Board contributions to
organisational outcomes
Martin Laverty
Doctoral candidate
Business School, Faculty of the Professions, University of New England
Doctoral thesis
“What, if any, corporate governance
approaches might optimise organisational
performance within human service
organisations utilising two tiered boards?”
Three objectives of this presentation
Summary of academic literature to consider:
1. The place of the Board of Directors within an
organisation and board links to organisational
performance (as distinct from board performance);
2. Factors shown to have some influence on a board’s
contribution to organisational performance;
3. Translation of findings arising from the literature to a
theoretical model not-for-profit board.
Three messages of this presentation
The academic literature indicates:
1.
The real value of a board in practice is not obviously clear (Denis and
McConnell 2003), and consequently not fully realised.
2.
The link between boards and organisational performance is not well
understood, and the complex relationship between the two has not yet
enabled anything but mixed results and ongoing debate as to if such a
link exists (Nicholson and Kiel 2007).
3.
A corporate board’s exercise of strategic influence (Huse and Rindova
2001), its participative nature (Heeracleous 2001), its level of
transparency (Mitton 2001), and its ownership of stock (Bhagat and
Bolton 2008) are each factors that have been found to correlate with
organisational performance in varying circumstances and to differing
extents.
For-profit corporate governance practices
Argument
Contemporary governance is a response to needs of owners of for-profit companies.
•
Corporate governance is the mechanism by which those providing capital to corporations
satisfy themselves that a return on their investment will be provided (Shleifer and Vishny
1997).
•
The design of a set of institutions to force or induce the welfare of shareholders to be
pursued by management is what has come to be known as corporate governance (Tirole
2001).
•
The key determinants of the development of a corporation’s governance system are said to
be the legal protections a state gives to investors, and the presence of large investors in the
corporation (Denis 2001).
Question
Are for-profit corporate governance practices best suited to not-for-profit governance?
Not-for-profit corporate governance
Argument
Governance of not-for-profits needs to accommodate the “multiple principal” framework.
•
Academic knowledge of governance arrangements in not-for-profit organisations is not well
known (Dyl, Frant, and Stephenson 2000; Jegers 2009).
•
The non-distribution constraint prohibiting profits being paid to founders is at the core of the
character of a not-for-profit organisation’s governance (Hansmann 1987).
•
Stakeholders take on characteristics of the principal or shareholder within a not-for-profit
organisation, such that there is a “multiple principals” framework; this type of not-for-profit
theory has yet to be developed fully and little research has focused on the role of donors,
volunteers, beneficiaries and staff members in non-profit governance (Jegers 2009).
Question
Do not-for-profit governance practices adequately identify and sufficiently address the
“shareholder like” needs of “multiple principals?”
The place of the not-for-profit Board
Argument
Beyond performance of statutory obligations, there is some ambiguity in the
literature as to what a Board’s purpose should be.
•
Board’s purpose is ultimately to enable cooperation (van Ees, Gabrielsson and
Huse 2009).
•
Board is a group gathered for their ability to add value to the organisation through
their collective actions (Ingley and van der Walt 2003).
•
The real value of a board in practice is not obviously clear (Denis and McConnell
2003).
Question
Do not-for-profit boards agree on their “other than legal purpose”, and how to fulfil
this purpose?
Theories on governance purpose
Argument
Boards can consider and adopt a desired governance approach as a clarifying motivation to help
fulfil purpose
•
Agency theory: Financiers assuring a return on investment and avoiding wasting or expropriation of
their funds (Shleifer and Vishny 1997).
•
Resource theory: Board is link between the organisation and external resources needed for the
organisation to achieve best performance (Pfeffer 1972); the board’s key role is enabling the
organisation to access resources it needs (Cowen and Marcel 2011).
•
Stewardship theory: Management interest is linked to the attainment of the goals of the owners of
the capital (Young and Thyil 2008), so that Board and management collaborate in enabling the
organisation (Farrell 2005).
Question
Do not-for-profit boards have sufficient knowledge of the differing governance approaches they can
apply in response to organisational needs as they arise?
What governance theory works best?
Argument
There is no established ‘best’ method of corporate governance.
