Supervisory Boards and the Woningwet 2015: reducing the agency problem

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Master Thesis

Supervisory Boards and the Woningwet 2015: reducing the

agency problem

By

Ruth Haaksema

S2467984

ruth_haaksema@hotmail.com

University of Groningen

Faculty of Economics and Business

MSc BA Organizational and Management Control

Supervisor Elma van de Mortel

Co-assessor Irene Burgers

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Abstract

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Chapter 1. Introduction

1.1 Motivation

In 2013 Aedes, the association for public housing organisations, published an article named; De balans verstoord, which roughly can be translated to: the balance is off. In this article Aedes describes in detail what has been going wrong in the public housing organisations in the Netherlands and how these events could have happened.

Since the 1990’s the central government of the Netherlands tried to privatise many organisations and to let the market forces take a hold in these previously governmentally owned institutions. This also happened to some extent in the public housing sector. These organisations were not given any subsidies from the government anymore and they did not have to ask the government for permission anymore for their large investment projects. Only in hindsight were these projects tested to see if they fitted with the public task that these organisations had to provide. However, the borders of their public task became increasingly blurry and gave these organisations a lot of freedom in their investment opportunities. To counteract this increasing freedom in investment opportunities and to ensure some form of control, public housing organisations had to set up a supervisory board that would monitor the management and their decisions internally.

The consequences of this higher level of investment freedom and lesser external control came to light after the financial crisis of 2008. In the article by Aedes (2013), they mention the 22 biggest incidents in the public housing sector, with the Vestia case in 2012 being the most well-known. These incidents are stated as financial mismanagement, mismanagement of projects and fraudulent activities. While fraudulent activities are not something new, not to any sector, they state that the financial mismanagement and the high risk of projects can be ascribed to the deregulation of the semi-public organisations. It has to be stated that these incidents are not unique to the public housing sector. Klaassen (2013) mentions different incidents in the health care sector which can be attributed to management not focusing on their core task but on other high risk projects.

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5 This housing act consists of a couple of core changes that should help these organisations to refocus. Firstly, there are changes in Daeb1_{or non-Daeb activites. Daeb activites are activities that serve a} general economic interest. Housing organisations now need to strictly separate these two and can only take on a non-Daeb activity if other private organisations in the market will not take on that project. Secondly, there will be a tighter relationship between the municipalities, the tenant organisations and the public housing organisations. Together they have to make agreements on what needs to be accomplished and they can hold each other accountable for upholding these agreements. The third core change consists of changes in the external control. There will be a new housing authority that will control and oversee every housing organisation. Lastly, there are changes in governance. All new and re-elected members of the supervisory board need to do a test that shows whether or not they have integrity and have adequate knowledge of the public housing sector. The aim for this last measure is to ensure the level of integrity and professionalism of the public housing organisations, which should help keep these organisations focused on their core task.

In the next part of this introduction the reasoning behind the interest in governance will be explained and the aim of this paper and the research question will be discussed.

1.2 Aim of this research

As stated above, the supervisory board was introduced in the mid 90’s as an internal control measure to make sure that decisions made by management were in line with the public goal that these organisations were supposed to serve. At that time the idea of a supervisory board was fairly new and was just recently introduced in the different non-profit sectors (Hooge & Helderman, 2007).

The need for a supervisory board has its roots in agency theory. According to Eisenhardt (1989) an agency problem can be defined as the problems that occur when the principal delegates its work towards the agent. Problems arise when these two parties have different goals and when it is difficult for the principal to ensure that what the agent is doing is in the best interest of the principal. Agency problems are therefore based on an agent working in self-interest and not in the interest of the principal (Eisenhardt, 1989). At that time a supervisory board was seen as the answer to an agency problem. To make this more concrete, in this case the supervisory board is the principal. They ensure that the actions taken by the management of the organisations are in line with the best interest of the public goal they are serving. This makes the management of the public housing organisations the agent and the frictions that exist between these two groups an agency problem.

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6 However, as can be seen by the problems not only in the public housing sector, but also in other non –profit organisations, problems could still arise and high risk projects were still accepted by the supervisory boards. This can be seen in the report by Aedes (2013). It cannot be said that all the problems that these organisations faced after the financial crisis were due to bad internal control, but the need for better standards for internal control was clear.

The answer of the government for better internal control was given in the Woningwet 2015 by having higher standards for the members of the supervisory board. A new member or a re-elected member needs to take a test that ensures the integrity of that person and that he or she has adequate knowledge of the public housing sector. This is needed since it is the task of the supervisory board to inform the minister of any wrongful activities that might harm the public housing sector and any activity that can be seen as an agency problem.

Therefore, a lot of emphasis to strengthen the internal control is placed on the level of integrity and professionalism of the members of the supervisory board. The idea behind this new measure is that this integrity and professionalism can be tested. This raises the question whether this can be done by such a test and if this new measure will lead to a better supervisory board with a higher level of integrity. In the article by Boers & Montfort (2009) it is mentioned that one of the problems these supervisory boards are facing is that there is not enough knowledge to make appropriate decisions. The see whether or not the Woningwet 2015 is successful in creating a more professional supervisory board and to see the effects on the agency problem, this paper will try to answer the following research question:

What are the effects of the quality of board members on reducing the agency problem?

1.4 Scientific contribution

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1.5 Social contribution

As stated before in the article of Boers & Montfort (2009), they mention many difficulties that supervisory boards are facing. For example, they still have to rely on the management for their information supply and not all supervisory boards have an appropriate level of knowledge to do their task well. However, the level of integrity of the board members is not mentioned. By shining a light on the effectiveness of this test and what it does to the quality of the supervisory board, this paper can open up new research into the importance of the integrity of the board members and whether you can actually test for that.

In many non-profit sectors in the Netherlands, the organisations involved have a mandatory supervisory board. However, the role of these boards are still somewhat vague and they do not all function properly. For example in the article about the health care sector by Klaassen (2013), it is mentioned that in many of the incidents mentioned, the supervisory boards did not respond properly or responded too late. By answering the research question that is mentioned above, this paper examines the effectiveness of the supervisory boards and its effects on the agency problem. This is not only important for the public housing sector but can be generalised to other non-profit sectors in establishing how well their supervisory board is functioning, if they have an agency problem and if they should test and look deeper into the quality of their supervisory board members.

