Semi-public governance: An explorative in-depth study of supervisory board composition and recruitment in the healthcare sector.

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Semi-public governance: An explorative in-depth

study of supervisory board composition and

recruitment in the healthcare sector.

B.A.H. van Warners

University of Groningen

Faculty of Economics and Business

Nettelbosje 2

9747 AE Groningen

Student number: s1914596

Phone number: 06-18996601

Email:

b.a.h.van.warners@student.rug.nl

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“Sed quis custodiet ipsos custodies?”

Iuvenalis, Satire VI, Line 347

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ABSTRACT

In this thesis I review governance in the highly complex and hybrid healthcare sector. In doing so, it addresses supervisory boards’ composition in this sector, the ways in which new members of those boards are recruited, and the influence of recruitment on board composition. Specifically, regarding board composition, different types of experience and expertise are studied in their relation to the ability to monitor of those supervisory boards. Thereby, I used and adapted Hillman and Dalziel’s (2003) board capital model as the main theoretical construct. In-depth semi-structured interviews were conducted with five supervisory board members and a senior consultant of an agency which recruits executives and non-executives for semi-public organizations. This latter respondent was included to triangulate the data from the other respondents. The respondents perceive the contribution of different types of experience and expertise to healthcare supervisory boards’ capital to different extents and in different ways. Regarding recruitment, a mix of recruiting by means of public advertisements, recruiting agencies and personal networks is used by all but one of the supervisory boards in this study. Using the respondents perceptions, I found indications that especially the increasing use of recruiting agencies may have a possible positive influence on new supervisory board members’ competences and therefore a possible positive influence on their ability to monitor.

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ACKNOWLEDGEMENTS

The past few months have been quite intensive and there were times where I struggled. However, all the time I had a clear goal in mind. But I couldn’t have done this all on my own. Several people have supported and helped me during the process of writing this master thesis.

Therefore, I first want to give special thanks to my beloved parents who have raised me to the person I am today. They supported me in every single step I took during my studies and the rest of my life. I also want to thank the rest of the family, my sister and my brothers, for all the good times we had together during the weekends at our family home. Unfortunately, my beloved grandfather isn’t able to witness the finalizing of my master thesis and my possible future graduating, since he passed away unexpectedly three years ago. Ever since I was a child, he has been a great role model for me and a source of wisdom.

I also want to thank my friends Albert, Peter, Ronnie, Thomas and several others for having confidence in my abilities, supporting me in their own ways when needed and the good times we had together during our time as a student. Those times were unforgettable and somehow this master thesis unfortunately marks the end of those times as a student as well.

Of course, I want to thank the respondents who reserved some of their valuable time for me in participating in the interviews. Besides, it were interesting and enjoyable conversations.

Mr. Van Veen, who was my supervisor during the process, thank you for your helpful insights and advice along the way. It was a pleasure working with you.

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1. INTRODUCTION

In the Netherlands, a vast debate is going on recently about how to improve governance in the semi-public sector. This debate in academia, government and the semi-semi-public sector itself is mainly the result of the often disastrous results of (conscious or unconscious) mismanagement in the semi-public sector throughout roughly the last decade, partly due to bad monitoring of supervisory boards. The semi-public sector mainly entails healthcare, education and social housing. According to the report of the Commissie Behoorlijk Bestuur (Halsema, Februari, van Kalleveen and Terpstra, 2013: 9), irresponsible portfolios of derivatives and amounts of borrowing were contracted. Also, commercial projects were initiated and agricultural lands, castles, Maserati’s and even yacht harbors were acquired for private purposes. Ultimately, partly because of the foregoing, some large organizations in this sector went bankrupt or needed large amounts of government aid to survive. An example of this in the healthcare sector, the sector where I focus on in this thesis, is the bankruptcy of Meavita in 2009. At the same time, even though the Dutch government is increasingly cutting

down its budget because of the economic crisis which started in 20081, until recently sacked

directors are often provided with large amounts of severance pay. This is a much discussed issue in

The Netherlands, since those compensation packages in some cases exceed the legal standard2 and

are indirectly provided by the government. Semi-public organizations are after all partly financed by the government, but ultimately financed by taxpayers themselves.

All the foregoing has led the government to give institutions like ECORYS and the Halsema-committee the assignment of investigating the subject. First a definition of semi-public organizations is required to give an indication of their specific characteristics. According to Halsema et al. (2013: 9), these organizations need to meet the following three criteria: (1) having a duty imposed by law, (2) to be financed to a large extent by public goods, and (3) serving a public interest.

Some specific characteristics of the semi-public sector following from the aforementioned research are that semi-public organizations carry a deeply rooted societal task, are operating on a particular distance of public administration and therefore require a particular degree of freedom in managing the organization (Ecorys, 2010: 11). These required higher amount of distance and freedom from public administration are a result of the gradual introduction of market forces in the sector. Those market forces were believed to bring several positive features such as cost efficiencies so public goods could be spent more efficiently. At the same time, especially because of the required larger extent of freedom and distance from the government, monitoring is required to safeguard the

1_{http://www.europa-nu.nl/id/vhrtcvh0wnip/economische_crisis}

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societal importance of these organizations. Regarding the specific focus of this thesis, after all, high quality healthcare is a public interest and monitoring is necessary to ensure the proper functioning of those organizations.

Monitoring can be external in the form of inspections or internal in the form of supervisory boards. The latter, internal monitoring in the form of a supervisory board, is the subject under review in this thesis. Specifically, the unit of analysis is supervisory boards in the healthcare sector. In corporate governance literature, monitoring traditionally refers directly to the responsibilities of directors to monitor managers on behalf of shareholders (Hillman and Dalziel, 2003). It is derived from agency theory, which sees the primary function of a board as monitoring the actions of “agents” (managers) to protect the interests of “principals” (owners/shareholders). It specifically entails monitoring the CEO, evaluating strategy implementation, planning succession, and rewarding top management (Hillman and Dalziel, 2003). However, in this thesis I focus on the healthcare sector, which is part of the semi-public sector. Here, monitoring additionally entails dealing with the beliefs, ideas, opinions and values of stakeholders and society at large and monitoring the quality of the healthcare provision to stakeholders and society at large (italics adjusted to healthcare context) (Moore, 2000; Goodijk, 2011). Also, according to Speckbacker (2008), compared with private organizations, in non-profit organizations supervisory boards play an even more important role by acting as a mechanism to reduce information asymmetries and control costs for primary stakeholders. Indeed, healthcare organizations have a different relationship with most stakeholders than private organizations have. This is because customers or clients have a primary interest in semi-public organizations, because basically these organizations are financed by those customers/clients in the sense of taxes they pay to the government.

