Watch on the watchers who watch their watchers?
M. Verschueren
‘De auteur is verantwoordelijk voor de inhoud van het afstudeerverslag; het auteursrecht van het afstudeerverslag berust bij de auteur’.
Title:
Watch on the watchers who watch their watchers?
Name: M. Verschueren, s1154990
City and country: Antwerp, Belgium
Date: July 19th 2005
Organization: Amnesty International Vlaanderen
Faculty: Business Science
Department: International Business
Institute: Rijksuniversiteit Groningen, The Netherlands
1st supervisor: Prof. Dr. Ir. R. Goodijk
2nd supervisor: Dr. A. Neuijen
Guidance at AIVL: Mrs. K. Vandenberghe
In memory of my father
Dr. R.C.J. Verschueren
28 06 2004
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Preface
Last two years have been turbulent; the second time my father was diagnosed with cancer, my studies in the United States of America during this illness and last but not least the death of my father.
As a surgeon, my father meant a lot for many people. This inspired me to do something relevant with my mostly market-driven knowledge I had acquired over the years.
Therefore I decided to try to have an added value for the NGO world. The offer to do a study on a hot issue such as corporate governance in combination with a return to my Belgian roots made me decide to do my internship at Amnesty International in Antwerp.
I would like to thank Mrs. Vandenberghe for her trust and support, the whole Board of Directors of Amnesty International Vlaanderen for their time and feedback and Mr.
Brocatus and Mrs. Veroft for the daily chitchat and support.
I would like to thank Prof. Dr. Ir. Goodijk and Dr. Neuijen of the Rijksuniversiteit Groningen for their very constructive feedback.
Last but not least I would like to thank my family for all their support and my friends for distracting me through the years!
Marc Verschueren
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Summary
The subject of this research can be classified as corporate governance at NGO’s. The Board of Directors of Amnesty International Vlaanderen was the object under study.
The research question for this thesis is as follows:
“To what degree does the Board of Directors of Amnesty International Vlaanderen have an awareness and consistency in its behavior to be accountable to its stakeholders, and how can this awareness and consistency be optimized?”
After a discussion of relevant issues in corporate governance, four sub questions were formulated. These sub questions were approached by building a theoretical framework.
This theoretical framework finally resulted in a research domain.
This thesis is structured according to four sub questions. These sub questions cover the following aspects; the stakeholder interaction, the functioning of the board, the composition of the board and board evaluation. It was unknown how these four aspects were interrelated. For this reason an explorative research approach was chosen. Based on these explorations various hypotheses were formulated, hypotheses that formed the input to the final recommendations.
Data was collected by interviewing board members and by performing desk research.
This data was analyzed by performing a network-analysis, in which the earlier discussed research domain was an important factor.
Based on this data analysis the following hypotheses were formulated:
• A more efficient operating Board of Directors will be created when its composition will be adapted to the organization’s direct environment. The precise composition should be adapted to its situation with regard to its size, background of the directors and the amount of executive/non-executive directors.
• A more efficient and effective operating BoD will emerge when there is a sufficient amount of communication and a shared view within the BoD regarding the exact roles of directors, their individual added value and expectations.
• A more frequent screening of the organization’s environment, within the strategic framework, will increase the awareness and consequently the consistency in the behavior of a BoD to be accountable towards stakeholders.