1.6 Paper structure

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Chapter 2. The Public Housing Sector

In this part of the paper, a more detailed explanation of the public housing sector in the Netherlands will be given. By showing how this sector operates, the difficulties that this sector faces will become clearer. First an analysis of the public housing sector itself will be given, then this paper will explain what the supervisory board of a public housing organisation does and what is expected from this board. Finally, the competency test will be explained.

The public housing sector in the Netherlands is part of the semi-public sector. This means that these organisations serve a public interest and therefore these organisations do not aim for a profit but they aim for their public goal. The purpose of the public housing sector is to build houses to rent to low income households (Woningwet 2015). According to the Rijksoverheid, a public housing organisation needs to rent at least 80 percent of its houses to households with an income below 35.739, 10 percent can be rented to households with an income between 35.739 euro and 39.874 euro and the remaining 10 percent they can be rented out freely.

The public housing sector has been through a lot of changes throughout the decades. The first public housing act was published in 1901 with the aim of enabling organisations to build affordable housing for low income families by offering subsidies and governmental loans (Aedes, 2013). For these organisations, this means that they could not be profit driven. This new law pathed the way for what we now call public housing organisations.

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2.1 Internal control: the supervisory board

Along with the easing of the external control measures in 1990’s came a measure of internal control for public housing organisations, the supervisory board (Hooge & Helderman, 2007). This supervisory board is by law required to be two-tiered, meaning that the supervisory board is independent of the directors, who are involved in the day to day decision making of the organisations. According to Hooge & Helderman (2007) the supervisory board has four main tasks: to supervise, to advise, to be an employer and to bridge the gap between the organisation and the community.

Source: Hooge & Helderman (2007)

These are the four tasks that the supervisory board in theory is given to ensure that the management of the public housing organisations functions as it should and that they make appropriate decisions. These are the tasks a supervisory board does if it is functioning properly.

According to the Woningwet 2015 a supervisory board needs to consist of three members or more. A member is only allowed to join the board for up to four years and can be re-elected only once. A member has to be selected by the other board members and needs to be approved by the minister. A member of the supervisory board cannot have a conflict of interest. It is expected of a board member to have adequate knowledge of the public housing sector and the challenges it faces. The government expects from the members of the supervisory board that he or she will inform the minister of internal affairs of important events. For example if a director shows a low level of integrity or if the organisation is financially unstable (Woningwet 2015). This asks of a board member themselves to have integrity, to be well informed and to be knowledgeable about the situation the organisation is in.

When looking at the results of research done by Hooge & Helderman (2007), it can be seen that a vast majority of the members of the supervisory boards are highly educated and are knowledgeable about finance, organisational and public housing. There is less knowledge in these boards about safety and liveability. However, these results come from a survey that the board members and chairpersons of

Supervisory board tasks

Task 1: Supervision

- Data collection

- Judgement

- Intervention

Task 2: Advice

Task 3: Employer

- Deciding management

structure

- A fitting director

- Contract form

- Evaluation director

Task 4: Bridging

the gap between

the organisation

and the

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10 boards have filled in themselves. In reality they might be less or more knowledgeable than they see themselves.

One other thing that came out of the survey done by Hooge & Helderman (2007) was something that was also stated in the Aedes (2013) paper, that the public housing organisations have a difficult time correcting themselves. In the survey, the board members gave the integrity of their own organisation an average of 8.8 and the overall public housing sector a grade of 6.6. This can mean that organisations have a difficult time seeing their own level of integrity and therefore their own wrongdoings.

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Chapter 3. Literature Review

In the previous chapters, this paper explained the need for this research and gave information about the public housing sector and the changes it has faced. In this chapter, the literature review, this paper will go more in depth into the available literature and this will result in four propositions that will help to better understand the following research question:

3.1 The agency problem

The main theory of this paper is the agency theory and how to reduce the costs associated with the agency problem. The definition of an agency problem is that an agent does not act in the best interest of the principal (Eisenhardt, 1989). This can be malicious, as a conscious decisions to act not in the interest of the principal. However, part of the agency problem lies in that the agent tends to have more information than the principal and therefore can or will not always pursue the same goals as the principal. Moral hazard occurs when the principal cannot establish exactly what an agent has done and the agent is not putting in the agreed upon effort (Eisenhardt, 1989).

According to Hill & Jones (1992) the principal can put in measures and incentives to control the agent, thus lowering the chance for an agency problem to occur. The agency cost is defined by the cost of monitoring the agent, the cost associated with bonding the agent to the principal and the residual cost when there is still a divergence between the agent and the principal (Hill & Jones, 1992). In the paper by Eisenhardt (1989) seven assumptions are used for the agency theory. These assumptions can be seen in the table below.

Seven Assumptions of Agency Theory

Self interest Agent working in its own interest, not that of the principal Goal conflict The agent and principal of have different goals in mind.

Bounded rationality Decision makers are bounded by the information they have, limited time and their own cognitive limitation.

Information asymmetry Information is distributed asymmetrical throughout the organizations Preeminence of efficiency The importance of efficiency

Risk aversion Principal and agents have different risk levels

Information as a commodity The agent and the principal have different levels of availability of information.

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12 Note that it should be said that not all of these assumptions need to be present for a problem to be called an agency problem. These are seven assumptions that if they are present, there is a higher change of a divergence of interest between the principal and the agent. According to Eisenhardt (1989) the most important agency problem lies in the goal conflict.

In a study done by Chen et al. (2012) they found that companies with weak corporate governance are more likely to have signs of cost asymmetry which is associated with the agency problem. Indicating that organisations with strong governance are more likely to mitigate the effects of cost asymmetry and therefore lowering the agency cost.