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of experience, expertise, knowledge and skills is therefore likely to be required in a healthcare supervisory board to ensure high quality monitoring. This is also recommended by the Halsema-committee (2013: 9), which states that the safeguarding of public interests requires management and boards of semi-public organizations to be representative and in every aspect diverse: in terms of disciplines, norms and values, expertise, members with a business background complemented by members with thorough knowledge of the sector and financial experts besides service providers. Goodijk (2011) is even more critical about semi-public supervisory boards’ abilities when he questions the current quality and involvement of semi-public supervisory boards and when he recommends a ‘better mix of specialists and all-rounders’ inside semi-public supervisory boards. In contrast, private organizations in a sense basically have one main objective, which is to make profits. Healthcare organizations, with their semi-public character, have relatively higher amount of responsibilities and need to take into account relatively more interests. Healthcare organizations therefore are, in comparison with private organizations, possibly relatively more complex to manage and monitor. In any case, it could be assumed that healthcare organizations need to be managed and monitored in a different way than is required with private organizations because of their semi-public nature. Most existing research on board composition and recruitment is carried out in the private sector, where it is called corporate governance. Hence, with this thesis I try to fill a gap by researching composition and recruitment of supervisory boards in a new and different setting. Also, the ways of recruitment will be subject of research in this thesis. In the ZGC (2010) is codified that board member applications need to be clear and transparent. However, the recent study of Halsema et al. (2013) states that the selection of new managers or directors too often still takes place via intransparent ways. Even more, it was assumed that there is an ‘old-boys network’ in place which provides jobs to each other and where political affiliation plays a larger role than competencies (Halsema et al., 2013). This give relevance for this thesis because different ways of recruiting are likely to influence the ability to monitor. Indeed, sometimes the involved supervisory board candidates lack the required education, experience, expertise or detract the group dynamic or diversity and ultimately the quality of monitoring. Furthermore, in this thesis I try to explore how and why certain recruitment practices in practice are used in healthcare supervisory boards.

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methodology I used and the results. Finally, I will end with a conclusion section and a section about the limitations of this research and opportunities for further research.

2. THE HEALTHCARE SECTOR IN THE NETHERLANDS

The healthcare sector in The Netherlands is a highly complex and dynamic sector. This can partly be characterized by a few of its distinctive characteristics given by Boer & Croon (2009). First, the healthcare sector is strongly influenced by moral and ethical beliefs. For example, high quality healthcare is seen as a fundamental right. Second, the government still has a highly regulating role. This is because constitutionally the government is responsible for the provision of high-quality healthcare. An example of the regulating role of the government is the highly limited possibility of profit distribution in healthcare organizations. Third, patients not always can successfully adopt the role of customers. This is because a patient is extra vulnerable on the moment of demanding healthcare. Also, a patient is highly dependent on the healthcare provider because of a high extent of information asymmetry between healthcare consumer and provider. Thereby, when a patient needs acute healthcare there is no possibility to choose between different healthcare providers. Fourth, the healthcare sector in The Netherlands is complex and dynamic because of numerous changes of regulations and the uncertainty about possible future changes.

With regard to the structure of the Dutch healthcare sector, it consists of a large amount of types of actors. These can be divided in three main groups: (1) Suppliers (2) Healthcare providers and (3) Healthcare facilitators (Boer & Croon, 2009). Also, several types of actors are responsible for the

guarantee of affordable, high-quality and accessible healthcare.3 First, the government controls the

main thrusts and is responsible for safeguarding public interests. Second, health insurance companies need to buy healthcare services of a high quality at competitive prices. And third, healthcare providers do not just only provide healthcare services anymore, they have become market participants. They need to be accountable about their actions. Performances of healthcare providers need to be visible to health insurance companies to be able to conclude contracts with them. Also, performances of healthcare providers need to be visible to healthcare consumers so they can choose a healthcare provider consciously. The possibility of consciously choosing a healthcare provider and healthcare insurer ultimately needs to result in high quality healthcare against competitive prices.

This current structure of the Dutch healthcare sector is the result of the introduction of regulated market forces in the healthcare sector in 2006. This was to guarantee affordable, high-quality and

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accessible healthcare, since an increasing aging population resulted in a rising pressure on the

healthcare sector regarding costs4. As an indication, from 2000 to 2007 total expenditures to health

care providers rose with 60% from around 40 billion euro to 65 billion euro. The high amount of money which is spent by the government on healthcare needs to be spent as efficient and sustainable as possible. Therefore, regulated market forces were introduced in the sector and here the healthcare sector shifted from a government sector to a semi-public sector.

Related to the several types of actors in the healthcare sector, financing in the healthcare sector is quite complex. Money flows from healthcare consumers to healthcare providers via several different paths. Via health insurance companies, via employers by means of social contributions, and via the national and municipal governments by means of taxes (Boer & Croon, 2009). The majority of those financial flows passes via health insurance companies, the national government and also municipal governments (Boer & Croon, 2009: 52).

Managing an organization in the complex Dutch healthcare sector requires balancing between political interests, the demands of austere management, the needs of professionals such as teachers and medical/nursing staff, and the needs of people who make use of healthcare services (Halsema et al., 2013). It is crucial for good management to serve professionals and civilians, without losing sight of the responsibility of proper financial and organizational management. This is a difficult task. Though, healthcare organizations often have a foundation as their legal entity. This means that they

have no members, shareholders or voters who can monitor management5. To avoid problems related

to the operating on a particular distance from the government, professional supervisors are required who need to be able to call the executive board to order when the provision of high quality

healthcare is at risk4. Indeed, as already mentioned in the introduction, monitoring can be external in

the form of inspections or internal in the form of supervisory boards. Supervisory boards in the healthcare sector, the unit of analysis in this thesis, need to serve three aims: (1) Monitoring and giving advice in the interest of the healthcare organization (2) Dealing with the beliefs, ideas, opinions and values of stakeholders and society at large and (3) Monitoring the quality of the

healthcare provision to stakeholders and society at large (italics adjusted to healthcare context)

(Moore, 2000; Goodijk, 2011).