To increase the awareness and consistency in behavior to be more accountable towards the organization’s stakeholders, the Board of Directors of Amnesty International Vlaanderen should take the following issues into account:
• The exact role the BoD of AIVL is playing
• The role individual directors (should) play
• A more structured evaluation process
• A more frequent screening of the environment
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Contents
CHAPTER 1: INTRODUCTION...8
1.1 BACKGROUND...8
1.2 AMNESTY INTERNATIONAL...9
1.3 AMNESTY INTERNATIONAL VLAANDEREN...9
1.4 RESEARCH QUESTION...10
1.4.1 Objective...11
1.4.2 Research question...11
1.4.3 Approach...11
1.5 BOUNDARIES...11
1.6 BASIC ASSUMPTION...12
1.7 DEFINITIONS...12
CHAPTER 2: THEORETICAL FRAMEWORK ...14
2.1 ISSUES IN CORPORATE GOVERNANCE...14
2.1.1 NGO vs. private sector...14
2.1.2 Role of the Board of Directors ...15
2.1.3 Transparency in the boardroom...16
2.1.4 Principles and codes of good governance ...17
2.1.5 Stakeholder approach...17
2.1.6 Points of departure ...18
2.2 SUB QUESTIONS...19
2.3 APPLIED CONCEPTS...20
2.3.1 Stakeholder interaction ...20
2.3.2 Functioning of the Board of Directors...24
2.3.3 The composition of the Board of Directors...27
2.3.4 Evaluation of the Board of Directors...30
2.4 RESEARCH DOMAIN...31
CHAPTER 3: METHODOLOGY ...33
3.1 APPLIED RESEARCH METHOD...33
3.1.1 Research type ...33
3.2 MAKING THE RESEARCH METHOD OPERATIONAL...34
3.2.1 Interviews...34
3.2.2 Desk research ...35
3.2.3 Methods of data collection...35
3.2.4 Data analysis ...37
4.1 STAKEHOLDER INTERACTION...39
4.1.1 Stakeholder perception...39
4.1.2 Opinion on stakeholder interaction ...39
4.1.3 Mapping of the stakeholders ...40
4.1.4 Most relevant stakeholders...44
4.1.5 Current relationship with most relevant stakeholders ...44
4.2 FUNCTIONING OF THE BOARD OF DIRECTORS...46
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4.2.1 Role of the Board of Directors ...46
4.2.2 Learning Board Model...47
4.2.3 Tasks of the Board of Directors ...49
4.3 BOARD COMPOSITION...50
4.3.1 Principles behind the current composition of the Board of Directors...50
4.3.2 Guidelines for best practice ...51
4.4 BOARD EVALUATION...52
4.4.1 Methods of Board evaluation...52
Knowledge...52
4.4.3 Information ...53
4.4.4 Authority...53
4.4.5 Time...54
4.4.6 Motivation ...55
CHAPTER 5: CONCLUSIONS, HYPOTHESES AND REFLECTION ...56
5.1 CONCLUSIONS...56
5.1.1 Awareness...56
5.1.2 Consistency in the behavior of the Board of Directors...57
5.2 HYPOTHESES...58
5.3 REFLECTION...61
5.3.1 Data collection ...61
5.3.2 Evaluating the research...62
CHAPTER 6: RECOMMENDATIONS ...63
REFERENCES ...65
BOOKS...65
WEBSITES...67
Figures: FIGURE 1: BASIC ASSUMPTION...12
FIGURE 2: CONSTELLATION OF INFLUENCES ON THE STAKEHOLDER ORGANIZATION ...20
FIGURE 3: LEARNING BOARD MODEL ...25
FIGURE 4: MAXIMUM SIZE BOD: THE VIRTUOUS CIRCLE ...28
FIGURE 5: RESEARCH DOMAIN...32
FIGURE 6: HYPOTHESIS 1 ...58
FIGURE 7: HYPOTHESIS 3 ...60
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Chapter 1: Introduction
1.1 Background
The ongoing globalization of the economy – pushed by the information-technology, the worldwide acceptance of the market economy and the enormous and flexible flows of capital – have led to the creation of organizations of unprecedented size and complexity, while the product-, service-, and capital movements have become increasingly complicated. It speaks for itself that the boards of directors of these organizations and the monitoring of their behavior fit with this ‘new’ environment. The debate of corporate governance, or good governance, promotes these thoughts.1 Corporate governance is an umbrella term that covers specific issues arising from interactions among senior management, shareholders, boards of directors, and other corporate stakeholders.2 Various stakeholders demand more transparency and accountability with regard to the behavior of companies and their Board of Directors (BoD). Recent scandals at Ahold, Enron and WorldCom, to name a few, have justified these discussions.