Dalton et al. (2007) look at the available literature about agency problems and how these papers propose to mitigate agency problems. When looking at the research done on agency problems, it can be seen that there are many papers that focus first on whether something is an agency problem and then second how to mitigate this agency problem. This indicates that problems can occur in many different organisations and how difficult it is to reduce this problem. Dalton et al. (2007) find in previous research the importance of the board and the focus on the independence of the board members, such as not having the CEO of the company be part of the board. As the board’s main task is to supervise the managers of a firm, some research states that the independence of the board member is important for how well they can adhere to this task. However, another part of the literature states that there is no such thing as an independent board member (Dalton et al., 2007).

While the literature is scattered on the importance of board independency and whether or not this can actually exist, this paper does underline the debate that exists about board members and the influence they have on reducing the agency problem and the costs associated with this problem. As stated before by Hill & Jones (1992) the agency costs are not only those cost associated with the divergence between the principal and the agent, but also the monitoring cost and ensuring that no agency problems will arise. This indicates that there should be a balance between the cost of ensuring that no agency problem will arise and the actual cost of a divergence between principal and agent.

3.2 Quality in general

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13 The study of Wicks & Roethlein (2009) looks into these different definitions of quality for the service and product industry and they state that satisfaction plays a big part in their definition of quality. They give as a definition of quality that you can speak of something of quality, when a customer is satisfied with each objective that creates customer satisfaction. However, in their paper they also give a wider applicable definition of quality and that one is derived from the ISO; “The degree to which a set of inherent characteristics fulfills requirements”. This definition is a more widely used definition of quality and applicable to more and different kinds of areas than just services or products.

In Bouckaert & Thijs (2003) they state that the definitions of quality come from two different perspectives. One perspective is about the features of the product and the outcomes from the product, as is it is perceived by the producer. The other perspective on quality comes from how a product or service is perceived from a customer point of view. They state that this last definition is becoming much more prevalent and takes more into account the satisfaction of the customer who receives the product or service instead of how the producer perceives the product or service. It can therefore be said that quality is closely related to the fulfillment of the requirements that are expected of a product, service or in the case of this paper, a board member (Glinz, 2005) and that the level of satisfaction from the person who receives the product or service is what determines the quality.

This definition can be linked to agency theory. An agency problem can arise when the inherent characteristics of that person lead to them not fulfilling the principal’s goals, but rather lead them to fulfill their own desires. This negatively impacts their quality. This is one of the earlier mentioned characteristics of the agency problem, self-interest.

3.3 Quality in the public sector boards

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14 The difference of course between boards in for profit organisations and non-profit organisations, is that for profit organizations focus on gaining the highest level of return for their shareholders (Shleifer & Vishny, 1997), whereas non-profit organisations have a focus on the public goal they are serving (Brown, 2007). While these goals are different, the similarities between these boards are that they both monitor and control what happens in the organisations. Therefore, in essence, the for profit boards do the same as the supervisory boards in non-profit organisations.

The tasks of these boards are mostly focused on reducing agency problems as stated in many papers (Baysinger & Butler, 1985; Eisenhardt, 1989; Shleifer & Vishny, 1997). However, the literature about the individual members of these boards and the effect of quality, is still quite limited.

A study done by Brown (2007) looks into what makes a quality board member for non-profit organisations and how a good board member impacts the firm. To support the importance of quality board members he references the resource dependence theory. This means that in order for an organisation to have a satisfactory performance, the proper resources are needed. One of these resources for a non-profit organisations are the board members. The importance of a strong board is also mentioned by Hillman & Dalziel (2003), who stress the importance of capital, such as expertise and experience, in a board member.

Brown (2007) states that there are three different elements of how an organisation can impact the quality of the board members: the recruitment, the orientation and the evaluation of the board member. The competency test focuses on the recruitment part of the board members. He gives three steps that need to be taken into account when looking for new board members.

Source: Brown (2007)

He states that the first step an organisation has to go through in finding a new board member is to fully understand themselves what they need and expect from this board member in terms of skills and competences. According to Lee and Phan (2000) someone’s competency encompasses their knowledge, skills and attitudes that are related to their job and these competencies are aligned with how well that person is performing.

Step 1:

Developing the set of

skills and

competences

needed for the

supervisory board

and how to identify

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15 As mentioned by Brown (2007) and Hillman & Dalziel (2003), board members who are knowledgeable and skillful will have a positive impact on the performance of a board. However, something else they mention is the reputation and the social contacts of a board member. This is as much part of the capital of a board member as their knowledge and skills. They state that in a selection process for a board member, an organisation should choose and test for the right competencies (Brown, 2007; Hillman & Dalziel, 2003; Lee & Phan 2000). As can be seen by the outcomes of Hooge & Helderman (2007), board members have a difficult time seeing and assessing their own level of perceived integrity.

Brown (2007) states that competent board members lead to a better performing board, meaning a board that monitors and advises the management of an organisation with the strategic goals of the company in mind. Cornforth (2001) studies the effectiveness of a board and the different tasks a board has. They state that one of the important input variables that helps a board to do their task well, is that a board has the right skills and experience, as well as time to do their job. Again, the skill of the board member is emphasized as a way for the board to do their task properly.

When taking all the previous literature into account, it can be stated that this paper expects that a board member who is of high quality impacts the supervisory board positively and that will reduce the agency problem that firms are facing. This will reduce the agency cost of an organisation.

P1: Higher quality board members lead to a higher quality board P2: Higher quality of the board reduces the agency problem

P3: A reduction in the agency problem means a reduction in the agency cost

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3.4 The competency test

The idea behind the competency test is to increase the level of internal control and to have better governance in these public housing organisations. According to Schleifer & Vishny (1997) corporate governance is put in place to ensure that the financial investors get a proper return on their investments. The corporate governance structures are therefore put in place, either organically or by legal institutions, to reduce the agency problem and to make sure that everybody is working in the interest of the principal (Schleifer & Vishny, 1997). When a governance mechanism is not working properly it has to be altered and a new mechanism has to be put in place, for example the competency test.