The changes in the healthcare sector regarding the introduction of regulated market forces seem to have influenced governance in the healthcare sector as well. The Dutch Healthcare Authority (Nederlandse Zorgautoriteit, NZA) was established in 2006 as an external supervisory authority to

4_{http://www.zorgverzekering.org/algemene-informatie/nederlandse-zorgautoriteit}

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guarantee external monitoring. Also, in 2005 a healthcare governance code was drawn to improve internal monitoring as well in the form of supervisory boards. In 2010 this governance code was updated. Although this governance code includes several guidelines for improving governance, according to an article in 2013 of the Dutch Knowledge Center for Supervisory Board Members (NKCC

in Dutch), it is still often not entirely clear to internal supervisors what their task is4. Some of them

lean back and act insufficiently as a counterbalance for the executive board. Also, sometimes there is

a lack of professionalism or competence.’4 For example, in 2009, the Dutch Board for Health and Care

(Raad voor de Volksgezondheid & Zorg in Dutch) wrote a report called Governance and Quality of Healthcare. In this report, it was argued that knowledge of primary healthcare processes was often absent in supervisory boards in the healthcare sector. This is because those supervisory boards were mainly focused on finance and strategy, while quality of healthcare was often not addressed. However, this knowledge of primary healthcare processes is indispensable to assess risks for the quality of healthcare as part of their responsibility.

However, the government is currently working on a legislative proposal which is supposed to become the legal basis for the establishment of a supervisory body within foundations (and associations), the

type of legal entity which semi-public organizations such as healthcare organizations often have6.

This already exists for the legal entities ‘public company’ (NV in Dutch) and ‘private limited liability company’ (BV in Dutch). The goal of legal basis is to improve the quality of management and monitoring by having one uniform regulation which clarifies responsibilities and duties of supervisory boards.

3. THEORETICAL FRAMEWORK AND RESEARCH QUESTIONS

The two main constructs researched in this thesis are board capital as a proxy for a supervisory board’s ability to monitor, and recruitment practices of new supervisory board members. Hereby, recruitment is expected to influence board capital and therefore this relationship is researched as well. This thesis is divided in two main theory sections. First, board capital will be discussed and second recruitment of new supervisory board members.

3.1 Board Capital

According to the ZGC (2010: 24), the supervisory board needs to be constituted in such a way that it can fulfill its role properly. Each individual supervisory board member needs to be able to evaluate

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the main outlines of an organization’s policies. Also, each individual supervisory board member needs to possess the specific expertise required for the fulfilment of his or her specific task within the supervisory board (ZGC, 2010: 25). However, Blokdijk and Goodijk (2011) argue that a tension exists between on first hand pursuing a small effective supervisory board, while on the other hand securing sufficient diversity and competences. Specifically, supervisory boards in the healthcare sector mainly consist of six or seven members with a tendency to decrease.

By examining board capital, a board’s ability to monitor can be inferred. Board capital is the amount of experience, expertise, knowledge and skills available in the board (Hillman and Dalziel, 2003). It entails the often in the literature used concepts ‘human capital’ and ‘relational (or social) capital’ which build on the widely used resource dependence theory (RDT) (Hillman, Cannella & Paetzold, 2000; Hillman, Withers & Collins, 2009; Withers, Hillman & Cannella, 2012). Human capital is directors’ expertise, experience, knowledge, reputation and skills (Hillman and Dalziel, 2003). Relational capital is the sum of actual and potential resources embedded within, available through, and deprived from the network of relationships possessed by an individual or social unit. However, Hillman and Dalziel (2003) don’t further distinguish between them and continue their story with the composite variable board capital. Although this thesis mainly focuses on the ‘human capital’ component of board capital, it will continue to use the composite construct of board capital, following Hillman and Dalziel (2003).

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competences of Daud et al. (2010) and Hsieh et al. (2012) continue to use knowledge and skills as part of competences.

Competences can include generic or technical competences (Hsieh et al., 2012). Related to the ZGC (2010), generic competencies are likely to include the task of being able to evaluate the main outlines of an organization’s policies. Technical competences are likely to include the specific expertise required for the fulfilment of his or her specific task within the supervisory board.

In the remainder of this section, experience, expertise, knowledge and skills are discussed in their respective subsections. However, the actual research focuses on experience and expertise since I argue that those types lead to knowledge and skills. This is visualized in figure 1.

The overall research question in this section is the following:

- Research question 1: How do supervisory board members in the healthcare sector perceive to what extent and how different types of experience and expertise contribute to a supervisory board’s capital in the healthcare sector ?

Figure 1 – Conceptual model of board capital, adapted from Hillman and Dalziel (2003):

3.1.1 Knowledge

As said before, together with skills, knowledge is directly influencing a supervisory board (member)’s competences. Because competences are used here as a proxy for board capital, knowledge contributes directly to a supervisory board’s capital. Knowledge refers to what somebody has learned about facts and relationships, and about techniques and procedures within a particular domain (Roe, 2002). Also, it refers to a body of information about the theoretical and practical understanding of a subject, acquired by a person through experience or education (Hsieh et al., 2012). Therefore, when

Experience Expertise

Knowledge Skills

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combining the model of Hillman and Dalziel (2003) with competence literature, I argue that knowledge is directly influenced by experience and expertise.

3.1.2 Skills

Skills refer to the application of data or information with manual, verbal, or mental proficiency (Hsieh et al., 2012). They are often not obtained by education, but learned in practice (Roe, 2002). Examples of skills are communication, teamwork, problem-solving, planning and organizing, analytical or conceptual thinking, information seeking, visioning and relationship building (Daud et al., 2010; Hsieh et al., 2012). Derived from Daud et al. (2010), I categorize those skills as cognitive, interpersonal and intrapersonal skills.

