On board(s): they’d better play nice if they want to get tough – a behavioural perspective on power dynamics between management and the board of directors

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On board(s):

they’d better play nice if they want to get tough –

a behavioural perspective on power dynamics

between management and the board of directors

Abstract:

In this thesis we present a behavioural perspective on management-board power dynamics. We ultimately argue that effective governance is more about recruiting human agency than about requiring it. By drawing from the social-psychological literature, we propose a „gentle cycle of counsel and managerial vulnerability‟ in contrast to the „vicious cycle of control and counter control‟ that is prevalent within the governance literature. The interplay between managerial trust, board power and board influence tactics are meticulously set out. We specifically argue that the board‟s control role and the board‟s counsel role can function as two distinct influence tactics for influencing management. We argue that the effectiveness of these two roles are respectively contingent on the board‟s formal power and the board‟s informal power. For which we argue that informal power is related to the board‟s external resources. This thesis thereby integrates control, counsel, and resource dependence perspectives into a single conceptual model. We posit that exercise of the board‟s control role will ultimately undermine board effectiveness through generating managerial distrust. Conversely, exercise of the board‟s counsel role is expected to foster managerial trust and ultimately increase the board‟s ability to monitor effectively.

Thesis Dennis Veltrop (1154699)

Research Master International Economics and Business

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st

supervisor

Prof. Dr. Eric Molleman

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Voorwoord

Het kan altijd beter, maar op een gegeven moment dient er dan toch een eind te komen aan een scriptie. Probleemloos zou ik nog een aantal weken, maanden, en wellicht zelfs jaren kunnen wijden aan het verfijnen van de denkbeelden zoals ze in in deze scriptie worden gepresenteerd. Voor velen is het afronden van de scriptie met het behalen van hun bul het einde van de academische loopbaan en het begin van een flitsende cariere in het bedrijfsleven. Gelukkig heb ik het voorrecht om mij nog een aantal jaren als promovendus te kunnen wijden aan het verder uitwerken en testen van de denkbeelden in deze scriptie. Eveneals een aantal overige onderwerpen waarvan ik nu nog niet kan bevroeden wat deze zullen zijn.

De volgende personen ben ik dank verschuldigd, alhoewel niet iedereen deze scriptie en dus ook dit voorwoord onder ogen zal krijgen kunnen zij desalniettemin niet ongenoemd blijven. Dank aan Jakob de Haan en Bart Los voor mijn toelating tot de research master twee jaar geleden. Aanvankelijk op voorwaarde van een tussentijdse beoordeling, gelukkig bleek dit niet meer nodig te zijn na een aantal maanden. Het volgen van de research master was een voorrecht, inhoudelijk en methodologisch een enorme opsteker. Ik heb veel geleerd van de overige research master studenten met name in het eerste jaar was er zeer zeker een positive externaliteit.

Dank aan de collega‟s – zo kan ik ze nu toch wel noemen – van de accountancy vakgroep. In het bijzonder de bezetting van het secretariaat, Ingrid, Inez, Anja en Anna, de afgelopen paar jaar heb ik met veel plezier als student-assistent en aan mijn scriptie kunnen werken daar. Dick de Waard, een transformationeel leider uit het boekje, een fijne samenwerking aan Dick‟s proefschrift, waarbij ik langzamerhand meer en meer bekend ben geraakt met corporate governance onderzoek en maatschappelijk verantwoord ondernemen. Reggy Hooghiemstra voor zijn open deur en suggesties voor relevante literatuur over corporate governance.

Eric Molleman bedankt voor een uitstekende begeleiding, zeer snelle feedback, meestal binnen een paar dagen. En een algemene open houding rekening houdend met het feit dat ik geen psycholoog ben. Dank voor de bereidheid om een scriptie en een promotieonderzoek te begeleiden op het voor psychologen ietwat vreemde gebied corporate governance. Dank aan Jaap van Manen voor zijn positieve houding tegenover wetenschappelijk onderzoek, in het bijzonder het mogelijk maken van mijn promotieonderzoek en zijn bereidheid tot optreden als tweede begeleider van deze scriptie.

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1. Introduction

Corporate governance has received increasing attention over the past two decades. Instigated by a number of high profile corporate collapses in Europe and the United States – e.g. Enron, the Barings Bank, and Royal Ahold – regulatory bodies and scholars worldwide have been absorbed by seeking answers to the question of – what has somewhat become the holy grail of corporate governance research – how to increase governance effectiveness and prevent future wide scale corporate fraud.

The year is 1992, sparked by large scale corporate frauds the Cadbury report is introduced, the start of the current governance era. An era with an ever increasing focus on improving corporate governance effectiveness; but also an era in which corporate governance research has failed to materialize in unequivocal findings and recommendations for legislators and corporate practitioners; an era in which the schism between corporate governance research and corporate practice has widened; an era in which econometrical rigor is preferred to keen observation; and an era in which clean artificial proxies are favored to field research.

Boards of directors have been at the nucleus of the corporate governance debate, publicly scrutinized but also as the object of scientific research. Phrases like the board is “the ultimate center of control” (Mizruchi, 1983, p. 433), or the board is “the lynchpin of corporate governance” (Gillan, 2006, p. 385) are prevalent. Practitioners like Jonathan Charkham (2005, p. 16). – one of the members of the Cadbury committee – note that:

“(t)he most interesting development over the last ten years has been concern about the way the board works and reports. This takes us away from the worlds of law and economics into behavioral sciences.”

This thesis concentrates on boards of directors through a behavioral lens, more specifically on how to improve board-governance effectiveness through focusing on power dynamics between management and the board of directors. Drawing from social-psychological research we postulate that an integrative view of board roles as influence tactics can be particularly helpful in improving the board‟s capacity to monitor management and thereby ultimately improving board-governance effectiveness. We postulate on the interplay between board roles in conjunction with board power and managerial trust. Whereas traditional agency theorist see the board‟s counsel role and control role as irreconcilable we argue that the board‟s counsel role can actually strengthen the board‟s control role through fostering managerial trust.

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disregard board process completely and see no need for focusing on board process. Secondly, there are scholars that acknowledge the importance of intervening board process, however, these scholars state that beliefs and behaviours can be successfully inferred from surface-level characteristics (see Forbes & Milliken, 1999, p. 490). This also holds for regulation, the lion‟s share of board regulation aspires to increase board effectiveness through adjustment of surface-level board characteristics (e.g. ratio of outside directors, equity compensation, structural board independence, board composition).

