HomeChapter 4: Boards - Consensus Perspective4.2 A Consensus Perspective of Board Organization

4.2 A Consensus Perspective of Board Organization

In response to the popularity of the agency theory and other conflict perspectives of board organization, proponents of a consensus approach to board organization are gaining support in the corporate governance literature. An approach that is receiving attention is the stewardship theory. This relatively new theory is grounded in sociological, psychological and organizational approaches to corporate governance (Davis, 1991; Gedajlovic, 1993; Davis et al., 1997; Hung, 1998). The stewardship theory shows in principle some similarities with the agency theory. First, this theory sees corporate boards as instruments to create shareholder wealth (Davis, 1991).

Second, when applied to corporate governance, the stewardship theory mainly concentrates on the relationship between shareholders, directors and management. In particular, the stewardship theory sees shareholders as important stakeholders of the corporation (Donaldson and Davis, 1994). As such, the stewardship theory departs from the literature on corporate societal responsibilities that directors are trustees of all stakeholders of the firm who should balance the interests of many diverse interest groups.

Third, proponents of the stewardship theory also do not oppose the agency-theoretical notion that the separation between ownership and control in listed corporations is cost efficient and that a corporation is a nexus of contracts that specifies the relationship between principals and agents (Donaldson and Davis, 1991). Yet, the stewardship theory also differs in many ways from the agency theory. Perhaps the most striking difference lies in the way the behavior of agents is being perceived and how this behavior should be constrained. In other words, the stewardship theory is based on a model of managerial behavior that departs from theories that are based on a conflict perspective of board organization.

          

The Model of Managerial Behavior

Williamson (1985) indicates that alternative approaches to the organization of corporations owe their origins to differences in the underlying assumptions of the behavior of agents and principals. The agency theory and stewardship theory are good examples of theories that differentiate on assumptions with respect to the behavior of agents. As indicated previously in chapter three of this study, proponents of the agency theory see agents as potentially self-serving actors whose behavior needs to be constrained by control mechanisms such as a corporate board of directors. The stewardship theory follows a different train of thought on the model of managerial behavior. Contrary to the agency theory, stewardship theory assumes that conflicts of interests between principals and agents do not necessarily arise due to differences in utility functions.

Directors and managers are seen as pro-organizational and trustworthy agents who do not act as self-serving opportunistic agents and who predominantly act in the interests of the principals of the corporation. The differences between the model of men in the agency and stewardship theory can be illustrated by the distinction between McGregor’s (1960) Theory X and Theory Y. As stated by Bettis and Donaldson (1990:377): “Whereas the agency theory is derived from the economic model of man (i.e., Theory X), stewardship theory is derived from the theory Y stream of organization behavior.” As such, the stewardship theory sees agents as organizational role-holders who are “ . . . motivated by a need to achieve, to gain intrinsic satisfaction through successfully performing inherently challenging work, to exercise responsibility and authority, and thereby to gain recognition from peers and bosses” (Davis, 1991:83). As good stewards, they take responsibility for themselves.

Seen from this point of view, proponents of the stewardship theory oppose the “narrow” model of men in the corporate governance literature that treats human behavior as a radical simplification of social life (Perrow, 1986). This does not mean that the stewardship theory does not recognize any opportunistic behavior of agents. Yet, according to Davis et al. (1997:25), “. . . the steward’s opportunity set is constrained by the perception that the utility gained from pro-organizational behavior is higher than the utility that can be gained through individualistic, self-serving behavior.” This observation reflects the fact that psychologists and sociologists have identified a much larger range of human motives - than have agency theorists - such as the need for achievement, responsibility, recognition, altruism and respect for authority that aligns the interests between agents and principals (Bettis and Donaldson, 1990; Muth and Donaldson, 1998).

          

Models of Managerial Behavior and the Organization of Corporate Boards

Davis et al. (1997:225) indicate: “If the utility functions of self-serving agents and principals coincide, there is no agency problem: both agents and principals enjoy increases in their individual utility.” The consequences of this observation are rather far-reaching when the stewardship theory is applied to the formal organization of corporate boards. To maximize the interests of shareholders, the stewardship theory strongly emphasizes management participation in board activity and the empowerment of executive directors. Based on a definition of Lorsch (1995), empowerment means that executive directors have the capability, authority and discretion to influence the strategic direction of the corporation. As indicated by Donaldson and Davis (1994:159), stewardship theory suggests that “ . . . organizational financial performance and shareholder wealth will be maximized by empowering managers to exercise unencumbered authority and responsibility.”

In line with Finkelstein and D’Aveni (1994), the juxtaposition of conflict and consensus perspectives of board organization and their underlying theoretical assumptions make the study of board structures compelling. Based on the premise that corporate boards of directors need to direct management and represent shareholders’ interests, the agency theory advocates independent formal board structures that support the control roles of boards. Grounded in a conflict perspective of board organization, the agency theory seeks a control oriented board model with independent board leadership, outsider-dominated board composition and independent oversight board committees. These specific elements of board organization are designed to constrain the behavior of agents.

In contrast to the agency theory, proponents of the stewardship theory seek formal board structures that empower managers through structures that integrate decision management with decision control (Davis et al., 1997). Based on the Theory Y view of human behavior, the stewardship theory proposes a board model that seeks to support the involvement of directors in the strategic course of the corporation through the integration of CEO and chairman roles, insider-dominated board composition and supporting board committees in so-called “participative boards” (Andrews, 1982). As such, the stewardship theory departs from the view that the behavior of agents needs to be constrained by organizational structures.

As an alternative to agency theory, it holds the opposite view that board structures can ineffectively constrain the behavior of agents when they do not facilitate trust, empowerment and clear cut leadership for strategy formulation and implementation (Muth and Donaldson, 1998). The implications of the Theory Y view of human behavior on the organization and composition of one-tier and two-tier boards are explored in more detail in the remaining parts of this chapter. See also table 4.1 for the assumptions of the stewardship theory and the agency theory and the implications for board model design of these assumptions.

 

Table 4.1

The Comparison of Conflict and Consensus Perspectives of Board Organization

Assumptions of Human Models:

 

 

Conflict perspective:

 

Consensus perspective:

Theoretical basis:

agency theory.

stewardship theory.

Human model:

opportunism, theory X;

self-serving.

altruism, theory Y;

collective serving.

Information asymmetries:

large.

small.

Incentives:

extrinsic financial rewards.

identification with individual goals.

intrinsic motivation and satisfaction

identification with organizational goals.

Time frame:

short.

long.

Objective:

cost control.

performance enhancement.

Control mechanism:

internal and external control mechanisms.

trust.

Implications for Board Model Design:

Board model:

control oriented;

control model to alleviate agency problems;

involvement oriented;

participating model to empower management.

Leadership structure:

independent, CEO and chair positions are separated.

dual = CEO-duality: CEO and chair positions are combined.

Composition:

outsider-dominated.

insider-dominated.

Committees:

oversight committees.

supporting committees.

Organization:

two-tier.

one-tier.

Board involvement / roles:

separation of decision management from decision control;

control roles.

integration of decision management with decision control;

strategic roles.

Representatives:

Williamson (1985); Kosnik (1990); Johnson et al. (1993); Fama and Jensen (1983).

Donaldson (1990); Donaldson and Davis (1991, 1994); Davis et al. (1997).

Sources: based on Davis et al. (1997:37); Jonnergård and Svensson (1995:68).


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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.