One or Two:
Ensuring Director Contributions to
Organisational Outcomes
in Two Tiered Governance Structures
Martin Laverty
Doctoral candidate
Business School, Faculty of the Professions, University of New England
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Learnings from doctoral thesis
“What, if any, corporate governance
approaches might optimise organisational
performance within human service
organisations utilising two tiered boards?”
Why two-tier boards?
Federations face tension in the balance between
demand for efficiency through centralisation and
competing need for representation of constituent
bodies, causing federated bodies to spend energy
discussing and modifying structures of governance
(Widmer and Houchin 1999, Cornforth 2012).
To answer the question…
Presentation Structure
• What is known about the scale of the Australian not-for-profit
sector
• Theories and practice of governance in the not-for-profit sector
• Assessment of not-for-profit organisational performance
• 12 identified links between board governance and organisational
performance
• Framework for board directors to contribute to organisational
performance
Australian Not-for-profit sector
•
•
•
•
600,000 not-for-profit organisations
59,000 economically significant
Employ 8% of Australia’s total workforce
Contribute $43 billion annually, or 4% of GDP
(Productivity Commission 2010)
Theory of not-for-profit governance
• 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 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 of not-for-profit organisations take on characteristics of the
principal or shareholder, such that there is a “multiple principals”
framework within which corporate governance occurs. Those identified as
capable of inclusion within the group of multiple principals include
donors, volunteers, consumers, beneficiaries and staff members.
(Jegers 2009).
Practice of not-for-profit governance
• The design of a set of institutions such as boards and board committees 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)
• Contemporary governance is mostly a response to the needs of owners of
for-profit corporations; little attention has been given to if for-profit
corporate governance practices actually suit the unique needs of not-forprofit organisations.
• Corporate governance of not-for-profit organisations in Australia is mostly
exercised through a single or unitary board. Some organisations are
governed through a two-tiered board. Not-for-profit governance research
is partly limited because of its narrow focus on unitary governance,
whereas in practice federations, subsidiaries, and multilevel complex
governance structures have evolved in many non-profit organisations.
(Cornforth 2012).
Practice of two-tiered governance
• Two-tiered boards operate by separating executive and nonexecutive directors with specific roles and legal responsibilities.
(Bezemer et al 2012)
• The two-tier structure sees the supervisory (or higher tiered) board
simultaneously act on behalf of the shareholder as agent, and
direct the management (or lower tiered) board as principal.
(Triole 1986)
• Subsidiary boards, which are arrangements where a controlling
board creates or mandates a subservient board with an assigned
role are treated differently to two tiered boards. So too are the
relationships between boards in a federated structure. However,
the dynamics of the two-tiered structure can inform the practice of
subsidiary or federated board practice.
Use of two-tiered boards
• Germany first enshrined two tiered boards into
corporate law in the nineteenth century; the German
template has since been utilised in central-Europe,
Latin American countries, China and east-Asia.
(Goo & Hong 2011)
• 22.6% (or 6,419) of Australia’s total private hospital
overnight stay beds are operated by not-for-profit
organisations that utilise two-tiered boards of
governance that are consistent with the Germanic
framework.
Assessment of not-for-profit organisational performance
• Performance of not-for-profit organisations on the other
hand has been said to be a social construct, and its
determination depends on who you ask.
(Herman & Renz 1997)
• Accounting and market measures are the key methods of
determining for-profit corporation performance.
(Wang and Clift 2009)
• Assessment of 149 publications in the decade leading to
2006, common measures of performance were found to be
(a) efficiency or productivity, (b) market share, (c) customer
satisfaction, and (d) quality.
(Baruch& Ramalho 2006)
Governance/organisational performance link
1 – Basic Board Functionality
• Before a board can contribute to an organisation’s outcomes, it
needs to first be able to function properly as a board itself.
• Boards contribute to value creation when their director members
both individually and collectively are able to effectively fulfill their
board roles.
(Huse, Gabrielsson, and Minichilli 2005)
• Effective boards have 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)
Governance/organisational performance link
2 – Monitoring of performance
• Board should determine what it requires by way of organisational
performance, and then focus its monitoring effort on achieving this
performance.
• Not-for-profit status itself, and the unclear nature of some goals of
not-for-profit organisations, limits the accuracy of relying on
financial performance indicators alone
(Brown 2005)
• It is not clear what a not-for-profit manager is meant to maximise;
choosing what it is the not-for-profit manager is to maximise is key
to the board being able to assist the organisation’s performance.
(Eldenburg et al 2004)
Governance/organisational performance link
3 – Board Makeup
• Anglo-American studies of for-profit corporations do not support selection
of ‘independent’ directors as necessarily adding value to the corporation’s
performance.
(Lawrence and Stapledon 1999)
• Where directors are selected in order to bring diversity of skills, thought,
and experience to the board, a study of more than 6,000 for-profit firms
between 1991 and 2003 found no causal link between diversity and firm
performance.