The results have been inconclusive however (Daily, Dalton, & Cannella Jr, 2003; Dalton, Daily, Certo, & Roengpitya, 2003; Dalton, Daily, Ellstrand, & Johnson, 1998). There is much we do not know about the inner working and the efficacy of various governance mechanisms (Daily et al., 2003) and great inferential leaps are made between proxies and the internal processes which presumably link inputs to outputs (Pettigrew, 1992). Similarly, Leblanc (2004, p. 440) notes that uncovering how boards work can “have tremendous practical significance”. It can therefore be expected that providing a behavioral account on board dynamics will be relevant as well for academics investigating boards of directors as for governance regulators.

Luckily board researchers do not have to start from scratch. There is an entire field of inquiry that has been trying to find answers to similar behavioral questions for over several decades. In their seminal work Cartwright & Zander (1968) present the following questions in need of clarification; what conditions are necessary for effective functioning of groups?; how do group processes affect behavior, thinking, motivation and adjustment of individuals?; what makes some groups have a powerful influence over members while others groups exert little or none?; what characteristics of individual members are important determinants of the properties of boards as a whole?; what determines the nature of relations between groups; how does the institutional landscape surrounding the group influence its functioning?

It would be impossible to find answers to all these questions for boards of directors in this thesis. We are particularly interested in what makes boards have powerful influence over management and what determines the nature of the management-board relationship. Whereas agency theorists have focused on the board‟s incentives to monitor and control management (board independence), we are primarily interested in the board‟s capacity to influence management (also see Hillman & Dalziel, 2003). The board can have incentives to monitor management, but without the capacity to influence, i.e. power, such monitoring would most probably not materialize in effective governance. Board power can therefore be considered as a necessary (not necessarily sufficient) condition for effective governance.

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structured as follows. In chapter 2 we will discuss corporate governance in general, ranging from a number of contemporary high profile corporate collapses to the neoclassical foundations of corporate governance. In chapter 3 we focus on board research, specifics of boards of directors, and board regulation. Our conceptual model pertaining to the power dynamics between management and the board of directors is presented in chapter 4. Chapter 5 concludes.

2. Corporate Governance

The main goal is to present a succinct, by no means fully comprehensive, overview of the field of corporate governance research and practice (see Denis, 2001; Denis & McConnell, 2003; Shleifer & Vishny, 1997, for a more complete overview of the literature). In this chapter we set out to position board research within the larger whole of corporate governance research and corporate practice. The prominence of neoclassical assumptions in board research has to be seen in the larger whole of corporate governance research. This warrants an explication of the historical foundations of corporate governance research.

The board‟s role has to be seen in relation to various other governance mechanisms, like, for example the market for corporate control, and shareholder proxy voting. An overview of various governance mechanisms besides the board of directors is therefore briefly touched upon in this chapter, it can be regarded as the institutional context for boards of directors. In section 2.1 we presents a number of high profile collapses in the United States and in Europe that have spurred attention for corporate governance research and regulations worldwide. A great deal of corporate governance regulations are in fact responses to these corporate frauds. In section 2.2 se address the neoclassical foundations of corporate governance and in section 2.3 we pay attention to corporate governance as a scientific discipline.

2.1. High Profile Collapses – (Lack of) Corporate Governance in Practice

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2.1.1. Enron

Enron filed for bankruptcy in December 2001 and was by far the largest bankruptcy in US history. Enron had set up a series of special purpose entities (SPEs), in which losses and loans were concealed. The Securities and Exchange Commission (SEC) started an investigation after if was announced in October 2001 that Enron was worth $1,2 billion less than previously reported. Enron share price plummeted from about $90 to mere pennies during 2001 (see figure 1). This did not only adversely affect shareholders, but it also completely vaporized employee benefit plans, and took one of the five largest accounting firms with it in its downfall.

It is generally believed that top executives were aware of the huge losses and debts that were stowed away in these SPEs. In response to Enron and a series of other corporate frauds the Sarbanes-Oxley Act (SOx) was signed into law as of July 30, 2002. It is one of the most far stretching reforms in American business practice for over a century. SOx establishes standards for „public company‟ boards, management and accounting firms not only for U.S. firms, but also for foreign firms that are publicly traded in the U.S. Among other requirements, SOx requires financial expertise on the audit committee and requires executives to declare that the information that is presented is „true and fair‟. The main lesson to be learned from Enron is the importance of integrity among executives and the need for non-executives to be able to assess advanced accounting related issues. It stresses the importance of expertise, information and a critical attitude that are needed for non-executives to perform their duties.

2.1.2. Barings Bank

The downfall of the Barings Bank was brought about by the actions of one man, Nick Leeson, a broker stationed in Singapore in charge of both the dealing desk and the back office. Normally the back office provides checks and balances on transactions made by the front office. However, a lack of internal control – he had both access to the front office as to the back office – allowed Nick Leeson to cover up the losses he made, ultimately culminating to £850 million in losses. Such a staggering loss led to the downfall of the Barings Bank and the Barings Bank was bought for a symbolic £1 by ING.

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2.1.3. Royal Ahold

The financial scandal surrounding Royal Ahold earned Ahold the disfavoring title of “Europe‟s Enron” (Mallin, 2007). In February 2003 Ahold announced that it had overstated its earnings, resulting in an instantaneous decrease in share price (see figure 2). Falsely recognized purchase bonuses of an American subsidiary US Food service,

ultimately resulted in a profit adjustment of $880 million and completely vaporized Ahold‟s entire 2002 profit. But, this was only part of the fraud that was uncovered at that time. Ahold‟s management had also committed fraud by falsely stating that they had full control over a number of subsidiaries. Ahold‟s management hid

sideletters from the external auditor that clearly indicated Ahold‟s partial control over these subsidiaries. The external auditor was presented with false documents indicating full control. Based on these false documents Ahold‟s subsidiaries were fully consolidated thereby artificially boosting sales and assets.

Why didn‟t the supervisory board1

act? The CEO, Cees van der Hoeven, had a large impact on the company‟s strategy and governance effectiveness. Everyone on the management board owed their position to this CEO (de Jong, DeJong, Mertens, & Roosenboom, 2007a). Cees van der Hoeven already „earned his marks‟ before he joined Ahold and was successful with Ahold first as the Chief Financial Officer (CFO) and later as the CEO.

