership with control;

 

  • little incentive for outside investors to participate in corporate control;
  • control by related parties such as banks, partners and employees;

 

  • a climate where hostile takeovers are not unusual, and they can be costly and antagonistic;
  • absence of hostile takeovers; in fact, an aversion to them;

 

  • the interests of other stakeholders are not represented;
  • the interests of other stakeholders are represented;

 

  • low commitment of outside investors (whatever they may say in public!) to the long-term financial strategies of the company;
  • the intervention of the outside investor is limited to periods of clear financial failure;

 

  • takeovers may create monopolies.
  • insider systems may create collusion and cartels.

 

       

        

Source: Sheridan and Kendall (1992:53-55).

Contingencies are not necessarily limited to external variables. General models of board involvement also recognize internal variables as well, such as the phases of product life cycles and the size of corporations. Of importance to this study is the recognition that contingencies can influence the formal organization of corporate boards. Chapter five of this research further explores pressures from regulators, legislators and boardroom reformers on the formal independence corporate boards of directors.


Related news items:
Newer news items:
Older news items:

 
You may also be interested in these articles:

PDF Download

Interested in the PDF version of the study? Click here to download.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.