•
Theoretical pluralism is required to understand the contributions that boards make
to organisational performance because no single theory provides sufficient
explanation of governance effectiveness (van Ees, Gabrielsson and Huse 2009).
•
The absence of evidence supporting known theories of boards and links to
organisational performance casts doubt on the utility of the agency, resource, and
stewardship approaches (Lynnal, Golden, and Hillman 2003).
•
There is ongoing debate and mixed evidence about the link between corporate
governance and organisational performance (Nicholson and Kiel 2007).
Question
If a link between governance and performance is not certain, is it entirely up to
management to ensure organisational performance?
The functionality of the Board
Argument
Before a board can contribute to an organisational outcome, it needs to be able to function
properly as a board itself
•
Three factors have been found to contribute to how a board functions: first, historical factors
influence how a board is comprised; secondly, boards have a certain capability to apply; finally,
interventions occur that alter this capability from time to time (Nicholson and Kiel 2004).
•
Use of knowledge, skills, cognitive conflict, and effort norms enable board task performance
(Forbes and Milliken 1999).
•
Alignment of the resources of knowledge, experience, relationships and procedures with the
Board’s required role set determine the ability of a board to achieve corporate objectives
(Nicholson and Kiel 2004).
Question
Do boards that review their own performance and functionality also review their contribution to
organisational performance?
Not-for-profit performance
Argument
Assessing board contributions to not-for-profit organisational performance
requires agreement on what constitutes organisational performance
•
Accounting and market measures are the key methods of determining for-profit
organisational performance (Wang and Clift 2009).
•
Not for profit organisational performance is often only able to be assessed by
perception of board members and its executive (Brown 2005).
•
Not-for-profit performance has alternatively been described as assessable by
consideration of organisational management and program effectiveness, with
program effectiveness best assessed through capacity provision and service
outcomes (Sowa, Coleman-Seldon and Sandfort 2004).
Question
Do not-for-profit organisations have clarity on what constitutes performance?
Standard governance-performance links
Argument
‘Garden variety’ good governance practice enables organisational performance
•
Boards contribute to value creation when their director members both individually and
collectively are able to effectively fulfil their board roles (Huse, Gabrielsson, and Minichilli 2005).
•
An effective board will execute its four roles of monitoring, providing strategy, providing advice,
and enabling access to capital; ultimately organisational performance is influenced by board
effectiveness (Nicholson and Kiel 2004).
•
Boards require resource providers, advisors, mentors, decision makers, evaluators, and
negotiators, and each of these skills must function simultaneously in order for value creation to
follow (Huse, Gabrielsson, and Minichilli 2005).
Question
Does not-for-profit board director selection widely deliver contributors able to fulfil these roles?
Current governance-performance links
Argument
Recent focus on board size, independence, and composition has not always improved
organisational performance
•
Size: Boards of smaller sizes have been shown to have a positive impact on organisational
performance (Hermalin and Weisbach 2001).
•
Independence: Anglo-American studies do not support independent directors as adding value
(Lawrence and Stapledon 1999), and a United Kingdom study found dominance of outside directors
actually impeded management (Franks, Mayer, Renneboog 2001).
•
Composition: A study of more than 6,000 firms between 1991 and 2003 found no causal link
between board structure and current firm performance (Wintoki, Linck, and Netter 2009), and the
impact of race and gender diversity is not a significant influence on performance, but does not lead
to poor performance (Wang and Clift 2009).
Question
Have not-for-profit boards assessed the benefits of smaller boards and composition?
Emerging governance-performance evidence
Argument
Organisational performance is ultimately determined by strategy
•
Strategic input is the key method by which a board can influence firm performance (Huse and
Rindova 2001). Organisational performance has been found to be ultimately linked to strategy,
such that board attributes might be of little consequence except to the extent they influence
strategic thinking and its implementation (Heracleous 2001).
•
Educational attainment and diverse functional backgrounds have been found to enable better
contribution to strategic decisions (Erhardt, Werbel, and Shrader 2003).
•
Unfortunately, boards have been found in practice not to be deeply involved in strategy setting,
with many involved only in strategy ratification rather than its formation, with CEOs playing the
leading role in strategy development (Finkelstein and Hambrick 1996).