Relevancy of corporate governance for NGO’s
Amnesty International Vlaanderen (AIVL) has directed that this research should analyze the extent in which the concept of corporate governance is embedded in their organization. Why is it relevant to study the degree in which corporate governance is embedded in a non-governmental organization (NGO) such as AIVL?
• In general, the public shows some degree of skepticism on the governance of NGO’s. What are the various actors’ motives? How is the money spent? Recent scandals at NGO’s, for instance Foster Parents Plan, have justified these doubts.
• Organizations striving for transparency and accountability in society have to be transparent and accountable to be a legitimate voice in public forums.3
• NGO’s do not exist only to make money and stay in business - they exist to achieve specific social, cultural, educational or other objectives. People who donate money or put effort in the organization have a justified claim on the degree in which the organization succeeds in reaching these objectives or on how the money is spent.
Based on the above arguments you can state that attention should be spent on corporate governance; there is an urgent need to make good corporate governance of NGO’s the rule rather than the unavoidable exception.
As can be read in the next paragraph, this research will be focused on the degree in which the BoD of AIVL has awareness and consistency in its behavior to be accountable to the various stakeholders surrounding the organization.
1 Van Luijk, H. & Schilder, A., Patronen van verantwoordelijkheid; ethiek en Corporate governance, Academic Service Economie en Bedrijfskunde, Amsterdam/Almere, 1997, p. 2.
2 Tricker, R., International Corporate governance; text, readings and cases, Prentice Hall, Singapore, 1994, p. 9.
3 http://www.efc.be/cgi-bin/articlepublisher.pl?filename=PF-SE-01-00-1.html
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1.2 Amnesty International
Amnesty International is a worldwide movement of people who campaign for internationally recognized human rights. Amnesty International’s vision is of a world in which every person enjoys all of the human rights enshrined in the Universal Declaration of Human Rights and other international human rights standards. In pursuit of this vision, Amnesty International’s mission is to undertake research and action focused on preventing and ending grave abuses of the rights to physical and mental integrity, freedom of conscience and expression, and freedom from discrimination, within the context of its work to promote all human rights.
When following the typology of van Luijk and Schilder (1997, p.36), Amnesty International can be characterized as a private non-profit organization serving a sectional interest; the interests of those individuals or groups of individuals whose human rights are violated.
Amnesty International is independent of any government, political ideology, economic interest or religion. It does not support or oppose any government or political system, nor does it support or oppose the views of the victims whose rights it seeks to protect.
Amnesty International sections and local volunteer groups are primarily responsible for funding the movement. No funds are sought or accepted from governments for Amnesty International’s work investigating and campaigning against human rights violations.1
One of the backbones and highest governing organs of Amnesty International forms the International Council Meeting, which is held once every two years. Delegations of the various worldwide sections have the opportunity to propose certain issues at this meeting. Statutes can be changed, the overall policy is made and budgets are decided at this meeting.
1.3 Amnesty International Vlaanderen
One of these worldwide sections is Amnesty International Vlaanderen (AIVL). The objective of AIVL is to support and express the objectives, plans and actions of the international organization of Amnesty International, keep the organization operational and make it grow within these boundaries. AIVL thus acknowledges and commits itself to the interpretations the international organization of Amnesty International has given to the mission, vision and thus the objectives of the organization.
Amnesty International acclaimed popularity in Belgium in 1973 through an anti-torture campaign. This same year the Belgian section was divided into AIVL and Amnesty International Belgium francophone. Between both of these sections still informal and formal consultation is taking place. AIVL also frequently consults the section of Amnesty International in The Netherlands.
1 Amnesty International website, www.amnesty.org.
10 There are various degrees of involvement at Amnesty International and thus at AIVL.
Members of the organization have a subscription on AIVL’s publications, can work in local groups and are involved in campaigns. Donors financially support AIVL’s working.