In the Woningwet 2015, the government sees governance as an important measure to counteract agency problems and one of the measures implemented to improve this governance is the competency test. This test should lead to their main goal of having more professional public housing organisations with a higher level of integrity. Since the competency test is their main measure to do this, they assume that this test will lead to better quality board members. As stated before, a qualitatively sound board member should be knowledgeable, skilful and have integrity (Brown 2007; Hillman & Dalziel, 2003). In order to test a board member, this competency test should therefore embody these quality characteristics.

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Chapter 4. Methodology

4.1 Qualitative research

Qualitative research is chosen for this paper because of the very recent introduction of the Woningwet 2015. This makes it difficult to quantify the results, since they can be very minimal. Qualitative research helps to better understand phenomena that cannot be captured by statistics and is a measure of phenomena that happen in the real world (Golafshani, 2003). Therefore qualitative research will help to better understand why certain events happen and the reasoning behind it.

Qualitative research is done when the research is still in the development stages and much information still needs to be gathered (Golafshani, 2003). Qualitative research does not aim to find indisputable results, but aims to bring more information to the discussion. The qualitative research method that was chosen for this paper are semi structured interviews.

4.2 The interviewees

When looking at the different scandals that are mentioned in the Aedes rapport (2013) it can be seen that the regions that these different public housing organisations are located in are scattered throughout the country. These incidents occur more where there are more people and therefore more organisations present. This indicates that the locations are not of great importance when looking at differentiating these organisations. Therefore the organisations chosen for this research are all in the northern part of the Netherlands. This is done because these organisations are culturally close and they deal with a similar population.

The most common method to differentiate public housing organisations is by size and the size is determined by the amount of units the organisation rents out. This is the most common method because the larger the amount of units, the larger the organisation itself and therefore the more complicated the structure of an organisation. A difference in size of the organisation asks different things of the supervisory board and may also lead to different problems that a company faces. The total amount of housing rental units has been quite stable according to Aedes (2017). However, the amount of public housing organisations has decreased. They state that between 5,000 and 10,000 units is medium. Anything below 5,000 is small and above 10,000 is considered large. The majority of organisations have less than 5,000 rental units. To be in line with the common measurement system this paper will adhere to this division.

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18 interested in being part of this research. After two weeks a second email was send to the non-respondents as a reminder. Of these 18 organisations, 11 responded and 9 were willing to be part of this research.

Besides the public housing organisations, two other organisations were approached that are closely linked with the implementation of this competency test and both these organisations were willing to be part of this research. The first of these two organisations is the authority of public housing organisations and this is a governmental institution that supervises the public housing organisations and inspects whether or not public housing organisations are functioning properly. This institution also implemented the competency test and is in charge of this test. The other organisation is the VTW. They are an organisation that helps the supervisory board members of public housing organisations. These two organisations were chosen to shine a light on the supervisory board and the competency test from a different perspective.

The table below summarizes the response rate and the participation rate of the different sized public housing organisations and the monitoring organisations.

Table 1: Response rate

Public housing organisations Monitoring organisations Total Size Small (<5,000) Medium (5,000 -10,000) Large (10,000>) Approached 8 4 6 2 20 Responded 2 4 5 2 13 Accepted 2 3 4 2 11

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19 The people who were interviewed, the organisations they belong to and their position in the organisation can be found in the next table. These interviews lasted on average 40 minutes. After the interviews were done, they were transcribed as soon as possible.

Table 2: Interviewees

* Yearly reports of 2015

Person Position Organisation Rental

units*

Date of interview

Ingrid van der Kraan Beleidsmedewerker VTW - 11-05-2017

Willemien Bekius Annemarie ter Weijden

Coordinating inspector housing associations

Authority housing associations

- 18-04-2017

Jan van der Moolen Chairperson supervisory board Lefier 32,871 10-04-2017

Anne van der Heide Member supervisory board Actium 17,122 01-05-2017 Wouter de Jong Chairperson supervisory board Nijestee 14,989 21-04-2017 Jan Kruijer Member supervisory board Acantus 13,003 10-05-2017 Frank van der Meulen Chairperson supervisory board Patrimonium 6,642 19-04-2017 Marjolein Sulter

Klaas Stol

Vice- chairperson supervisory board

Chairperson supervisory Board

ThúsWonen 6,434 25-04-2017

Eelke Wiersma Chairperson supervisory board Wierden en Borgen

5,179 03-05-2017

Henk Jan Bolding Chairperson supervisory board Woonborg 4,917 24-04-2017 Olaf van der Heide Chairperson supervisory board Woongroep

Marenland

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4.3 Interview method

Semi structured interviews are chosen because the implementation of the Woningwet 2015 is very recent and therefore it would be difficult to see clear results from a large survey. The value of interviewing is that it helps to understand the behaviour of others and as a researcher to better understand this behaviour (Seidman, 2013). Interviews help to better understand the actions of a person and the reasoning behind these actions. Seidman (2013) states that interviews are most appropriate when asking open ended questions that leave a lot of room for the interviewee to answer. Two different sets of interview questions were made. One for the supervisory board members and one for the employees of the monitoring organisations. These interviews were subdivided in different categories in order to represent the structure of this research. These categories are general information, agency problem, the supervisory board, supervisory board members and the competency test. The translation of the questions can be found in the appendices. These categories were chosen because they are linked to the theory discussed in the earlier chapters and to the different propositions. Knowing more about the supervisory board itself and the importance of the individual board members gives more knowledge about how this effects the agency problem.

This qualitative research gives in depth information about the supervisory boards, how they function and how they ensure internal control. For this paper ten members or chairpersons of nine different supervisory boards were interviewed and three employees of two organisations that are involved in the supervision of public housing organisations internal control are interviewed. The implementation of the competency test will be the main focus of the interviews with the employees of VTW and the authority of housing organisations.

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Chapter 5. Results

In this chapter the results will be given. This result section is structured the same way that the interviews were. This means that every section will have a different paragraph in which first the questions will be stated and then the answers of the interviewees regarding these questions will be given. This chapter starts with some general information about the interviewees and their organisations, which will give an overview of the interviewees and their background. The answers to the agency problem questions will be discussed in the following section, after this section the quality of the board itself will be discussed, then the quality of the board members and lastly the competency test will be discussed. The focus of the answers will be on the supervisory board members. Incidentally, to add another perspective, the answers of the monitoring organisations will be mentioned.