(Wintoki, Linck, and Netter 2009)
• Smaller boards have been shown to have a positive impact on for-profit
corporation performance.
(Hermalin and Weisbach 2001)
Governance/organisational performance link
4 – Strategy Engagement
• Strategic input is the key method by which a board can influence a forprofit corporation’s performance.
(Huse and Rindova 2001)
• Corporation 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)
• 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)
Governance/organisational performance link
5 – Participation
• Participative boards correlate with higher financial performance.
(Heeracleous 2001)
• Organisational effectiveness has been found to relate confidence of
board directors in the understanding of their responsibilities.
(Herman & Tulipana 1985)
• Gender, experience as a not-for-profit director, service on other
not-for-profit boards, mission attachment, and training have been
found as the best indicators of confidence and participation in
board governance.
(Brown, Hillman, and Okun 2012)
Governance/organisational performance link
6 – Reward “ownership”
• Stock ownership by board members in particular has been
found to correlate with improved operating performance
(Bhagat and Bolton 2008)
• Directors on average may not be sufficiently rewarded to
fulfill their functions adequately
(Denis 2001)
• Directors who are not remunerated sufficiently lack the
incentive to contribute fully to their board role.
Governance/organisational performance link
7 – Transparency
• Firms that have higher levels of corporate transparency have been
found to demonstrate better performance.
(Chiang, H-tsai 2005)
•
Favourable accountability assessments have been found to
increase donor contributions, which in turn contributes to
organisational performance
(Sloan 2009)
• A not-for-profit organisation’s accountability is determined by a
combination of its strategy, capacity, governance, and contextual
engagement with its particular stakeholder groups
(Saxton and Guo 2011)
Governance/organisational performance link
8 – Donor monitoring
• Major donors on a not-for-profit board have been found to perform a
monitoring function motivated by their investment in the organisation,
just as large shareholders do in a for-profit corporation.
(Brown 2005)
• A significant association has also been found between organisational
efficiency and boards that comprise major donors.
(Callen, Klein, & Tinkelman 2003)
• Donors who participate in a not-for-profit organisation’s board governance
by setting objects and directions have been found to enhance
organisational efficiency.
(Van Puyvelde et al 2012)
Governance/organisational performance link
9 – Resource attraction
•
Board directors engaged with resource gathering activities including fundraising
and the making of personal contributions have been found to participate on
boards more associated with improved organisational performance.
(Brown 2005)
•
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)
•
Appropriate board size, tenure, chair tenure and business executive background
have also been found to correlate with improved revenue and gift income of notfor-profit organisations.
(Olson 2000)
Governance/organisational performance link
10 – Stability
• Poor financial performance of a series of American not-for-profit
organisations was found to relate to high board and CEO turnover.
(Eldenburg et al 2004)
• A board’s purpose is ultimately to enable cooperation.
(van Ees, Gabrielsson and Huse 2009)
• 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)
Governance/organisational performance link
11 – Independent supervisory board
• Genuinely independent supervisory boards in Germany and Austria
have been found to correlate with improved firm performance.
(Velte 2010)
• Larger and more active supervisory boards were found to improve
earnings returns and have higher quality reporting
(Firth et al 2007)
• Active and large supervisory boards in China have been found to be
associated with more robust financial reporting and increased
earnings, but too many members leads to less effectiveness.
(Jia et al 2009)
Governance/organisational performance link
12 – Professionally matched supervisory boards
• Where supervisory boards comprise members
with appropriate professional knowledge,
work experience, and independence from
management they have been found to be
more likely to be able to improve
organisational performance.
(Shan & Xu 2012)
Single and two-tiered boards
Framework for
not-for-profit
board
directors to
contribute to
organisational
performance
Functionality
Basic board
functionality is essential
in being able to
contribute to
organisational
outcomes.
Monitor performance
Board should define
meaning of
organisational
performance and
monitor the board’s
contribution towards it.
Makeup
The Board should
determine its
appropriate
independence,
composition, and size.
Strategy engagement
The Board should
develop the capacity of
it and its members to
actively engage in
strategy and strategic
decisions.
Two-tiered boards only
Donor monitoring
The Board should
enable active
participation of major
donors in governance.
Participation
The Board should
develop each board
director’s capacity to
participate fully in the
affairs of the Board.
Independent
A supervisory board
should work to be
genuinely independent.
Resource attraction
The Board should
engage directors in
resource gathering.
Reward “ownership”
The Organisation
should empower and
reward board directors
as “owner
shareholders.”
Stability
The Board should work
towards low board and
chief executive officer
turnover.
Transparency
The Board should adopt
a transparent
governance processes.
Professional match
A supervisory board
should comprise
members with
appropriate
professional knowledge
and work experience
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mlavert3@myune.edu.au