Staff members professionally support the working of the organization. But there are various other ways to get involved and support the movement.
Annual General Meeting
Formally the Annual General Meeting (AGM) forms the highest authority at AIVL.
Once a year AIVL’s members have the opportunity to attend the AGM, to examine all documents, to submit resolutions and the right to vote and speak. The AGM delegates a license to operate to AIVL’s BoD.
BoD
The highest authority, by delegation, at AIVL is thus formed by the BoD. Currently the BoD of AIVL consists of seven directors. At an AGM AIVL’s members vote for each member of the BoD; once voted for the directors have a mandate for two years. The members of the BoD of AIVL are operating on a voluntary base.
The BoD of AIVL consists of four formal positions; a chairman, a secretary, a treasurer and a deputy chairman.
To support the BoD in its policy, three committees have been installed. These are the committee International Policy, Action and Movement and Fundraising. Some of the directors take part in these committees.
National Secretariat
The National Secretariat of AIVL is located in Antwerp and represents the Flemish section of Amnesty International. The national secretariat of AIVL consists of approximately fifty employees; a combination of salaried employees and volunteers. The management of AIVL consists of two managers who are responsible for managing the daily operations of AIVL. One of these managers is responsible for managing the day-to- day affairs at the National Secretariat of AIVL; the other manager is responsible for AIVL’s external affairs.
Governance structure
At Belgian organizations the one-tier board structure is being applied. In this one-tier board executive and supervising tasks are combined in one organ. These two tasks are separated in countries like The Netherlands and Germany where the two-tier board structure is applied. In the two-tier board structure the management board is responsible for direction and executive action. The supervisory board is responsible for the organization’s accountability and supervision.
Although AIVL is an organization vested in Belgium an alternative governance structure is applied; the BoD serves as the supervisory board and the two managers at the National Secretariat form the management board at AIVL.
1.4 Research question
When consulting the note on corporate governance at AIVL’s website (www.aivl.be), they claim to be an organization which acts in a socially responsible way with regard to its stakeholders. Acting in a responsible way towards stakeholders involves offering a certain
11 amount of information, transparency and accountability afterwards. This should result in a dialogue with the organization’s stakeholders. Initially there should be a certain dedication within the BoD to act in a socially responsible way with regard to its stakeholders. This research will be focused on the degree in which there is attention for these stakeholders.
The problem that determines this research can be defined by describing the research objective and research question.
1.4.1 Objective
The main objective of this research is to gain more insight into the degree in which there is an awareness and consistency in the behavior of the BoD of AIVL to be accountable towards the organization’s stakeholders. A second objective is to propose hypotheses on how to optimize awareness and consistency in the behavior of a BoD to be accountable towards stakeholders. A third objective is to recommend the BoD of AIVL on how to optimize the awareness and consistency in its behavior to be accountable towards its stakeholders.
1.4.2 Research question
1.4.3 Approach
In order to explore the theoretical background to this research question several concepts in the field of corporate governance will be described. From this exploration of relevant theory, the research domain and the sub questions for the data collection will be described. The theoretical framework behind this research domain and sub questions will then be discussed. Data will be collected and discussed according to the variables discussed in the research domain. Based on this data conclusions will be drawn, which form the input to the hypotheses and recommendations for AIVL.
1.5 Boundaries
The way in which the research was approached has been determined by the following boundaries:
The research needed to take place within a period of 6 months.
The findings of this research are focused on the BoD of AIVL as a whole.
The individual functioning and behavior of the directors will not be taken into account. This boundary will be further explained in the next paragraph.
“To what degree does the Board of Directors of Amnesty International Vlaanderen have an awareness and consistency in its behavior to be accountable to its stakeholders, and how can this awareness and consistency be optimized?”
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1.6 Basic assumption
As could be read in the boundaries, the individual functioning of the BoD, and thus the decision-making processes, will be considered a black box.