5.1 General information

The different interviewees were first asked how they became part of the organisation, how long they have been part of the board, what kind of committees their supervisory board has and lastly if they are part of other supervisory boards. In the next table a short overview is given of the different members or chairpersons of the supervisory boards that were interviewed.

Table 3: General information of the supervisory board interviewees Person Length of

membership

Committee Background Other supervisory boards

Jan van der Moolen 3 years Remuneration Public Housing Yes, also public housing. Anne van der Heide 2 years Audit Healthcare Yes, focused on healthcare Wouter de Jong 5 years Remuneration Governmental No

Jan Kruijer 1.5 years Audit Finance Yes, diverse

Frank van der Meulen 2 years Audit Governmental No Marjolein Sulter Klaas Stol 2 years 2 years Remuneration Remuneration Jurist Public Housing

Yes, educational institution No

Eelke Wiersma 6 years Remuneration N.A. Yes, focused on healthcare Henk Jan Bolding 7 years Remuneration Jurist and

Governmental No

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22 A majority of the chairpersons or members became part of the supervisory board by responding to a vacancy ad in the newspaper and going through the general selection process. Only one chairperson was asked to join the board because of his extensive knowledge and background in the public housing sector and because of lack of acceptable candidates for the vacant position.

The majority of the organisations have two different committees in their board: a remuneration committee and an audit committee. Only Lefier, the largest organisation, has a third committee called social spheres, which focusses on the social spheres surrounding Lefier. The remuneration committee is in most of the organisations combined with a selection committee.

Five of the members or chairpersons of the supervisory boards are also on other boards that ensure internal control for other organisations and for the other five this is the only supervisory board they are on. What also can be seen is the diverse background, which is something that will be discussed again when looking at the quality of the board.

5.2 Agency problems and agency cost

In the different interviews the agency problem was described by the interviewer as an information gap that can exist between supervisory board members and the director. The questions in this section were how the supervisory board gets their information, if this information is always sufficient, if there ever been problems because information was lacking, how this was resolved and how the supervisory board guides the management.

When asked how the board gets their information all of the interviewees answered that there are different streams through which they get their information. One stream of information comes from the director of the public housing organisation. This information includes all the different papers and documents that the supervisory boards are required to receive. The different interviewees called this information the hard information. This includes for example trimester or quarterly rapports on how well the organisation is doing. The interviewees stated they also get information from having meetings with different stakeholders, for example the tenant organisations and the accountant of the organisation. Some supervisory boards also speak once a year to an alderman of the municipality they are operating in and talk about the organisation and the area. These are the different kinds of information that the board members receive or gather.

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23 “ This third one is a little outside the flow between the director and board, that is that you use your own common sense and you look around and read the newspaper and speak to people.” Henk Jan Bolding, Woonborg

However, he also emphasizes that the most important flow of information comes from the organisation itself, from the director. While this hard information flow is heavily regulated, one chairperson emphasized not only the quantity of the information but also the quality of the information.

“So I think the art lies in the fact that the director and the board can differentiate between what you need to have and what according to the code, the law, you need to have seen or approved or discussed, you need to discuss with the director what is useful and what is not.” Jan van der Moolen, Lefier In the next table an overview of the different organisations is given and whether they feel that they are always given sufficient information, if there ever has been a problem because of lacking information and how this was solved.

Table 4: Agency problems

Organisations Sufficient information Problems Solved

Lefier Yes, always Never a problem -

Actium Yes, almost always Never a problem -

Patrimonium Yes, almost always Never a problem - Wierden en Borgen Yes, almost always Not really -

Woonborg Yes, almost always Not really Better arrangements

ThúsWonen Yes, almost always Only once -

Nijestee Yes, almost always Only once Was seen as an incident

Woongroep Marenland Yes, almost always Only once Discussed the problem

Acantus You never know Yes, years ago Not relevant anymore

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24 “Well, you have to trust that the information is complete and that is also a question of making sure a trusting relationship is build. So that a director also does not hesitate to tell bad news.” Henk Jan Bolding, Woonborg

“That is the core of the relationship between the board and the director, the trust. If you do not trust that the other does not give you the right stuff that you need, than you should not become a member of the supervisory board.” Jan van der Moolen, Lefier

Besides the level of trust, the abilities of the board members themselves were mentioned when discussing the completeness of the information.

“What is actually one of most important core qualities of a supervisory board is that they can ask questions well. How you can ask questions well. Therefore in a meeting we always ask; how does this work? And what is behind this? That way we also try to have completeness.” Wouter de Jong, Nijestee This emphasizes that part of receiving and having the correct information, and therefore closing the information gap, does not only rely on the quality and the intentions of the director, but also on the supervisory board members themselves. One part is trusting that the director supplies the board with the correct information and another part is asking the appropriate questions to ensure that in fact this information is correct and sufficient. When asked whether or not there had been any problems because of insufficient information, no big problems were stated by the interviewees. However, four interviewees stated some small incidents that were mentioned when asked this question.

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5.3 Quality of the board

In this result section the different supervisory boards of the interviewees will be discussed and how they see their own supervisory board and their tasks. In this section, the interviewees were asked what the composition of their board is and how many times their board meets. They were also asked how they see the four tasks of a supervisory boards, how their board fulfils these tasks and how satisfied they are.

Backgrounds

In the table below the composition of the boards of the nine different public housing organisations are shown. These are the compositions as stated by the interviewee, sometimes the age of the members was not discussed and therefore not given.

Table 5: Composition of the supervisory boards

Organisation Backgrounds

Male-Female

Age

Lefier Finance, HRM, governmental, public housing, social sector

3-3 55-64

Actium Governmental, public housing, finance, juridical 4-2 N.A. Nijestee Public housing, real estate, finance,

governmental,

4-2 N.A.

Acantus Juridical, business administration, finance, healthcare

4-1 N.A.