According to the Dutch Association of Healthcare Supervisors (NVTZ), contemporary monitoring needs to focus more on ‘managing’ the organization, instead of only on ‘management’ of the organization. On first hand this seems only a minor difference. However, it requires a broader look and therefore supervisory board members increasingly need to engage in dialogue with employees inside and stakeholders outside the organization (Buiting, 2013). Of the just mentioned categories of skills, interpersonal skills are required here. When you need valuable information from such sources, it is important to be able to extract information in the right way. That type of skills is also required to have an open, honest and trusting relationship with executives. Since supervisory board members need to monitor executives, they are reliable on executives as well for the provision of information. I argue that skills are directly influencing competences and hence board capital. In turn, skills are developed by experience and expertise.

3.1.3 Experience

Experience is familiarity with a skill or field of knowledge acquired over months or years of actual

practice and which, presumably has resulted in superior understanding or mastery7. Supervisory

board members’ current and past professional experiences as managers and board members can be strong indicators of their human capital because it allows them to develop specific skills and tacit or procedural knowledge about how boards, firms and industries operate (Kor & Sundaramurthy, 2009: 984). This sort of experience I will cover in the first two types of experience: supervisory board experience and executive experience. Thereafter, healthcare and political/societal experience will be discussed.

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The first type of experience covered is supervisory board experience. This can be thought of as past professional experience as a supervisory board member and the current membership of other supervisory boards. Participation in multiple boards allows directors to build a diverse knowledge base on strategy and governance issues (Kor & Sundaramurthy, 2009: 998). It provides timely access to a wide variety of ideas and knowledge needed for general problem recognition, analysis and solving (Kor & Sundaramurthy, 2009: 997). Also, members of multiple boards are exposed to a diverse set of strategic decision making and implementation challenges and complex corporate governance issues. This all contributes to a supervisory board member’s knowledge and skills and ultimately to the ‘general human capital base’ or aforementioned kind of general competencies of a supervisory board member. Indeed, it allows a supervisory board member to be able to evaluate the main outline of a healthcare organization’s policies.

The second type of experience in this thesis is experience as an executive and also is likely to mainly contribute to the aforementioned ‘general human capital base’ of supervisory board members. I define executive experience as experience as a person who is appointed and given responsibility to manage the affairs of an organization and the authority to make decisions within specified

boundaries8. Withers et al. (2012) found that CEO’s seem to be the most highly valued type of

supervisory board member in the profit sector. Other research to supervisory board members of all types of sectors in The Netherlands, argues that 97% of the respondents in that particular research consider it important that supervisory board candidates have executive experience and therefore is most often an important criterion in supervisory board recruitment profiles (Deloitte Commissioners Survey (from now on abbreviated to DCS), 2012: 11). Even more, remarkably, in the same research past professional experience as an executive seems much more important than past professional experience as a supervisory board member. Only 44% of the interviewed supervisory board members considered the latter (very) important and it is only part of the recruitment profile in 49% of the supervisory boards of the interviewees. In contrast, regarding past professional experience as an executive, these percentages raise to respectively 97% and 98%. This is a vast difference for which an explanation cannot be found yet. The empirical research in this study may give some explanations for this large difference. Both aforementioned studies did research to respectively the profit sector and a collection of various types of sectors in The Netherlands. It is not sure whether those results hold for the Dutch healthcare sector as well. In this thesis, I will try to uncover this as well.

The third type of experience is a slightly different sort of experience. It is industry experience, which in this thesis means experience in the healthcare sector. The inclusion of this type of experience is

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specifically recommended by the ZGC (2010). It states that a supervisory board in the healthcare sector should consist of at least one member with experience or knowledge in healthcare relevant to the healthcare organization (ZGC, 2010: 25), since the presence of knowledge about primary processes adds significant value to the board’s capital (ZGC, 2010: 51, italics added by own interpretation). Or as Kor and Sundaramurthy (2009) articulate it, prior experiential knowledge of the industry provides supervisors with specialized business and technology knowledge and access to industry networks. Furthermore, it helps them develop a sophisticated and tacit understanding of the current and future industry dynamics, which enables them to better evaluate policy proposals of the executive board. This contributes to the ability to monitor the executive board. Buiting (2013) finds it interesting and hopeful at the same time that in contrast with previous years, the majority of new members of healthcare sector supervisory boards has a healthcare background. Indeed, Goodijk (2011) in his research to supervisory board members in the healthcare sector, observes that knowledge of healthcare is fairly present in most of such supervisory boards. However, knowledge of healthcare also can be developed through expertise. Therefore, I will mention it again in the expertise section.

The fourth type of experience is political/societal experience. Nearly every aspect of business is shaped by government regulation, which can significantly affect modify firms’ opportunity sets (Lester, Hillman, Zardkoohi and Cannella, 2008). Therefore, it can be valuable to have former government officials in the supervisory board. They can provide valuable nonbusiness perspectives on issues, intimate knowledge of the public policy process, legitimacy, and access to key decision makers still in government (Hillman, Cannella & Paetzold, 2000). Also, having a government insider in the supervisory board can reduce the transaction costs of securing information about political decisions (Lester et al., 2008). Supervisory board members need aforementioned types of knowledge to monitor the way in which executives interact with national or local governments.

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stakeholder directors. They show that the degree of regulation within an industry positively influences the amount of stakeholder directors in the board. This degree of regulation can be seen as closeness to the government. In the healthcare sector, organizations have a duty imposed by law, are to a large extent financed by public goods and serve a public interest (Halsema et al., 2013). Overall, the healthcare sector can therefore be seen as a rather ‘regulated industry’ in the sense of Luoma & Goldstein (1999). The implication is that it would seem likely that representatives of stakeholders are present in a healthcare supervisory board. Recall that the most important stakeholders of healthcare organizations are customers/buyers and society at large. Therefore, representatives of these particular stakeholders are likely to be present in such supervisory boards. Representatives of society at large may be former members of public administration, such as the parliament, or renowned (former) community leaders/officials. Or people who have experience in societal organizations. I argue that aforementioned examples of representatives are likely to have a certain amount of social affinity. This means that they care about society and take into account its interests.