Question
Do not-for-profit boards enable, by way of capacity development and time allocation, a sufficient
contribution to strategic inputs?
Emerging governance-performance evidence
Argument
The more participative a board, the more able it is to impact organisational performance
•
Participative boards correlate with higher financial performance (Heeracleous 2001).
•
Group dynamics drive team effectiveness (Nicholson and Kiel 2004); improved dynamics
better enable boards to contribute to organisational outcomes.
•
Political, legal, moral, and class roots are neglected in assessing corporate performance, as is
the difference between how people behave and how companies are advised to behave;
companies would be well served to consider techniques of motivation (Donaldson 2012).
Question
Do not-for-profit boards sufficiently prioritise participation of each director in board affairs?
Emerging governance-performance evidence
Argument
Ownership stakes in an enterprise incentivise directors to contribute to organisational performance
•
Stock ownership by board members correlates with improved operating performance; efforts to
improve operating performance through governance might seek to focus on stock ownership by
board members (Bhagat and Bolton 2008).
•
Dated evidence indicates directors on average may not be sufficiently rewarded to fulfill their
functions adequately (Denis 2001).
•
Alternatives to stock ownership would need to be considered in relation to not-for-profit
organisations.
Question
Do not-for-profit organisations sufficiently induct and reward board directors as “owners” of the
enterprise so as to incentivise their contribution to performance?
Emerging governance-performance evidence
Argument
Corporate transparency might relate to corporate performance
•
Disclosure per se does not correlate with firm performance but does enable better
functioning markets and protection of minority shareholder interests (Berglof and
Pajuste 2005).
•
Firms that have higher levels of corporate transparency demonstrate better
performance (Chiang, H-tsai 2005).
•
Governance transparency has also been found to correlate with analyst forecast
accuracy, but it is not clear if disclosure of governance or the governance structure
itself drives this association (Bhat, Hope, and Kang 2006).
Question
Noting the transparency-governance-performance link is not clearly established, do
not-for-profit boards demonstrate sufficient transparency?
Translating findings into a limited theoretical notfor-profit board model
For-profit governance practice
refined to suit needs of notfor-profit organisation
Basic board functionality is the
first step towards being able
to contribute to organisational
outcomes
Governance practice to
recognise “multiple principals”
or organisational “shareholder
interests”
Develop board capacity to
actively engage in strategy and
strategic decisions
Develop board director’s
capacity to participate
Board to determine its
purpose and approach (ie,
agency, resource, stewardship)
with same clarity of
understanding of its legal
obligations
There is no single “best”
method; Board to actively
determine its own structure
and approach
Determine board size in
knowledge of evidence of
benefit of fewer directors
Empower and reward board
directors as “owner
shareholders”
Define organisational
performance, adopt
framework to assess defined
performance, monitor board’s
contribution to organisational
performance
Adopt transparent governance
processes
References
Berglof, E., Pajuste, A., (2005), What do firms disclose and why? Enforcing corporate governance and transparency in Central and Eastern Europe. Oxford Review of Economic Policy, 21 (2), 178-197.
Bhagat, S., and Bolton, B., (2008), Corporate Governance and Firm Performance. Journal of Corporate Finance, 14, 257-273.
Bhat, G., Hope, O., Kang, T., (2006), Does corporate governance transparency affect the accuracy of analyst forecasts? Accounting and Finance. 46: 715-732.
Brown, W., (2005), Exploring the association between Board and organisational performance in non-profit organisations. Nonprofit Management and Leadership, 15, 317-339.
Chiang, H-tsai, (2005). An Empirical Study of Corporate Governance and Corporate Performance. Journal of American Academy of Business, 6, 95-102.
Cowan, A., Marcel, J., (2011) Damaged goods: Board decisions to dismiss reputationally compromised directors. Academy of Management Journal, 54(3), 509-527.
Denis, D.,(2001), Twenty-five years of corporate governance research…and counting. Review of Financial Economics, 10, 191-212.
Denis, D., McConnell., (2003), International Corporate Governance, European Corporate Governance Institute Finance Working Paper No 5.