Patrimonium Governmental, banking, healthcare, 4-3 40-55

ThúsWonen Juridical, public housing, HRM, governmental, finance

4-1 46+

Wierden en Borgen Finance, healthcare, governmental, juridical 3-2 40-67 Woonborg Social sector, finance, governmental, real estate,

juridical.

3-2 N.A.

Woongroep Marenland

Public housing, finance, governmental, juridical, entrepreneurial

3-2 50+

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26 “That all the different kind of knowledge fields that we have defined, that those are present. That all disciplines are there. That when the budget is presented, that it can be well understood by the board. Or when there are different laws and regulations that someone with a juridical background can explain it well.” Willemien Bekius, Authority Housing Associations

This is something that is well understood by the different public housing organisations and also something they adhere too. The importance of being representative was emphasized by one interviewee.

“You see movements within the boards that a very young person, even students, joins the board or does an internship to have a good representative board. Because you need to have the expertise well represented, but the board also needs to be representative of society. At least the man-woman ratio needs to be good.” Marjolein Sulter, ThúsWonen

In the different interviews there was an emphasis on the age of the board members. While they do need the expertise of the different knowledge fields, they also want to rejuvenate to be a good representation of society. What comes forward in the different interviews is that the interviewees feel that a board should be representative of society, with different fields of knowledge, age groups and a representative ratio of men and women. However, this is still a point of concern since especially the different age groups and experience is not always a possible combination.

Board meetings

When asked how many times the board members meet in a year, the supervisory boards met six to eight times a year for their regular meetings. Then they also have extra meetings for committees, OR meetings, meetings with the tenant organisations and meetings with the municipalities. When asked what the rules were with regards to missing meetings, all interviewees stated that missing a meeting was not allowed and in the yearly reports it was stated who attended how many meetings. Of course unforeseen things can happen and a person might not be able to come due to for example illness and these incidents are tolerated.

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27 Supervisory board tasks

The next section concerns the four different tasks that are assigned to the supervisory board and these are supervision, to advise, employer task and a network task, which is finding the connection between the boards and society. Table six shows a summary of whether the interviewee recognized these four tasks as the core tasks of their supervisory board, how satisfied they are with their board regarding these tasks and what their board can still improve.

Table 6: The four tasks of the supervisory board

Person Recognition Satisfied Improvement

Eelke Wiersma Yes Yes -

Anne van der Heide Yes Yes -

Wouter de Jong Yes Yes The network task

Marjolein Sulter Klaas Stol

Yes Yes The network task

Jan van der Moolen Yes Yes The network task

Olaf van der Heide Yes Yes, but still room for improvement

The network task

Henk Jan Bolding Yes Yes, but still room

for improvement -

Jan Kruijer Yes Yes, but still room

for improvement

New supervisory board, still getting used to each other. Frank van der Meulen Yes, but the network

is not a main task

Yes New supervisory board, still getting used to each other. Ingrid van der Kraan

(VTW)

Yes - -

Willemien Bekius Annemarie ter Weijden (Authority)*

- - -

*Did not answer this question

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28 “I think, if you analyze what kind of meeting you have, what kind of decisions are being made, than I think it is about 40 percent supervising, 30 percent advising, 10 percent employer task and 20 percent connecting.” Henk Jan Bolding, Woonborg

One thing that was recognized by the interviewees was the difficulty in finding the right balance between advising, but not putting themselves in the place of the director, because this would interfere with their supervising role. All interviewees stated that they were satisfied with how their board fulfilled these tasked, however, three interviewers also saw room for improvement. The network task is of growing interest to the supervisory boards and it was also debated how this task should be fulfilled.

“It is mostly orientating and keeping your eyes open and that you keep in contact with your stakeholders to get also from outside the organisation an idea of whether or not it is going well with the organisation. That you are not only dependent on the signal you get internal, for example the director. But how you fill in that task, that is something we discuss frequently. How are we going to fill in this last task?” Frank van der Meulen, Patrimonium

This indicates the importance of the network task in closing the information gap. The more information the supervisory boards get from outside the organisation, the less they depend on the director to get the right information to do their tasks properly.

The qualities of the board that were given by the interviewees were that a board is representative of society with a broad and diverse knowledge field that is represented in their supervisory board. This is important because as was mentioned earlier it is of importance that board members ask the right questions to various topics in order to get the information they need.

5.4 Quality of the board members

This section will go more into detail about the effects the individual board member has on the functioning of the entire board and what makes a good board member for a supervisory board. First the interviewees were asked what the competencies are of a good board member and after that they were asked how the different backgrounds of the board members work together. They were also asked what happens if a board member is not functioning correctly and how this was checked.

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Table 7: Competencies of a supervisory board member

Person Involved Independent Knowledge Team player Integrity Experience

Anne van der Heide X X

Eelke Wiersma X X

Jan Kruijer X X

X X

Olaf van der Heide X X

Jan van der Moolen X X X

Wouter de Jong X X X

Ingrid van der Kraan (VTW)

X X X

Frank van der Meulen X X X

Henk Jan Bolding X X

Willemien Bekius Annemarie ter Weijden (Authority)*

Total 8 5 4 4 2 1

* Did not answer this question

The most given answer to the competency question was that a board member should be involved in the organisation and should be involved with the cause of a public housing organisation. The interviewees also stated that he or she should be independent, have a good amount of knowledge and has to be able to work well within a team. A board member needs to understand the target audience of a public housing organisation and be able to show empathy for this cause. This empathy for the cause and the tenants, and the ability to go from abstract to concrete was something that eight interviewees stated as one of the most important qualities in a board member.

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30 Besides knowledgeable and empathetic, according to the interviewees, board members need to be able to work well together with the other board members. Since everyone who is on this board has different backgrounds, how you can work together with other members is very important to come together to one conclusive and well-grounded decision.

“Working together in a team. Because the individual board member is being measured on its qualities, but a decision by the board is not the strength of one board member but what you decide together as a team.” Klaas Stol, ThúsWonen

Therefore, a board member needs to have a good amount of knowledge, has to work well within a team, be independent and has to have the ability to emphasize with the goal of a public housing organisations. This is all needed because, as stated before, a board member needs to be able to ask the right questions in order to gather the right information. Also, because every board member is chosen onto the board because of their own specific background, and therefore its individual competencies, these critical questions are important.