A mix of all those types of experience in a supervisory board would contribute to tenure diversity. According to Barkema and Shyrkov (2007), tenure diversity implies heterogeneity in experience, skills, networks and viewpoints concerning a particular task. This may stimulate task-related constructive criticism and debate (Jehn, 1997; Jehn, Northcraft & Neale, 1999; Simons, Pelled and Smith, 1999) and therefore ultimately a supervisory board’s ability to monitor.

- Sub question 1a: How do supervisory board members in the healthcare sector perceive the relative contribution of supervisor experience, executive experience, healthcare experience, and political/societal experience to a supervisory board’s capital in the healthcare sector and how these different types of experience contribute to board capital?

3.1.4 Expertise

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Also, it refers to a body of information about the theoretical and practical understanding of a subject, acquired by a person through experience or education (Hsieh et al., 2012). I argue that expertise mainly is the sort of aforementioned knowledge that is developed by education.

Regarding education, in the Dutch National Commissioners Study (Nationaal Commissarissen Onderzoek, 2011), from now on abbreviated to NCS, the educational background of supervisors is examined. Hereby, research is conducted to supervisory board members from all different sectors in The Netherlands. Its results indicate that 32% of the supervisors have an economic background, 23% a business background, 14% a law background, 15% a technical background and 16% has an ‘other’ background. So economic and business education prevail here. For supervisory boards in the private sector this seems rational. However, it is unknown whether the prevailing of economic and business education is also specifically required for supervisory board members in the healthcare sector. According to Blokdijk and Goodijk (2011), in 2008, of the healthcare supervisory board members in their study, around 30% is employed in the private sector in their everyday job. Therefore, the possibility of the prevailing of business and/or economic education in the healthcare sector seems rather small. Also, Blokdijk & Goodijk (2011) give that in the healthcare sector in 2008, around 67% of the supervisory board members has a university degree and 30% has a college degree. So almost every supervisory board member in the healthcare sector has undergone some sort of higher education. Overall, other sectors included, those percentages are even higher. The NCS (2013) gives percentages of 78% (university degree) and 21% (college degree).

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expertise (33%), and real estate and architectural expertise (33%)9. Types of expertise that were often not present were risk management/accountancy/control expertise, strategic expertise, client perspective, national government/public administration expertise, political/societal expertise and municipal government expertise.

Indeed, some authors have argued that boards need to have complementary expertise (Goodijk, 2011: 20) and need to be diverse (Halsema et al., 2013: 20). Specifically, Halsema et al. (2013) argue that the safeguarding of public interests requires management and boards of semi-public organizations to be representative and in every aspect diverse in terms of norms, values and expertise. Members with a business background need to be complemented by members with thorough knowledge of the sector and financial experts besides service providers. Related to this, Goodijk (2011) states that a better mix of specialists and all-rounders is needed. Examples of such specialisms are portfolio management, sector trends and developments, types of financing, real estate, risk management and quality (Goodijk, 2011: 12) which were already partly mentioned above. Thereby, it can be argued that more education (as proxy of expertise) diversity will contribute to overall board capital, since education diversity will stimulate task-related debate (Barkema and Shyrkov, 2007).

- Sub question 1b: How do supervisory board members in the healthcare sector perceive the relative contribution of different types of expertise to a healthcare supervisory board’s capital and how do they contribute?

- Sub question 1c: How do supervisory board members in the healthcare sector perceive in what ways expertise inside healthcare supervisory boards possibly can be expanded to increase their boards’ capital?

3.2 Recruitment Procedures

In the previous section, the different components of board capital and their relative implications for the overall ability to monitor were discussed. This section will discuss the ways in which supervisors can be recruited and their possible implications for board capital.

Brown (2007) proposes that effective recruitment and development activities lead to securing highly competent board members. In doing so, he considers recruitment as part of ‘board development’. According to this author, the non-profit governance literature encapsulates board development as

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the nurturing and strengthening of the board to ensure its continued strength and viability. Translated to this thesis, board development can be seen as the building and maintaining of board capital. This is because Brown (2007) argues recruitment positively influences member competency. Indeed, as mentioned before, in this thesis I equate competences and board capital. Hence, recruitment influences board capital. Specifically, board development entails recruiting and selecting, training and preparing, monitoring performance, and removing board members (Brown, 2007). Those activities can be divided into three main components: recruitment, orientation and evaluation (Brown, 2007). However, not all of these components and related activities are relevant for this thesis. Only activities related to recruitment will be used. These activities are (1) Determining the required skills and competencies (2) Recruiting and attracting (3) Selecting (Brown, 2007). These three activities will form the subsections in this section.

Note however, that Brown (2007) did his research in the U.S. non-profit sector. On first hand one may wonder whether his findings can be used in this thesis, since it the U.S. and the Dutch healthcare may differ. However, in both countries the healthcare sector is operating on a particular distance

from public administration because of the influence of regulated market forces10. Hence, in both

countries the healthcare sector can be considered a semi-public sector. The bottom line is that Brown’s (2007) study overall seems to be relevant for the Dutch healthcare sector and can therefore be used in this thesis. The actual prevalence of the earlier recommended recruiting practices (or more broadly, HR practices) in non-profit governance is not clear while it is in the private sector (Brown, 2007: 303). Though, the best practice recommendation is fairly widely recognized (Inglis and Dooley, 2003; Watson, 2004). In the meantime, in The Netherlands the ZGC (2010) has adopted these recommendations. Brown (2007: 314) stated that his model should be replicated in other non-profit industry contexts such as healthcare. This thesis tries to fill a gap by studying those practices in the (semi-public) healthcare sector and tries to identify rationales for the use of the respective recruitment practices.

The overall research question in this section is the following:

- Research question 2: How do supervisory board members in the healthcare sector perceive how new supervisors are being recruited in healthcare supervisory boards, the rationales for this, and how these ways of recruitment influence board capital?