Once at the helm, he turned things around for Ahold. He was regarded as the undisputed leader of the firm and received several awards, including Dutch CEO of the year. Because of his success he had considerable leverage with other members of the management board and the supervisory board. Supervisory board members were probably not aware of the serious fraud that was committed. De Jong et al. (2007a) note that Ahold‟s supervisory board was not independent due to the presence of former executives with conflicting interest and many board members were overcommitted to the CEO and unable to devoted sufficient time to the firm. The case of Royal Ahold clearly signifies the influence of a single person, the CEO, on management and the supervisory board.

Summarizing from these three cases, although there are differences to be noted, it can be stated that effective oversight is contingent on adequate internal control and firm specific information for boards of directors. Board members need to be informed and the organization needs to have an effective system of internal control. Moreover, as could be seen from Enron, expertise on the board for

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complex issues is warranted and non-executive (supervisory board) members should not be overly dependent on management, they need to be able to operate independently if necessary.

2.2. Neoclassical Foundations of Corporate Governance

“The directors of such [joint stock] companies, . . . being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. . . . Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” (Smith, 1776, p. 941).

Scholars largely define corporate governance as the ways in which suppliers of finance assure themselves of getting a return on their financial investment (Shleifer et al., 1997). Corporate governance deals with „agency problems‟ stemming from the separation of ownership and control (Fama & Jensen, 1983; Shleifer et al., 1997) and it is concerned with the difference of interests between owners (principals) and managers (agents). Analogous with Adam Smith‟s work agency problems arise with those organizations “for which important decision agents do not bear a substantial share of the wealth effects of their decisions” (Fama et al., 1983, p. 301).

Building on the work of Berle & Means (1932), Coase (1937), Jensen & Meckling (1976) and Fama & Jensen (1983) agency theorists assume that there is an inherent tension between the agent and the principal resulting from the separation of ownership and control. Agency theory builds from the assumption that managers will act in a self-interested manner and that they will harm shareholder interest if this would benefit them. A great deal of corporate governance research and policy is grounded in assuming managerial self interested behaviour. Corporate governance is regarded as a mechanism for constraining the inevitable divergence of self-interest between principal and agent. The term „corporate governance‟ did not exist for twenty five years ago, its origin however is believed to be found in Adam Smith‟s magnum opus An Inquiry into the Nature and Causes of the Wealth of

Nations.

Many economists attribute the origin of the neoclassical assumptions of self-interested behavior and utility maximization to Adam Smith‟s notion of prudence as a driver for human action, set out in the Wealth of Nations. Smith himself, however, saw prudence in a system containing several virtues. Next to prudence, „sympathy‟ was also given considerable attention. He posited a simultaneous approach for „self-interest‟ and „the moral of sympathy‟, that were set out in the Wealth

of Nations (1776) and The Theory of Moral Sentiments (1759) respectively.2 The first sentence of the Theory of Moral Sentiments reads;

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their

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happiness necessary to him, though he derives nothing from it except the pleasure of seeing it”.

Smith‟s views on sympathy were submerged, however, in the growing influence of utilitarianism. One of the utilitarian protagonists, Jeremy Bentham, formalized prudence and called it by the name utility3, he thereby opened up the way for the marginalist revolution and the accompanying prominence of analytical rigor in economics (Roncaglia, 2005, p. 177). However, as Donaldson (1990) notes, motivations and behavior cannot be reduced to a one dimensional construct.

Moreover, this self-interested utility needs to be accompanied with methodological individualism – the actions of one man do not affect another – for it to be used in mathematical modeling. Corporate governance research is firmly grounded in the ideas of the marginalist‟s tradition. Interests of individuals are orthogonal to the interests of others and managers are expected to be rational and utility maximizing.

The prevalence of methodological individualism in corporate governance research can be clearly seen from the predominant scholarly interest in shareholder wealth in contrast to stakeholder interests e.g. job security, employee pension benefits, the local community, the environment. As noted above, corporate governance deals with the problems stemming from the separation of ownership and control to assure that suppliers of finance get a decent return on their investments. What about the interests of other stakeholders, like employees, customers, and suppliers (see Veltrop & de Waard, 2007, for a succinct overview of differences between shareholder oriented utilitarianism and normative stakeholder theory)? As can be seen from a recent takeover of ABN AMRO for example, maximizing shareholder return can be accompanied with negative consequences for employees in the form of job losses, for customers in the form of uncertainty about future quality of financial services, and even for Dutch citizens in general in the form selling a part of Dutch heritage to foreign investors. However, agency scholars assume that maximization of shareholder wealth is orthogonal to the interests of other stakeholders. Consequently, they posit that maximization of shareholder wealth will automatically lead to the highest utility and optimal social outcome. However, reality shows us that different stakeholder interests are related to one another, maximization of shareholder wealth can adversely affect other stakeholder interests.

Finally, control and collaboration are based on alternative models of man (Davis, Schoorman, & Donaldson, 1997). By building from the selfish model of man governance scholars a priori cast aside collaborative avenues in management-owner relationships. Sundaramurthy & Lewis (2003, p. 398) state:

“Control advocates [assuming egoism] accentuate the challenges of individualism and the value of extrinsic motivation. … A collaborative approach, in contrast, stresses managers‟ tendencies to be collectively oriented and intrinsically motivated. As stewards, managers may identify with the firm and internalize the mission”

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Perhaps there are some principles in the manager‟s nature, which interest him in the fortune of others, e.g. the owners of the firm or other stakeholders, though he derives nothing from it except the pleasure of seeing it.

2.3. Some Remarks on the Scientific Discipline of Corporate Governance

Corporate governance research spans fields like financial economics (Bebchuk & Fried, 2003; La Porta, Lopez-De-Silanes, Shleifer, & Vishny, 2000), finance (Bae, Lim, & Wei, 2006), institutional theory (Aguilera, 2005; Aguilera & Jackson, 2003), law (Bainbridge, 2002; Bebchuk & Hamdani, 2006; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998), strategic management (Mizruchi, 1983; Useem, 2006; Westphal, 1999; Westphal & Khanna, 2003), accounting (Choi & Wong, 2007) and more. There is a great deal of research that is trying to find an answer to the fundamental question of corporate governance research that is „how investors can assure themselves of getting a return on their investment (Shleifer et al., 1997).