“And at that moment, if someone with one specific profile does not function well, than you miss a certain amount of knowledge and input at that moment.” Frank van der Meulen, Patrimonium

Table 8: Influence of the individual board member Person Amount of influence

Anne van der Heide A lot of influence Marjolein Sulter

Klaas Stol

A lot of influence

Henk Jan Bolding A lot of influence Ingrid van der Kraan (VTW) A lot of influence

Jan van der Moolen Some influence, depends on the quality of the board member Wouter de Jong Some influence, depends on the quality of the board member Frank van der Meulen Some influence, depends on the quality of the board member

Jan Kruijer Some influence

Eelke Wiersma Some influence

Olaf van der Heide Some influence Willemien Bekius

Annemarie ter Weijden (Authority)*

-

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31 The interviewees were asked how much influence an individual board member has on the entire board. Their answers are summarized in table eight. Four interviewees stated that a board member has a lot of influence, three interviewees said that they have some influence and three other interviewees said the same, but they stated that it depends on the quality of the board member.

“In that way we try to get a mix and with that we try to get all different points of view in to the conversation. So that there can also be some unorthodox thinking and that we do not just all agree with each other opinions.” Wouter de Jong, Nijestee

“Every person has his own color and every person looks with his own background. I think with that, that every member has an important influence on the quality of the decision making and the supervision because every person has its own input.” Olaf van der Heide, Woongroep Marenland

The interviewees were also asked what happens if a board member is not functioning properly and how this was checked. Three chairpersons stated that that has happened, but after a brief conversation and sometimes some extra schooling, members would function a lot better on the board. They stated that because getting on the board is an extensive process, the vast majority of board members are able to do their tasks as a board member properly.

According to the interviewees a well-functioning board member is knowledgeable, independent, a team player and is emphatic to the goal that the public housing organisation is trying to achieve. This is important because all individual members have an impact on how well the supervisory board is functioning because of all their different backgrounds. If one person with a specific background is not functioning properly, you miss that vision and that aspect on the board in order for the board to make proper decisions and give good advice.

5.5 The competency test

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Table 9: Opinions about the competency test

Interviewee The test Changes the board Better members

Jan Kruijer Positive No Yes

Eelke Wiersma Positive No No

Willemien Bekius Annemarie ter Weijden (Authority)

Positive Do not know Maybe

Frank van der Meulen Positive Yes, in a negative way Maybe

Jan van der Moolen Mixed* No Maybe

Olaf van der Heide Mixed* No Maybe

Anne van der Heide Mixed* No No

Ingrid van der Kraan (VTW)

Mixed* Yes Maybe

Mixed* Negative

Yes, in a negative way Yes, in a negative way

No No

Henk Jan Bolding Negative Yes Maybe

Wouter de Jong Negative No Maybe

*They feel positive about a test. However, this test is too bureaucratic

When the board members were asked how they felt how about this test four interviewees answered positively, five answered mixed and three members answered negatively. The interviewees with the mixed feelings saw the need for the test and were positive, but disagreed with the setup of the whole process. It was seen as bureaucratic and cumbersome.

“I have done the test and I think it is good that we look critically at the person who will become a director or board member. However, I do find the test too heavy.” Marjolein Sulter, ThúsWonen “I find it an exaggerated formality. I find it all excessive. It is a lot of bureaucracy.” Henk Jan Bolding, Woonborg

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33 “But you try to create a bit of awareness. From the moment you stand before that task as a person, are you suitable for that task?” Annemarie ter Weijden, Authority Housing Associations

Interviewees that were positive about the test saw it as a way to help with the selection process. However, when asked if this test would change the composition of the board, six interviewees answered no and four of those who answered yes, three stated that this test could negatively impact the composition of the board. They stated that it could deter certain people from becoming a board member.

“A side effect could be that someone who has good intentions and could be a great asset in the supervisory board, does not pass the test. Because of for example too low educational level or certain qualification.” Frank van der Meulen, Patrimonium

Others stated that it would not change the composition of the board because before selecting a new board member these boards have already made a comprehensive guide of what they need in a new member and what qualifications they should adhere too.

When asked in the next question if this would lead to qualitatively better board members, one interviewee answered yes, four no and seven answered maybe. Most answers were maybe because board members felt that if you enhance the requirements you will have better qualified board members. However, it was questioned if you do not adhere to all these qualities, that that means that you could not be a good supervisory board member.

“From an extra check like the fit and proper test, there is always a warning effect. A person shall think extra if they should do this. On the other hand supervisory boards already have their own ways of checking a candidate. And personally, I think it goes too far.” Olaf van der Heide, Woongroep Marenland

Since this test is new and still evolving the interviewees were also asked about alternatives for this test and the majority of interviewees stated that they were fine with an extra check, just that they feel there is no need to check every person.

“So where before every member who is newly elected or re-elected needed to go for a talk at the authority, that they now strive for a process where they look at where is a risk and that they only talk to members with a higher level of risk.” Ingrid van der Kraan , VTW

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Chapter 6. Discussion

In the previous chapter the results from the interview sections were discussed. In this section these results are going to be linked to the four different propositions that were formed in the literature review.

6.1 Quality of the board and the board members

When looking at the first proposition, that a higher quality board member leads to a higher quality board it can be said that this proposition can also be seen in the answers of the interviewees. In the result section it could be seen that an individual member has an influence on the supervisory board and three interviewees emphasized that this influence depends on the quality of the board member, both positively and negatively. This is in line with the studies of Brown (2007) and Hillman & Dalziel (2003). For example Brown (2007) states that non-profit organisations need the right resources in order to work properly and one of the most important resources are the board members who govern the organisation. They are of importance because they bring resources with them that will help with the organisation. The supervisory board members are individually seen as important because they all have different backgrounds and knowledge fields and therefore bring their own resources to the board and therefore the organisation. Hillman & Dalziel (2003) call all these resources and competencies of the board members the board capital.