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3.2.1 Determining the required skills and competencies

The first step in the process of securing board members entails determining the required skills and competencies needed on the board and then developing procedures that facilitate the identification and selection of appropriate members (Brown, 2007: 303). Specifically, the determining of the required skills and competencies needed on the board are translated into the competency and skills profiles developed and used to nominate new members (Brown, 2007: 308). The ZGC strictly recommends this as well and articulates it with the phrase “recruitment, selection and appointment of new members of the supervisory board are based on an individual profile for the vacancy adopted by the Board”. In such an individual profile, specific requirements can be mentioned such as for example the possession of financial-economic knowledge, or knowledge about the primary process, healthcare quality, the client’s or employee’s perspective or entrepreneurship (Zorgbrede Governance Code, 2010: 53). Several authors already recognized the importance of this formalization of determining the requirements of a future supervisory board member. Some mention the importance of systematic job design and specification (Heidrich, 1990; Brannick and Levine, 2002). Another argues that clear specification of position requirements is the backbone of effective recruitment (Pynes, 2004). I argue that this formalization of the requirements of a supervisory board contributes to such a board’s capital, since recruited competences then better match the specific needs of the supervisory board.

- Sub question 2a: To what extent are profiles with requirements for supervisory board candidates when recruiting them drawn?

- Sub question 2b: How do supervisory board members in the healthcare sector perceive to what extent the drawing of formal profiles contributes to total board capital?

3.2.2 Attraction and recruitment

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‘old-boys network’. This term is broadly used in literature, for example in upper echelon theory literature. The old-boys network is an example of the informal way of recruiting. Here, candidates are not recruited publicly, but instead members of a supervisory board use their personal networks to recruit and attract candidates. According to the Dutch Knowledge Center for Supervisory Board

Members (NKCC in Dutch), this still seems so happen quite often although it has its drawbacks.11 This

is because in this way the pool from which candidates are attracted is reduced. Therefore, this way of recruiting can be dangerous, because of the rising possibility that informal recruited candidates lack the required education, experience, expertise or the possibility that they detract from (instead of strengthen) group dynamics or diversity within the supervisory board. However, the use of personal networks does not necessarily always bring only negative consequences. Effective recruitment recognizes the value of personal networks in locating potential board members, yet if referrals are constrained (that is, few individuals provide recommendations), the benefits are lost (Brown, 2007: 313).

Research has shown that the use of supervisory board members’ personal networks in recruiting is

still highly present nowadays. While top management teams are recruited through an increasingly

professional process, new supervisory board members are still attracted by the use of supervisory board member’s personal networks (Van den Berghe and Levrau, 2004). Even if a supervisor’s profile is made up formally, the first search for suitable candidates is limited to supervisory board members’ personal networks. Therefore, Van den Berghe and Levrau (2004) expected the remained importance

of the use of personal networks. Meanwhile, since the research of Van den Berghe and Levrau

(2004), a lot could have been changed in ways of recruiting. But more recent studies confirm the remained importance of personal networks in recruiting. It was argued that ‘we’ questioned ourselves justly whether the supervisory board is still too much a rather closed old-boys network (Goodijk, 2010: 19). Also, it was stated that selection of new executives and supervisors still too often takes place via intransparent invitation. According to Halsema et al., (2013) this is because of the operating of an old-boys network in which people provide jobs to each other and where political affiliation plays a larger role than competencies. She also argues that because of this old-boys network, the safeguarding of public interests lies in the hands of a too small and often mutually rotating group of people. It was already mentioned that this seems to have negative implications, since it reduces the pool where possible candidates can be recruited from.

However, Van den Berghe & Levrau (2004), Goodijk (2010) Halsema et al. (2013) don’t bring hard evidence to cover their claims. I found some data with regard to this phenomenon. Note however,

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that both following two studies include every sector in The Netherlands, instead of only the healthcare sector. The DCS (2012) (table 1) shows that 78% made use of their personal network, 74% made use of recruiting agencies, while 17% used media advertisements and the own organization. Here the respondents were allowed to choose multiple options of recruiting. Furthermore, the NCS studies (2007-2013) (table 2) indicate a few trends over time. The percentage of obtaining the position by supervisory board members’ personal network gradually falls from 69% in 2007 to 47% in 2013. At the same time, the percentage that obtained their position by application after having seen an advertisement increased from 12% in 2008 to 27% in 2013. Also, such a trend can be observed over the longer term with regard to intermediaries. In 2008, only 9% of the respondents obtained their position by means of a recruiting agency, which increased to 18% in 2013. The NCS studies only allow one choice between the different means of recruiting. The high differences in percentages of the two aforementioned studies can probably be explained by their different methodological

choices.Since NCS only allows one choice, this choice probably is the most important component of

the mix of different recruitment practices which is often used. This is recruiting by supervisory board members’ personal network (47%).

Table 1 - Deloitte Commissioners Survey: In which ways are supervisory board members recruited? (multiple choices possible)

Year Via advertisements/own website (%) Via recruiting agency (%)

Via personal network (%)

2012 17 74 78

Table 2 - National Commissioners Study: In which ways are supervisory board members recruited? (only one choice possible)

Year Via advertisements/own website (%) Via recruiting agency (%)

Via personal network (%) 2013 27 18 47 2012 28 12 50 2011 20 12 58 2010 16 11 60 2009 15 11 58 2008 12 9 66 2007 Unknown 14 69

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Goodijk’s (2011) study shows a rather high percentage of respondents that mention the use of their personal networks in recruiting new supervisory board members (52%). However, regarding the use of advertisements, they give a much larger percentage (68% vs. 17% and 27%). It is possible that in the healthcare sector, the way of recruiting differs from other sectors in The Netherlands.

Overall, a decrease in the influence of the use of informal ways of recruitment by means of personal networks can be observed, in favour of formal ways of recruitment by means of intermediaries and application after advertisements.

- Sub question 2c: By means of which channels are supervisory board candidates recruited?

- Sub question 2d: How do supervisory board members in the healthcare sector perceive the influence of particular ways of recruiting new members on a supervisory boards’ capital in the healthcare sector?

3.2.3 Selection process

The third step of the recruitment process that will be discussed in this thesis is the process of selecting a candidate. According to Brown (2007), board governance literature (e.a. Watson, 2004) argues that an independent nomination committee can play an important role in this process of selecting potential applicants. Furthermore, it was found that such use of a nomination committee seems to increase stakeholder involvement in board governance (Brown, 2002).