A large part of corporate governance research is grounded in agency theory (e.g. Fama et al., 1983; Jensen et al., 1976). The popularity of agency theory can be attributed to at least two factors (see Daily et al., 2003). Firstly, it is a very simple theory. The complexities of interactions within large corporations are ultimately reduced to a set of contracts between two parties, the managers (the agents) and the shareholders (the principals). Secondly, it is assumed that human beings are self-interested, rational and utility maximizing. Agency theorists build on these assumptions required for mathematical models depicting managerial decision making. Corporate governance scholars have been socialized to think in neoclassical abstractions, assuming selfish behavior, methodological individualism, and preferring analytical modeling to field research. This can be regarded as a paradigm in itself, Kuhn (1996, p. 9) notes;

“Rather than being elementary logical or methodological distinctions, which would thus be prior to the analysis of scientific knowledge, they now seem integral parts of a traditional set of substantive answers to the very questions upon which they have been deployed.”

Furthermore, governance research is primarily concerned with research investigating structure and governance proxies. These proxies are regressed to firm performance through econometrical rigour. Even in the presence of equivocal empirical results there are still scholars who note that “ambivalent results from empirical studies to date concerning the link between structural aspects of governance and corporate performance do not disprove a link between board activism and increased investor returns” (Millstein & MacAvoy, 1998, p. 1297).

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governance mechanisms. Internal mechanisms include, among other, the board of directors and managerial incentive alignment, i.e. managerial remuneration. External mechanisms include the market for corporate control and corporate regulation (see Denis et al., 2003; Walsh & Seward, 1990, for a comprehensive overview of various internal and external governance mechanisms). The board of directors has to be able to operate effectively in concert with other internal and external governance mechanisms.

3. The Board of Directors

The board of directors is denoted by scholars as the “apex of organizational internal control” (Fama et al., 1983; Gillan, 2006; Jensen, 1993), “the ultimate mechanism of control” (Zahra & Pearce, 1989), or as “one of the most important internal control mechanisms” (Daily et al., 2003). Both in scientific research and in corporate practice the board is attributed a central role (Stiles & Taylor, 2001). A wide array of publications is dedicated to investigating the board‟s impact on corporate performance. However, board research and board regulations are generally based on distant perceptions and scantly try to address real life board dynamics (Roberts, McNulty, & Stiles, 2005).

The prevalence of surface-level characteristics is not limited to scientific research on boards it can also be found in corporate legislation. Corporate governance codes around the globe contain best practices that are predominantly concerned with improving board effectiveness through easily observed board measures. Along with board research we will therefore also address board regulation. The ultimate goal of this chapter is to present behavioral avenues for further research that can resolve some of the ambiguity in board research and be relevant for corporate practice.

This chapter is structured as follows. In section 3.1 we will set out the most prominent theoretical perspectives for management and boards of directors that are employed in board research. Subsequently, board research is discussed in section 3.2 and section 3.3 provides insights into the specifics of boards of directors mainly drawing from descriptive studies on board performed by practitioners. Finally, in section 3.4 we address board regulation.

3.1. Theoretical Perspectives

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The appropriateness of the „independent board model‟ is contingent on which contributions can be expected from the board of directors. Agency theory can be considered as inadequate if board contributions also relate to other responsibilities besides control and monitoring. Daily et al. (2003, p. 376) for example state that “agency theory is not informative with regard to directors' resource, service, and strategy roles”, and that other theoretical perspectives may be more suitable for these other roles. The importance of these other responsibilities, besides monitoring and control has been widely acknowledged by corporate practitioners and academics. The most prominent theoretical perspectives related to these other board responsibilities, besides agency theory, are stakeholder theory, stewardship theory, upper echelon theory, and resource dependency theory. These perspectives are briefly set out below.

With the risk of beating the proverbial dead horse, agency theorists state that governance mechanisms should be designed to constrain managerial opportunistic behavior. Jensen & Meckling (1976) posited that the consequences of managerial self interested behaviour could be curbed by a set of mechanisms, aligning managerial and shareholder interests. Fama & Jensen (1983), furthermore, advanced that an effective approach to limit agency problems should consist of incentive alignment on the one hand, and separating the decision process into decision management and decision control on the other hand. Boards of directors have been attributed with decision control, they state that “the board is not an effective device for decision control unless it limits the decision discretion of the individual top manager” (Fama et al., 1983, p. 314).

A view very different from agency theory is stewardship theory. Executives are seen as stewards of the organization. Instead of assuming that directors are self-interested, stewardship theorists propound that managers will act in the best interest of the company. Donaldson (1990) states that from a stewardship perspective managers are intrinsically motivated to just do a good job. Managers are rewarded by doing challenging work, exercising authority and gaining recognition from peers and bosses. From a stewardship perspective there would be no (or less) need for monitoring and control, the board would try to facilitate management in strategic decision making.

Moreover, stakeholder theorists state that a wider group of stakeholders should be taken into account instead of focusing exclusively on shareholder interests (Freeman, 1984). From a stakeholder perspective the board of directors should not focus solely on shareholders as the principal, but should also take other stakeholders like employees and customers or the external environment into consideration. This is closely related to corporate social responsibility (see Donaldson & Preston, 1995; Veltrop et al., 2007).

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Hambrick et al. (1984, p. 193) stated that “organizational outcomes ... are partially predicted by managerial background characteristics”. The general idea of upper echelon theory is that upper echelon top-management-team (TMT) demographics can be seen as determinants of strategic choices and organizational outcomes.

Lastly, resource dependency theory claims that “boards serve as a cooptive mechanism for a company to link itself with the external environment to secure resources and, on occasion, protect itself against environmental adversity” (Stiles et al., 2001, p. 16). Organizations use their boards as “vehicles through which they … partially absorb important external organizations (Pfeffer, 1972, p. 222). By increasing the size and diversity of the board the organization can strengthen its hold on critical resources (Stiles et al., 2001). An overview of these theoretical perspectives is presented in table 1. Agency theory Stewardship theory Stakeholder theory Upper echelon theory Resource dependence theory Key assumptions Managers are utility maximizers, self-seeking and opportunistic Managers are the stewards of the organization and will act in the best interest of the organization A wider group of stakeholders , besides shareholders, should be taken into account Upper echelon attributes affect strategic choices and thereby organizational outcomes Boards of directors serve as a mechanism for a company to link itself with the external environment Role of the

board Monitoring

Strategy /

Service Various Strategy

Resources / Service

Table 1: Different theoretical perspectives on management and boards of directors

3.2. Board research

In our review of board research we explicitly focus on research that investigates the board‟s influence on management and on the organizational outcomes. However, the first thing to note about board research is the prevalence of research linking surface-level board characteristics to board influence, this will be addressed in the first subsection. The second subsection focuses on process research investigating the board‟s influence.