BLACK-BOX
Figure 1: Basic assumption
Since the decision-making processes and the functioning of the directors, the group dynamics, will be considered a black-box, the input of individual board-members to these decision-making processes will be assumed to equally effect the outcome. It is thus assumed that individual directors behave according to their profiles.
1.7 Definitions
The following definitions will be used in this thesis:
Accountability
Responsibility for the justification of expenditures, decisions or the results of the discharge of authority and official duties, including duties delegated to a subordinate unit or individual. The responsibility to provide evidence to stakeholders that a program is effective and in conformity with planned results, legal and fiscal requirements.1
Board of Directors
In our case the members of AIVL elect the members of the BoD. A BoD usually consists of at least three officers; a chairman, a treasurer and a secretary. The BoD acts as the representative of the organization. It formulates the organization’s policy and strategy, supervises the day-to-day affairs of the organization, is accountable to stakeholders and engages into contracts in the name of the organization and exercises any additional powers granted by the charter of the organization.2
1 http://www.undp.org/eo/ADR/glossary.htm
2 http://www.biztroubleshooter.com/Glossary/glossary_a-n.htm Decision-making processes of the Board of Directors
output input
13 Corporate governance
Corporate governance covers the mechanisms and relationships among various participants in determining the direction and performance of organizations. The primary participants are the stakeholders, the management and the BoD; the so-called tripod.1 Non-Governmental Organizations
A NGO is governed by a volunteer BoD, operated for public benefit, whose business is not conducted for profit. Organizations of this type are said to belong to the non-profit or third sector. They are neither government (public sector) nor business (private sector).2
Transparency
Sharing information and act in an open manner. Transparency allows various stakeholders to gather information that may be critical to uncovering abuses and defending their interests. Transparent systems have clear procedures for public decision- making and open channels of communication between stakeholders and officials, and make a wide range of information accessible.3
1 Monks, R., and Minow, N., Corporate governance; 2nd edition, Blackwell Publishing, Oxford, 2001, p.1.
2 http://www.nonprofitbasics.org/CompleteGlossary.aspx?curLetter=N&ID=-1#TermID3912
3 http://www.nonprofitbasics.org/TopicAreaGlossary.aspx
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Chapter 2: Theoretical framework
2.1 Issues in corporate governance
This paragraph will discuss several issues in the field of corporate governance. From this discussion various points of departure will be formulated, points that will be further discussed and researched in the continuation of the research.
2.1.1 NGO vs. private sector
Before the theoretical framework will be described, an overview of the differences and similarities with regard to corporate governance between NGO’s and companies in the private sector will be given.
Differences
According to Tricker (1994, p.422) one of the most fundamental differences between NGO’s and organizations in the private sector lies in the basis of the power to govern.
For organizations in the private sector the basis of power is ownership, for NGO’s the basis of power is membership rather than ownership. Where organizations in the private sector have shareholders to monitor and control the governing tasks, a NGO has no shareholders to exercise this governance role. Besides this, members of a BoD are seldom paid for their services, thus, there is a lack of market control, and they may be chosen for political reasons rather than their ability to exercise sound judgment about the organization’s activities.1
Another difference between corporate governance for NGO’s and organizations in the private sector is the fact corporate governance for organizations in the private sector focuses much more on the bottom line and making profits, and is concerned about issues that are largely internal to the organization. Corporate governance with regard to NGO’s, also called civil society governance, is more about the bigger issues of society and seeks to ensure that the external impacts of the organization are positive and in compliance with its mission.