The following will discuss what the nomination committee actually entails and how it operates. A nomination committee typically collects materials, (such as resumés), interview applicants, and provide recommendations to the full board for prospective candidates. When a couple of candidates are identified, the board votes on them. According to Brown (2007), decision making literature argues that it is important to have a list of several candidates so there can be voted between different alternatives. This will then result in a better choice and therefore ultimately better board members (Bainbridge, 2002).

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- Sub question 2e: To what extent are nomination committees established in healthcare supervisory boards?

- Sub question 2f: How do supervisory board members in the healthcare sector perceive the influence of the use of a nomination committee on a supervisory board’s capital in the healthcare sector?

4. METHODOLOGY

To study the topic of this thesis, I used multiple case studies. In doing so, I have conducted in-depth interviews with six respondents consisting of five supervisory board members and one field expert. The use of in-depth interviews was recommended by Blokdijk and Goodijk (2011), who argue that complementary in-depth interviews would most certainly produce more detailed information about the functioning of supervisory boards in the healthcare sector. This field expert respondent is a senior consultant from an agency which recruits executives and non-executives in among others the healthcare sector. I included this respondent to triangulate the data from the supervisory board members.

4.1 Case Study

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mainly conducted in the United States. In this thesis, I will try to extend them towards the healthcare sector The Netherlands.

In this study I do not intend to generalize conclusions regarding board composition and recruitment practices to the rest of the semi-public sector. In contrast, this study tries to offer new insights which may pave the way for future research to test whether the new knowledge derived from this research is generalizable to the whole healthcare sector and more broadly the entire semi-public sector.

4.2 Data Collection

Of the six respondents, three are chairmen of their respective supervisory boards. Two others are a vice-chairman and a regular supervisory board member. This latter regular supervisory board member is also an expert on semi-public governance since this person works at a university and a recruiting agency both related to this topic. Also, an interview was conducted with a field expert. This respondent is a senior consultant in the field of executive and non-executive recruitment in the public sector.

I selected the included five supervisory board members from distinct types of healthcare

organizations throughout the Netherlands to try to cover the whole healthcare sector.The different

types of healthcare organizations generally are: hospitals, mental healthcare, eldercare and care of

disabled people12. Of those, I included a hospital, mental healthcare and eldercare. Unfortunately, I

was not able to include the subsector ‘care of disabled people’. Despite many efforts, all the selected organizations rejected to cooperate. Due to time limitations, I have selected other healthcare organizations. In total, thirteen organizations were contacted for an interview. These consisted ten healthcare organizations and three field-expert organizations. First, I contacted those organizations by calling them per telephone. I explained the subject of my research and asked them whether I could get in touch with their supervisory board to make an appointment to conduct an interview with one of the supervisory board members. When such a person agreed I was asked to send an e-mail to a particular e-e-mail adress. Thereafter, most often an appointment could be made to conduct an interview. Those interviews took place at the respondents’ offices or homes. Table 1 shows the respondents and their respective type of organizations.

From the respondents I collected data by means of face-to-face interviews. Positive features of interviews are their high response rate, high response quality and their ability to deal with complex,

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sensitive issues. Also, in interviews interviewers can clarify unclear terms or ambiguous questions (Thomas, 2004:117-118). On first hand, interviews as the only data source may seem insufficient, since case study research often means engaging in a wide range of research methods such as interviews, questionnaires, observation and the analysis of documentary records (Thomas, 2004). However, as research moves away from everyday phenomena to intermittent and strategic decision making, interviews often become the primary data source (Eisenhardt, 2007:28). Furthermore, Eisenhardt (2007:28) argues that interviews are a highly efficient way to gather rich, empirical data, especially when the phenomenon of interest is highly episodic and infrequent. Recruiting and selecting new supervisory board members examples of such infrequent decisions in an organization and can be seen as higher-level, strategic decisions. Hence, interviews seem a proper way of collecting data in this study.

Also, data which normally can be collected by means of surveys or analysis of documentary records can also be collected during the interviews by means of asking the interviewees. This is what I did.

However, before conducting a particular interview, I checked external sources13 about the

background of the particular respondent and his or her co-supervisory board members. During the interview I checked this data with the data that the respondents gave me.

I conducted the interviews in a semi-structured way. This means that the order in which questions are presented depend on the specific context of each interviewer-respondent interaction (Thomas, 2004:165). This allows the interviewees to tell their own story and provide information which reflects their own perspective (Bryman and Bell, 2007). Also, this flexible approach supports the explorative, inductive nature of this study. Because of the semi-structured way of interviewing, the order of questions slightly differed between interviews. Also, I asked several additional questions to find out what was behind some answers or phenomena. Therefore, instead of a strict format of questions, I rather used a question template based on topics and subtopics which left space for additional, more in-depth questions. This template of interview questions can be found in Appendix A. As recommended by Thomas (2004), I tape-recorded the interviews. The type of space in which the interviews were conducted differs. Most of the interviews were held in a formal space, but some others were conducted at a respondent’s home or in a bar. The interviews typically took around one and a half to two hours. I secured the informed consent of the interviewees to prevent the risk of possible psychological or social harm. Furthermore, I secured confidentiality and anonymity of the interviewees to respect their privacy.

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4.3 Building Theory

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5. RESULTS AND ANALYSIS

In this section, data from the interview respondents will be presented and analysed. In the subsection ‘experience’, I use a table to show the variation in attitudes of the different respondents regarding the requirement of particular types of experience. This is useful because of the variation in rationales behind these attitudes. The variation in attitudes and especially the variation in rationales exists only to a lesser extent in the other (sub) sections. Therefore, I only used such a table in the section ‘experience’. In the other sections, quotes are used to describe and explain. Furthermore, it is important to remember that respondent F is a person who is not a supervisory board member himself, but a recruiter of executives and non-executives in the semi-public sector. Therefore, he is a field expert, who is able to triangulate the data from the other respondents. Note however, that no real conclusions can be drawn in this section because interviews only produce subjective respondent answers. So possible conclusions in this sections are only reflections of respondents´ perceptions.