6.2 Agency problem and agency cost

When looking at the second proposition, that a higher quality board reduces the agency problem, it can be said that this is something that also can be seen in the answers of the different interviewees. When asked about the quality of the board influencing the reduction of the agency problem, every interviewee stated that the board and the quality of the board was of importance because of the ability to know and gather the right information.

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35 available information is correct. This again highlights the importance of the quality of the board in order to reduce the agency problem. This is in line with the research done by Dalton et al. (2007). The third proposition is about whether or not reducing the agency problem reduces the agency cost associated with the problem. Comparing this proposition with the results of the interviews is difficult. The interviewees highlighted the high level of bureaucracy and the amount of time they had to put in for this test and that they felt little reduction in the almost non-existent agency problem.

Agency cost as defined by Jegers (2009) consists of bonding cost, monitoring cost and residual loss. With the implementation of this competency test there might be less residual cost since these new board members are more focused on their core task. However, the monitoring costs have also increased because of the higher level of bureaucracy in the selection process. Therefore, when implementing measures to reduce agency problems and therefore agency cost, the cost of the implementation of the measure should also be included in the agency cost. This paper is unclear on whether or not reducing agency problems also reduces the agency cost.

6.3 The competency test

When comparing the fourth and last proposition, that the competency test ensures higher quality board members, this is not something that came clearly back in the different interviews with the supervisory board members.

In previous literature it was stated that a change in the governance can help reduce the agency problem and if governance structures are not working properly they should be altered, either organically or by legal institutions (Schleifer & Vishny, 1997). The competency test is such a measure that is implemented by a legal institution in order to improve the quality of the board members and therefore to ensure a reduction in the agency problem. The results in this paper indicate that the board members had mixed feelings about how they thought about the test and six out of nine supervisory board members felt that the competency test would not change the composition of the supervisory board.

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Chapter 7. Conclusion

This paper aimed to research the importance of the supervisory boards in the public housing organisations, the agency problems they faced and how the new measures implemented by the Woningwet 2015 has effected the supervisory boards. This paper tried the answer the following research question:

The importance of a supervisory board and its individual members is highlighted in this paper. The quality of these members is especially important because having members with the right competencies and skills helps them to do their tasks properly (Brown, 2007; Hillman & Dalziel, 2003). The tasks for supervisory boards of public housing organisations are to monitor, to advise and to employ the director of the organisation and to help find a connection between the organisation and society (Hooge & Helderman, 2007). The results of this paper emphasized that high quality board members will lead to a higher quality board and that a higher quality board has an effect on the reduction of the agency problem.

The most common agency problem between the supervisory board and the director of the organisations is the difference in information that they have, which Eisenhardt (1989) categorized as information asymmetry. The supervisory board relies heavily on the organisation itself to supply them with the right information and therefore the board has to be extra involved in checking whether or not they have the right information and if not, they have to gather get this information. Therefore a high quality board that is knowledgeable, diverse and works well together is of importance to reduce the agency problem. This is because a high quality board can ask the appropriate questions to ensure that they have right information.

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7.1 Limitations

The first limitation of this paper is that the Woningwet 2015, and therefore the competency test, was only recently introduced and therefore it is difficult to see clear changes and therefore clear outcomes of the introduction of the competency test. This indicates that the outcomes of this research concerning the competency test can easily change over time.

The second limitation is the limited amount of supervisory board members that were interviewed of smaller public housing organisations. Their view of supervisory boards, the agency problem and the competency test could be different than that of larger organisations. Therefore the outcomes of this study could be biased against larger public housing organisations and therefore less generalizable. The third limitation of this study is that this study was not done anonymous. This could have led to interviewees not answering entirely truthfully and instead answering the question more socially acceptable. With anonymous interviews or surveys people might answer more truthful.

7.2 Future research

To continue on the first limitation that mentions the only recent introduction of the competency test, future research should look at this Woningwet 2015 and see what has changed over a longer period of time and see how successful the measures that were introduced were. This could help with the research about agency theory and learning how to reduce the agency problem in different kind of organisations and studies.

Other future research could look more in depth into what constitutes a good functioning supervisory board in the public sector. The majority of the research that is done with regards to internal control is with publicly traded organisations. Therefore to get a more clearer view on the functioning of supervisory boards and their ability to reduce agency problems more research on that topic could be done.

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Appendix 1: Interview questions members/chairperson public housing

organizations

All interviews started with a short introduction of the topic and the research. All interviewees were asked whether they minded if the interview was recorded and if they minded that they could be cited. No one minded the recording and also no one minded being cited.

Questions 1: General

1. How did you become member/chairman of the Supervisory Board? - How long have you been a member/chairman

2. What for committees does your Supervisory Board have? - Are you yourself a member of a committee? 3. Are you in other Supervisory Boards?

Questions 2: The agency problem and the cost

4. How does the Supervisory Board get its information about the management of the public housing organization?

- What does this information look like?

5. Is this information always complete? Do you sometimes miss something? - How do you get more information?

6. Have there been problems because the Supervisory Board is not correctly informed? - What for problems were these?

- What were the consequences of these problems? 7. How was this solved?

8. How does the Supervisory Board guide the management in different decisions?

Questions 3: Quality of the board

9. How does the composition of your supervisory board look like? 10. How many times does your Board meet?

- What are the rules regarding missing a meeting?

In my paper I mention four core tasks of a supervisory board: to supervise, to advice, employer and to bridge the gap between organisations and the community.

11. Do you recognise these tasks as the core tasks of the supervisory board? 12. How does your board meet these tasks?

- How much time do you spend on these tasks?

13. How satisfied are you with how your board is fulfilling these tasks?

14. How much influence does the quality of the board have on reducing the earlier mentioned information problems?

Questions 4: Quality of the board members

15. What are the qualities of a good functioning member of a supervisory board? 16. What kind of background do the members of your supervisory board have? 17. How do these different backgrounds work together?

18. How does the introduction programme of your board look like?

19. What do you do when you see that a board member is not functioning properly and how is this assessed?