Donaldson, T., (2012), The epistemic fault line in corporate governance, Academy of Management Review, 37(2): 256-271.
Dyl, E., Frant,H., and Stephenson, C., (2000), Governance and funds allocations in United States medical Research Charities. Financial Accountability and Management. 16, 335-352.
Erhardt, N., J. Werbel, and Shrader, C., (2003), Board of director diversity and firm financial performance. Corporate Governance, 11(2): 102-111.
Farrell, C., (2005), Governance in the UK public sector: The involvement of the governing board. Public Administration, 83(1), 89-110.
Finkelstein, S., and Hambrick, D., (1996), Strategic leadership – Top executives and their effects on organisations, West Publishing, Minneapolis.
Forbes, D. and F. Milliken (1999), Cognition and corporate governance: Understanding boards of directors as strategic decision making groups. Academy of Management Review, 24: 489-505.
Franks, J., Mayer, C., Renneboog, L., (2001), Who disciplines management in poorly performing companies? Journal of Financial Intermediation, 10, 209-248.
Hansmann, H., (1996), The Ownership of Enterprise. Cambridge, Massatutes, USA: Harvard University Press.
Heracleous, L., (2001), What is the impact of corporate governance on organisational performance? Corporate Governance, 9(3), 165-173.
Hermalin, B., Weisbach, M., (2001), Boards of Directors as an endogenously determined institution: a survey of the economic literature. FRBNY Economic Policy Review.
Huse, M,. and Rindova, V., (2001), Stakeholders Expectations of Board Roles: The Case for Subsidiary Boards, Journal of Management and Governance, 5, 153-178.
Huse, M., Gabrielsson, J., Minichilli, A., (2005), Knowledge and Accountability: Outside Directors contribution in the corporate value chain. Lund University, 2005/09.
Ingley, C., van der Walt, N., (2003), Board configuration: building better boards. Corporate Governance, 3(4), 5-17.
Jegers, M. (2009), “Corporate” governance in non-profit organizations, Non-profit Management and Leadership, 20:2, 143-164
Lawrence, J., and Stapledon, G., (1999), Do Independent Directors Add Value? Centre for Corporate Law and Securities Regulation, University of Melbourne.
Lynall, M., Golden, B., Hillman, A., (2003), Board composition from adolescence to maturity: A multitheoretic view. Academy of Management Review, 28(3), 416-431.
Mitton, T., (2001) A Cross-Firm Analysis of the Impact of Corporate Governance on the East Asian Financial Crisis. Journal of Financial Economics, 64, 215-241.
Nicholson, G., Kiel, G.,(2004)(1), A Framework for Diagnosing Board Effectiveness. Corporate Governance: An International Review, 12(4), 442-460.
Nicholson, G., Kiel, G.,(2007), Can Directors impact performance? A case based test of three theories of corporate governance. Corporate Governance: An international Review, 15 (4), 585-608.
Pfeffer, J., (1972), Size and composition of corporate boards of directors: The Organisation and its environment. Administrative Science Quarterly, 17, 218-228.
Shleifer, A., Vishny, R., (1997), A survey of corporate governance. Journal of Finance, 52, 737-783.
Sowa, J., Coleman-Seldon, S., and Sandfort, J., (2004), No Longer Unmeasurable? A multidimensional Integrated Model of Non-profit Organisational Effectiveness. Nonprofit and Voluntary Sector Quarterly, 33 (4),
711-728.
Tirole, J., (2001), Corporate Governance. Econometrica, 69, 1-15.
Van Ees, H., Gabrielsson, J., Huse, M., (2009), Toward a behavioural theory of boards and corporate governance. Corporate Governance: An International Review. 17(3), 307-319.
Wang, Y., Clift, R., (2009), Is there a “business case” for board diversity? Pacific Accounting Review, 21(2), 88-103.
Wintoki, J., Linck, J., and Netter, J., (2009) Endogeneity and the dynamics of corporate governance. Centre for Economic Policy Research.
Young, S., Thyil, V., (2008), A holistic model of corporate governance: A new research framework. Corporate Governance, 8(1), 94-108.
mlavert3@une.edu.au