5.1 Board Capital

To start, four of the respondents’ supervisory boards contain five members. The other supervisory board contains six members. I showed this already in table 3. According to respondent C, “a supervisory board should meet often and needs to be small, five members maximum. Otherwise a supervisory board becomes ineffective.” This seems to match the study Blokdijk and Goodijk (2011) who argue that supervisory boards in the healthcare sector mainly consist of six or seven members with a tendency to decrease.

5.1.1 Experience

As mentioned in the theory section, relevant experience for supervisory board members can include supervisory board experience, executive experience, experience in the healthcare sector and political/societal experience. I started with asking the respondents the open question which type of experience according to them is required in a healthcare supervisory board. Then I continued with asking why a particular type of experience was necessary and what it contributes to board competences. In table 4, those data is showed in the form of quotes of the respondents. I also asked to their own backgrounds. This is showed in table 5.

Table 4 - Which experience is needed in a healthcare supervisory board?

Interviewee A - Executive experience; ‘The chairman is there to make sure that everybody will be heard and is

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Therefore you don’t encounter unexpected surprises, you know where the pitfalls are. In my eight year experience as an alderman I was confronted with the same kind of problems as in my current role as supervisor. You can take that experience with you to other functions, it is really useful. But it is not a requirement for everybody in the supervisory board to have administrative experience.’

- Healthcare experience; ‘I don’t think you only should have people from the healthcare sector

in the supervisory board. At least one, but this can be someone who only has knowledge about the primary processes of the organization, instead of experience with them.’ I haven’t done that much in the healthcare sector myself. However, I have done quite a lot social work such as child care. So I didn’t had the experience in the healthcare sector, it is mainly about the experience in executive boards. In societal institutions.’

- Political/societal experience; ‘What kind of supervisory board members you recruit depends

on your type of healthcare organization and where it is located. ‘My’ healthcare organization is located in a rural municipality. I believe that a supervisory board of such a healthcare

organization needs to make sure that it includes a lot of stakeholders and that it is

representative of the local community. Regarding stakeholders, I mean people who represent a certain group in society. That can be a political association, a societal association, or other associations who are ingrained in a particular community. In other words, that you do not only recruit experts from a university for example, but that you instead look for people who are ingrained in the local community and also have a certain amount of competences.

Interviewee B - Executive experience; ‘I think it is vastly exaggerated that experience in an executive board is

required. You could say that overall administrative experience is a requirement. So you need to know what it is to govern. You need to have affinity with it. It is not necessary to have experience in an executive board. Actually some research even shows that having been a good executive director can work counterproductive. In the 90’s, supervisory boards in the

semipublic sector were cluttered with people who had proven themselves as an executive director. Subsequently, they took over the role of the executives or took too much distance from the executives. So having been a good executive doesn’t mean that you automatically are a good supervisor. Actually I tend to recommend more younger people to join supervisory boards in the semipublic sector, 40-year old people for example. Those people have more knowledge about interacting, are more critical to the system, and suffer less from status issues. But as a supervisor you should be able to act on the administrative level.

- Supervisory board experience; ‘By my supervisory board function I become familiar with

supervising, I learn from that. Also, if you are academic director from a course ‘Supervisors’ and not only teach but also participate in that course, then that is experience in itself.’

- Healthcare experience; ‘If you are for example a financial expert in a private organization, you

are not automatically suited for the position of financial expert in a supervisory board in the healthcare sector. The funding system in the healthcare sector is completely different. For that position, a mix of knowledge of the healthcare sector, financing in the healthcare sector and financial expertise is required. Financing in the healthcare system is highly complex. So experience as a financial expert in the healthcare sector or knowledge about it is required.’

- Political/societal experience; ‘Every member of a healthcare supervisory board needs to have

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a supervisory board member can monitor the executives in their role towards governments. Executives needs to make a connection with the municipal government regarding financing, so supervisory board members need to monitor this process. But I don’t think you need a specific recruited supervisory board member on this profile.’

Interviewee C - Executive experience; ‘I come from the administrative setting, I was the CEO in a couple of

organizations. Meanwhile, I know how things work on a higher level in organizations. I have seen a lot of things of supervisory boards which were not good, I learn from that as well. From an executive perspective I have seen how supervisory boards operate, which gives a good picture about how you should or should not supervise yourself. (..) If you sit on one side of the table, you learn a lot about how the other side does things wrong in my opinion, which you want to do better yourself. (…) Managing organizations in different sector still looks very similar. You have the same sort of budgetcycle, internal control procedures, strategy discussions and evaluating management. The content is different, but the managing itself is similar. (…)

- Supervisory board experience; ‘Because I am in multiple supervisory boards, I see people

doing things which you compare with practices in your own supervisory board or organization. When certain practices are interesting, you introduce them in other supervisory boards as well to further professionalize your own supervisory board.‘

- Other experience; ‘I have been in a committee that has written the Dutch Corporate

Governance Code, so I thought a lot about corporate governance.’

- Healthcare experience; ‘For the financial expert in the supervisory board it is necessary to

have experience in the healthcare sector or thorough knowledge about finance in the healthcare sector. Because Finance in the healthcare sector is very specific, it is different than finance in most other sectors.’

- Political /societal experience; The supervisory board as a whole has a responsibility towards

stakeholders and society. So every supervisory board member needs to have a certain amount of societal affinity, instead of only one person who is an expert regarding stakeholders for example. (…) (Former) politicians know who things work administratively. They have

experienced it in parliament, by means of procedures, queries and surveys. Procedurally, they know how society works.’

Interviewee D - Executive experience; ‘I think administrative experience is important, because since you gain

experience, you learn a lot about organizational politics. You have experienced the heat of the battle. You need to be able to imagine what it means to be chairman of the executive board (…) Those people with experience however need to be reflective practitioners.’

- Supervisory board experience; ‘As a supervisor you have taken more distance and from a

reflective point of view also take a look with other organizations. So the serving in other supervisory boards is really meaningful. But most of all, there needs to be a good mix of having carried (or still carry) heavy responsibility, complemented with people who have other

backgrounds.’

- Healthcare experience; ‘I have an understanding how things operate strategically. How the

interplay works with the government who prepares regulation and health insurance

Semi-public governance: An explorative in-depth study of supervisory board composition and recruitment in the healthcare sector.