3.2.1. Methodology in board research – the proxy machine at work

„Surface-level‟ characteristics can be defined as characteristics that can be easily observed and measured – sometimes referred to as „visible dimensions‟ (e.g. Milliken & Martins, 1996) – like for example age, gender and race (see Harrison, Price, Gavin, & Florey, 2002), but for boards these surface level characteristics also include board size, proportion of outside directors, structure of the board, and compensation packages of management and board members4. To assess the influence of

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boards on organizational outcomes these characteristics have been regressed onto organizational outcomes like strategic change (Golden & Zajac, 2001), internationalization (Tihanyi, Johnson, Hoskisson, & Hitt, 2003), diversification (Hill & Snell, 1988; Jensen & Zajac, 2004; Yoshikawa & Phan, 2005), R&D and innovation (Hill et al., 1988; Kor, 2006), corporate restructuring (Paul, 2007; Perry & Shivdasani, 2005), acquisition bids (Paul, 2007), and more.

Very broadly, scholarly research on boards can be divided into two camps. The first camp – the surface-level camp – focuses exclusively on board surface-level characteristics both theoretically as well as empirically, the second camp – the process camp – acknowledges the significance of board processes for board influence and the second camp. Forbes et al. (1999, p. 490) note that in line with the second camp “(m)ost scholars agree that predictions about the performance implications of demographic variables are presumed to operate through some set of intervening processes”. However, to make matters more complicated there is debate among scholars within the process camp whether studying of intervening processes would be necessary. Several scholars argue that beliefs and behaviors can be inferred successfully from demographic characteristics, as long as it can be explained

what the impact of surface-characteristics is, it is not necessary to investigate why these characteristics

are related to board influence e.g. upper echelon scholars.

Within the „process-camp‟ we therefore have scholars that do acknowledge the theoretical importance of intervening board processes, but do not aim to directly observe or indirectly measure these processes, inferring from surface-level board characteristics (input I from the IPO framework) they speculate on the mediating process (process P) linking surface-level characteristics to board influence (output O). The majority of empirical research on boards is either based on agency theory or upper echelon theory5 (Cannella et al., 1997; Jensen et al., 2004; Johnson, Ellstrand, & Daily, 1996; Zahra et al., 1989). Although agency theory and upper echelon theory differ in their underlying theoretical assumptions, upper echelon research would fit more in the process camp, they are comparable in that research is conducted “at one remove from board activity” (Stiles et al., 2001, p. 21). That is, “great inferential leaps” are made in linking surface-level characteristics with board effectiveness and organizational outcomes with no direct evidence on the mediating processes (Pettigrew, 1992, also see Daily et al., 2003).

Despite a considerable amount of empirical surface-level research on boards the results have remained ambiguous, this can be seen from several meta analyses and overview papers on board research (e.g. Daily et al., 2003; Dalton et al., 2003; Dalton et al., 1998). Regarding board size for example – a widely studied board characteristic – it can be argued that larger boards are positively related to strategy development because of a wider range of perspectives on the board (Pearce II & Zahra, 1992; Sanders & Carpenter, 1998), it can be argued that larger boards are negatively related to strategy development because of coordination problems and other process losses (Goodstein, Gautam,

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& Boeker, 1994; Ruigrok, Peck, & Keller, 2006), and it can be argued that board size is curvilinear related to the board‟s to strategy development due to a tradeoff between for example free-riding and different perspectives (Forbes et al., 1999; Golden et al., 2001). Moreover, Amason & Sapienza (1997) for example find that group size is both positively related to cognitive conflict as well as affective conflict. As Forbes et al. (1999) note, two processes that are believed to have opposite effects on the quality of a group‟s strategic decision making. Another example of mixed results can be found in Ravasi et al. (2006) who illustrate that scholars have described inside directors as „risk-averse pursuers of diversification strategies‟ (Hill et al., 1988), „defenders of the existing course of action‟ (Goodstein & Boeker, 1991), or as „bold supporters of innovation‟ (Baysinger, Kosnik, & Turk, 1991).

Stiles & Taylor (2001, p. 21) note that “much energy has been expended in testing theoretical models, using secondary data chiefly on company performance.” It would seem that addressing the

what question of surface-level board research without focusing on the why question, i.e. board process,

has failed to materialize in unequivocal relationships. The search for parsimony might have led researchers “to oversimplify the causal chain linking governance structures and dynamics to corporate performance” (Ravasi et al., 2006, p. 1674).

Greater attention needs to be given to behavioral dynamics (McNulty & Pettigrew, 1999). Moreover, as already stated by Pettigrew (1992) these behavioral board studies should focus on high quality process research investigating boards of directors. Over more than a decade later Pye & Pettigrew (2005) still stress the need for developing greater analytical process research for boards, there still is a very limited understanding of board behavior (Roberts et al., 2005) and we are still in need of a “rounded picture of board activity” (Stiles et al., 2001, p. 22). As Pettigrew (1992) noted descriptive non-analytical studies suffer from a lack of analytical rigor and rely on unquestioned assumptions. The majority of process research on boards is more concerned with practical insights rather than developing theory and has been performed by writers primarily engaged in corporate practice with direct access to boards and board members. These descriptive studies are discussed in section 3.3 as these „non-analytical‟ works provide a rich source of information on the inner workings of boards, the next subsection focuses on academic research on the board‟s influence.

3.2.2. Research on board influence – the gravity of power

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considered as a theory about power. Without power the board would be unable to influence strategic outcomes and unable to effectively control management.

“Power refers to the capacity of social actors to exert their will and to achieve their goals in a particular relationship” (Shen, 2003, p. 468, building on Pfeffer, 1981), boards can be considered as the “ultimate instrument of power in organizational settings” (Pettigrew et al., 1998, p. 198). However, as Pettigrew & McNulty (1998) note, paradoxically studies on power have rarely focused on the very powerful at the apex of large institutions.Research on board influence focusing on issues of power is scant, with a few exceptions (e.g. Pettigrew & McNulty, 1995; Pettigrew et al., 1998; Stiles et al., 2001). Most researchers rely on simplified assumptions of the agency framework and rarely investigate behavioral dynamics (Ravasi et al., 2006, see the previous subsection).

A great deal of research builds on Finkelstein‟s (1992) measurement of power who has put forward a number of „objective measures of power‟ – power measures that can be observed from outside the boardroom and the organization e.g. job titles, compensation, ownership, number of previous positions in a firm, the number of board memberships. Finkelstein himself acknowledges the drawback of these measures, in that they are based on second hand information. In a paper presenting early qualitative findings of a pilot study involving 20 part-time board members from UK companies, Petttigrew & McNulty (1995, p. 848) ask themselves the question “what do we know about power and influence in and around the boardroom?” For which they answer with “not a great deal”.

A notable attempt to integrate surface-level board research with behavioral research can be found in Westphal (1998). Questionnaires were sent to both the CEO and outside directors and considerable care was taken in measuring hypothesized mediating constructs. Westphal aimed to capture the “full range of CEO-board relationships” (Westphal, 1998, p. 521). The research is based on archival data amended with self-report measures. He finds that if structural power decreases, CEO‟s will attempt to influence other board members through „ingratiation‟ and „persuasion‟ to consolidate his or her power, i.e. board structure and interpersonal influence behavior can be seen as alternative sources of power. Inferring power dynamics between the CEO and the board through questionnaires can be seen as an appropriate methodology given that direct access to boards in observing CEO-board power dynamics would be difficult.

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making. However, whereas their theoretical arguments draw from psychological theories, their operationalisation of formal power consists of counting job titles obtained from public databases and informal power is operationalised as length of tenure.

In their attempt to resolve some of the ambiguity surrounding the relationship between characteristics of corporate elites and corporate strategy Jensen & Zajac (2004) combine elements from agency theory and upper echelon theory. They hypothesized several relationships between characteristics of corporate elites and strategic outcomes e.g. “having more finance executive directors, as opposed to more finance non executive directors, will be associated with high levels of diversification” (p. 511). They found that individual characteristics of corporate elites have different effects on corporate strategy depending on the agency contexts (CEO, outside director, non-CEO management) and they furthermore suggest caution in interpreting aggregate units of analysis such as top management teams. These authors recommend distinguishing between individual board members. However, in their original work on upper echelon research Hambrick & Mason (1984) were explicit in setting out the need to focus on the top management teams as opposed to individuals, the underlying argument was that strategic choice far exceeded the capability of a single individual board member (Carpenter, Geletkanycz, & Sanders, 2004). By advocating research on the individual corporate elite, Jensen & Zajac essentially refer to research from before the work of Hambrick & Mason, they thereby contend the validity of two decades of upper echelon research. Given these ambivalent interpretations and empirical results, reiterating our argument from the previous subsection, questions can be raised on the usefulness of relating surface-level board characteristics to organizational outcomes to assess board influence.

The contributions as they have been discussed here are indicative for a vast amount of research that takes surface-level characteristics as proxies for board process (for other examples see Daily & Dalton, 1994, on governance structure and bankruptcy; Fich & Shivdasani, 2006, on busy boards and company performance; Finkelstein & Daveni, 1994, on CEO duality and board vigilance; Hambrick, Cho, & Chen, 1996, on team heterogeneity and competitive moves; Maitlis, 2004, on CEO's influencing boards; Pearce & Zahra, 1991, on powerful boards and corporate performance; Ruigrok et al., 2006, on board interlocks and board involvement).

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the content, context and conduct of strategy‟ (influence is continuous and not confined to decision episodes).

Closely related to this are three board roles that come to the fore in the literature on boards. Board roles can be broadly categorized as control roles, service roles, and resource dependence roles (see Johnson et al., 1996; Ravasi et al., 2006; Stiles et al., 2001; Zahra et al., 1989). Succinctly, the control role entails monitoring management on behalf of shareholders and maintaining control over management. The service role includes advising management on administrative as well as strategic issues. Lastly, the resource dependence role is related to the provision of resources by the board. It should be noted, however, that there are some competing classification of board roles, Zahra et al. for example also acknowledge a „strategy role‟ next to the service role. En masse there is agreement on the three roles indicated here. Through these roles the board is expected to influence management and organizational outcomes.

Focusing on the interplay between different board roles can be particularly rewarding. Hillman et al. (2003) for example postulate that „board capital‟ (e.g. expertise, experience, knowledge, reputation) – related to the board‟s resource dependence role – is positively associated with the provision of resources for example in the form of advice – the board‟s service role – and ultimately with board effectiveness and firm performance. Hillman et al. specifically combined agency theory with resource dependence theory and noted that whereas agency theorists have focused on incentives of boards to monitor, resource dependence focuses on the capacity of the board to monitor. Boards can be independent and have the correct incentives to monitor management, however, without the capacity to monitor effectively boards can have all the right incentives, nonetheless this will not materialize in more effective governance.

In anticipation of descriptive board studies in the next section we can state that closely related to incentives to monitor and the capacity to monitor is the „independence paradox‟ that has been coined in the governance literature (e.g. Demb & Neubauer, 1992; Hooghiemstra & van Manen, 2004), one of the most paradoxical issues confronting non-executive directors. That is, due to information asymmetry between management and the board there is a tradeoff between independence and „informedness‟ (necessary for effective monitoring) of non-executive directors affecting board effectiveness in governing management.

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influence strategies for boards is expected to be particularly rewarding in resolving some of the ambiguity in board research.

3.3. Descriptive Studies on Boards

The work discussed in this section mainly comprises of books written by corporate practitioners and articles published in journals (also) aimed at non-academic audiences. The classification between academic works and non-academic is somewhat subjective, some works appear both in this section as well as in section 3.2. For this reason it would be best to view both sections in concert. The main difference with the previous section is that works in this section primarily address the inner workings of boards of directors. Generally, these are the works of practitioners that have direct access to boards, but sometimes also researchers that have come into contact with boards through their professional careers either as board members or as consultants.

Several issues facing non-executive directors on boards are addressed in this section, however only a selection of these issues will be relevant for our conceptual model on power dynamics. Our conceptual model in chapter 4 focuses explicitly on inter-board power dynamics between the supervisory board, i.e. non-executives, and management, i.e. executives. Even though not all issues are primarily relevant for the propositions in chapter 4 we are still under the impression that these „other issues‟ including intra-board aspects6 for non-executive directors should not be omitted here as they do contribute in providing a rich account on the inner workings of boards of directors.

One of the most salient characteristics of boards of directors is that they are an elite group with elite individual members. Although board members meet in private, their decisions are publicly scrutinized by scholars and the business press. This elite nature of boards makes access to these boards difficult (McNulty et al., 1999; Pettigrew, 1992). Board members run the risk of damaging their reputations or face legal repercussions when things go wrong (Carter & Lorsch, 2004).

The main responsibility of boards is to make choices and to challenge management to „see the bigger picture‟. The board of directors is categorized by Demb & Neubauer (1992, p. 39) as “a fulcrum where a comprehensive view of corporate activity comes together”, the board has the responsibility to take into account social, economic, and stakeholder aspects that are relevant for the performance of the firm. This is in line with stakeholder theory previously set out as one of the theoretical perspectives on boards. Non-executive directors are expected to provide executives with advice and put matters into perspective, whilst at the same time monitoring managerial executive performance. The main contribution of non-executives board members can be found in their ability to

6_{For parsimony, we define intra-board aspects as those aspects that operate exclusively between non-executive}

board members for the one-tier board structure and supervisory board members for the two-tier board structure. Strictly speaking, for the one-tier board structure interactions between executives and non-executives can also be characterized as intra-board dynamics. Both executives and non-executives are members of the same board of directors. However, our conceptual model in chapter 4 presupposes a two-tier board structure in which

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provide advice that is facilitated by detachedness and independence. Here we can see a combination of control roles and service roles as discussed in section 3.2. From a legalistic perspective Zahra et al. (1989, p 293) posits that:

“board attributes - composition, characteristics, structure, and process - determine a board's performance of its two primary roles: service and control … the service role involves enhancing company reputation, establishing contacts with the external environment, and giving counsel and advice to executives. The control role requires evaluating company and CEO performance to ensure corporate growth and protection of shareholders' interest.”

We can see here that the three roles as identified in section 3.2 have been rearranged into two grand roles; control and service. The „grand service role‟ as identified here is a combination of the service role and the resource dependence role from section 3.2. Aiming for clarity we define the „grand service role‟ as the counsel role of the board. We arrive at two board roles; control and counsel. The counsel role then entails providing counsel and advice on matters of strategic importance. External board resources can be expected to improve the effects (influence) of board counsel.

Bowen (1994, p. 20) elucidates board responsibilities by summing up a number of „principal functions‟ of the board of directors. It is not an exhaustive list, but it does present a good idea of the responsibilities and tasks facing non-executive directors. These responsibilities are to;

- select, encourage, advice, evaluate and, if need be, replace the CEO;

- review and adopt long-term strategic directions and to approve specific objectives, financial and other;

- ensure, to the extent possible, that the necessary resources including human resources, will be available to pursue the strategies and achieve the objectives;

- monitor the performance of management; ensure that the organization operates responsibly as well as effectively;

- nominate suitable candidates for election to the board, and establish and carry out an effective system of governance at the board level, including evaluation of board performance.

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asymmetry the board-management power relationship is complicated (Carter et al., 2004). It is one of the most paradoxical issues confronting non-executive directors, and has been coined „the independence paradox‟ (e.g. Demb et al., 1992; Hooghiemstra et al., 2004). A quote from one of the non-executive directors that participated in Pettigrew & McNulty „s (1995, p. 863) qualitative research, as shown below, clearly illustrates the importance of information for non-executive directors and the role of external networks.

“Information is very important. If you have any nous at all you extract the information you need. Nobody can refuse to give you the information if you want it. You need to know the right people and questions to ask of course.”

But even if directors were to get all necessary information from management, it would still be difficult for them to absorb this information given the time constraints facing non-executives. Carter & Lorsch (2004, p. 152) note that:

“(t)he task of remembering – let alone keeping up with change – is formidable for part-time directors who immediately have to turn their minds to other matters when board meetings are over, and who are often faced with gaps of two months between meetings.”

Moreover, the board of directors only meets episodic and the limited time of non-executive board members has been identified as one of the main problems facing non-executive board members. The two citations below clearly exemplify the time constraints and the episodic character facing non-executive board members in practice:

“In addition to board seats, most [non-executive directors] have very demanding careers-they are CEOs or senior executives of other companies, or very busy professionals. Many serve on more than one board … These part time directors don‟t spend much time together. The vast majority of boards have regular meetings around every second month, and some only quarterly. The meetings rarely last even a full day.” (Carter et al., 2004, p. 22)

“They [non-executive directors] may have great experience in their industry, but are very busy men, with little spare time, who fly in on a corporate jet the morning the board is due to meet, fly out before lunch and have no time to mingle with the managers who are not on the board.” (Keenan, 2004, p. 173)

Furthermore, non-executive board members do not divide up the work, every board member is individually responsible and accountable for all board decisions. Committees are an exception, they are “the one example where directors have been willing to divide up the work” (Carter et al., 2004, p. 106). Committee meetings provide additional opportunities for intra-board interactions (Forbes et al., 1999). Establishing committees enables the board to accomplish more, in limited time committee members can specialize and develop a deeper understanding of (firm) specific issues.

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Directors are the archetypical generalists in a world that values and needs specialization” (Carter et al., 2004, p. 53)

An important source for this „archetypical generalist‟ behaviour is that in many countries directors are jointly legally responsible for the all affairs of the corporation. Furthermore, by not dividing up the work they do not have to take personal responsibility when things turn for the worse, directors do not want to be attributed personal responsibility on a specific issue.

It is very hard for board members to confront non-executive noncontributing peers and sub par performers. Non-executive directors are individuals that have high status as former CEOs or as chairmen of large organizations. They have a reputation to uphold. Asking them to leave the board is very difficult, especially because relationships between directors can in some instances be categorized as „club-like relationships‟ or as „old-boys networks‟. Carter & Lorsch (2004, p. 114) note that “(t)hey [the board members] are colleagues, often long-standing ones, and it is difficult to ask such people to resign”. Ordinarily, directors serve on the board until they reached retirement age or in some cases as Carter & Lorsch (2004, p. 124) note “until it was embarrassingly obvious that they were no longer mentally able to serve”.

Boards of directors are clear examples of groups (Pye et al., 2005), “it is the collective strength of the directors that gives the board its capability for judgment” (Demb et al., 1992, p. 131). Forbes & Milliken (1999, p. 490) note:

“The very existence of the board as an institution is rooted in the wise belief that the effective oversight of an organization exceeds the capabilities of any individual and that collective knowledge and deliberation are better suited to this task.”

Boards are generally comprised of „all-star‟ team members with the best individual talent; they have climbed up the corporate ladder and have been successful in their careers. But as a group, however, despite their awesome individual abilities, they rarely even match a mediocre performance, “infrequent meetings, a sparse committee structure and, perhaps, a chairman/CEO who prefers to retain power, reduce the ability of these „teams‟ to build their collective strength” (Demb et al., 1992, p. 132). The relationship of non-executives to the board can be characterized, as one of “partial inclusion” (Stiles et al., 2001, p. 4).

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on boards are hardly confronted with their performance, and finally boards are clear examples of groups.

3.4. Board Regulation

Countries worldwide have shown an increased interest in trying to prevent high profile collapses. In the wake of corporate scandals in Europe and the United States legislators and regulators have implemented a wide range of corporate governance reforms and best practices. However, board regulation is mainly based on surface-level best practices and requirements. These relate to, among other criteria to board structure, structural criteria for independence of non executive directors, and the number or proportion of independent non-executive directors. In this light Carter et al. (2004, p. 85/86) notes;

“Board structure has become one of the great hopes of those concerned with improving corporate governance” … “It is easy to why structure has achieved such prominence in demands for board reform. Structure is visible, and changes in structure are measurable.”

We will specifically address board regulation for three countries, the Netherlands, the United Kingdom (UK), and the United States (US). These are all countries with differing regulatory systems affecting boards of directors. The Netherlands is discussed because it is one of the few countries with a two tier board structure, i.e. the Continental-European board structure. This is one of the most highlighted structural differences between the Continental European and Anglo-Saxon governance. Furthermore, the Netherlands has positioned itself as a country at the frontier of corporate governance through board regulation and corporate governance codes. The UK and the US are discussed because these countries can both be categorized as trendsetters in board regulation, e.g. the Cadbury code and Sarbanes Oxley. Both countries have a one-tier board structure, i.e. the Anglo-American board structure, however there are differences to be noted regarding CEO duality and „principles versus rules‟ climate.

The goal of this section is present an overview and illustrate the predominance of surface-level board regulation. Building on previous sections on board research and descriptive studies, we aim to provide behavioral avenues relevant for future adaptation of board regulation and best practices.

3.4.1. The Netherlands

The Dutch corporate governance system is based on the statutory two-tier regime (structuurregeling) that is mandatory by law for large organizations.7 Publicly traded organizations that do not have to conform to the two tier regime by law are generally required to do so by statutory requirement if they

7_{Three criteria are taken into account to assess whether an organization is categorized as a large organization.}

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are listed on the Dutch stock exchange. One of the characteristics of the two-tier regime is that large companies are obliged to have a supervisory board (raad van commissarissen) fully comprised of outside directors.

Firms generally have a management board, performing day-to-day operations, and a supervisory board. The supervisory board‟s main task is to monitor and provide management with advise, it approves key decision and appoints and dismisses management board members. Dutch law furthermore prescribes that the supervisory board should serve in the interest of the firm, thereby focusing on a broader set of interests than only shareholder interest. The Tabaksblat Code (2003), which is vested in Dutch corporate governance regulation, explicitly addresses the relationships between the management board, the supervisory board and the general meeting of shareholders. Principles and provisions with respect to the functioning of the supervisory board are set out below.

Regarding the role and procedures for supervisory boards, Principle III.1 states that “the role of the supervisory board is to supervise the policies of the management board and the general affairs of the company and its affiliated enterprise, as well as to assist the management board by providing advice”. Principle III.1 furthermore states that the supervisory board “shall take into account the relevant interests of the company's stakeholders” and that “the supervisory board is responsible for the quality of its own performance”.

Regarding independence of the supervisory board, Principle III.2 states “the composition of the supervisory board shall be such that the members are able to act critically and independently of one another and of the management board”. Criteria for independence are further enunciated in Best Practice Provision III.2.2, these criteria are related to employment history, financial compensation, business relationships, interlocking directorates and shareholdings. With the exception of one supervisory director, all supervisory directors have to be independent. As can be seen assessment of board independence is based on surface-level characteristics.

With respect to expertise and composition of the supervisory board, Principle III.3 states that “each supervisory board member shall be capable of assessing the broad outline of the overall policy” and “each supervisory board member shall have the specific expertise required for the fulfillment of the duties”. Principle III.3 furthermore states that “the composition of the supervisory board shall be such that it is able to carry out its duties properly” and Best Practice Provision III. 3.3 states that the supervisory board shall conduct an annual review to identify any aspects for which supervisory board members require further training or education.

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members, acts as the main contact person for the management board, initiates the evaluation of the functioning of the supervisory board and the management board.

Principle III.5 relates to the composition and the role of three key committees of the supervisory board. It states that “if the supervisory board consists of more than four members, it shall appoint from among its members an audit committee, a remuneration committee and a selection and appointment committee.” The chairman of the audit and remuneration committees may not be the chairman of the supervisory board or a former managing director of the company. It is furthermore stated that supervisory directors should not have board seats with more than five listed companies – a chairmanship counts twice – and that supervisory directors can be appointed for a maximum of three terms of four years.

3.4.2. The United Kingdom

The role of the UK government is minimal with respect to corporate governance regulation. The UK government has left most regulation to non-governmental institutions like the Cadbury Committee. Best practices by which stock listed firms are expected to abide have been primarily initiated by these non-public bodies. Firms are not required by law to comply to these best practices, however, the London Stock Exchange does require listed companies to indicate whether they comply with the code and if not, explain any deviations (comply-or-explain principle).

There are a number of provisions in the Combined Code (2003) that are of interest. Principle A.1 states that “every company should be headed by an effective board, which is collectively responsible for the success of the company”. The supporting principles state that as “part of their role as members of a unitary board, non-executive directors should constructively challenge and develop proposals on strategy” and that non-executive directors should scrutinize the performance of management and monitor its performance.

Furthermore, Provision A.1.3 specifically states that the chairman should hold meetings with the non-executives without the executives present. If the CEO is also the chairman of the board the non-executives should meet at least once a year, the meeting should then be led by the senior independent director.

Principle A.2 states that “there should be a clear division of responsibilities at the head of the company between running of the board and … running of the company‟s business … No one individual should have unfettered powers of decision”. The chairman is responsible for leadership of the board on all aspects regarding its role and setting its agenda. Provision A.2.1 specifically states that the role of the chairman and the CEO should not be exercised by the same individual, i.e. separation of the role of the CEO and the board chairman. Provision A.2.2 furthermore states that a former CEO should not go on to become the chairman.