Corporate governance for the private sector is thus geared under the law primarily to protect the interests of those who invest money in the organization; the organization’s shareholders. Corporate governance related to NGO’s is primarily supposed to protect the interests of society at large and, for membership organizations such as AIVL, of its members.2
Similarities
Any institutional framework that wishes to be effective and legitimate has to have certain basic elements. As was discussed before, to be legitimate, it has to have systems in place that ensure accountability, transparency and also the long term stamina to maintain the continuity of its operations. All these aspects require actors who are guided by and report to decision makers who are in turn guided by and report to policy makers. So, whether it
1 Tricker, R., International Corporate governance; text, readings and cases, Prentice Hall, Singapore, 1994, p. 422-423.
2 http://www.indianngos.com/governence/interview/ashokkhosla/fullinterview.htm
15 is in business, in public life or in NGO’s, it is crucial to have some mechanisms to ensure that the staff is accountable to management and management is accountable to those who make policy on behalf of the stakeholders and the wider public. This is usually the governing body, often known as the board of directors or governing council, possibly with the help of internal management committees, whose responsibility it is to supervise and maintain the overall health, well-being and character of the organization.1
2.1.2 Role of the Board of Directors
How can we view the role and position of the BoD within the field of corporate governance? What is its added value?
Cornforth (2003, p.6) discusses theories that give deeper insight in the role of the BoD within organizations. Each of these perspectives helps us to better map the role and position of the BoD towards relevant parties:
• Agency theory (principal-agent theory)
The key idea of the agency theory is that of the agency relationship, where one party (the principal) delegates work to another party (the agent), who performs that work. The theory defines the relationship between principals (shareholders) and agents (managers) as a contract in which the behavior of the agent is conditioned by incentive structures. The shareholders contribute capital and bear the risk of the organization, while the managers are wholly responsible for decision management. This separation, though deemed officially efficient by agency theory, can give rise to conflicts of interest between executives and shareholders, in particular through the opportunism of agents. Agency theorists argue that it is corporate governance mechanisms in general and the BoD in particular, that can harmonize these agency conflicts and safeguard invested capital.2 In case of membership organizations such as AIVL, the organization’s members can be considered as its principals.
• Stewardship theory
Compared to the agency theory this theory has a slightly different view on the role of the BoD. This theory operates from the basic assumption that the BoD exists to maintain a partnership with the management and the shareholders. The primary task of the BoD is to determine the policy, vision and mission; a good performing organization has priority. Directors are being selected on the basis of their expertise and external contacts.
• Resource dependency theory
This theory sees the environment as a crucial element in the survival of the organization. From this perspective the role of the BoD is to maintain a good relationship with its main stakeholders. Directors are being selected based on their external contacts and knowledge that they can bring to the organization.
1 http://www.indianngos.com/governence/interview/ashokkhosla/fullinterview.htm
2 Stiles, P., Taylor, B., Boards at work; how directors view their roles and responsibilities, Oxford university press, Oxford, 2001, p. 13.
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• A democratic perspective
The democratic perspective operates from the perspective that the BoD represents all stakeholders surrounding the organization. Directors having some degree of expertise or the ability to bring in certain external resources are of secondary importance.
• Stakeholder theory
The stakeholder theory emphasizes the responsibility towards the diverse groups in society and the organization’s environment.
• Managerial hegemony theory
Within this perspective the BoD is seen as a necessary evil; the only function it has is to legitimize management decisions.
When looking at these perspectives there is not one single ‘right’ perspective; there is not one theory that illuminates the whole spectrum of board endeavor. According to Cornforth a customized approach should be adopted in which for instance a combination of some of these perspectives could be employed for a BoD to function effectively. It’s necessary to take this multi-paradigm or perspective approach to prevent linear thinking and simple either/or choices. These perspectives should be seen as paradoxes; managing paradoxes means embracing and exploring tensions and differences rather then choosing between them.1
2.1.3 Transparency in the boardroom
As was mentioned earlier, the basic principles behind corporate governance are transparency and accountability. Tricker (1984, p.185) discusses four instruments to achieve these principles as a BoD;
• The two hats solution
This principle emphasizes the distinction between executive duties and all of the other activities of governance.
• The non-executive director
A simple solution to separate executive duties and all other duties is to assign a non-executive director. A non-executive director has no direct connection with the executive tasks and can operate from a more objective perspective.
• The audit committee
An audit committee is a main board committee, wholly or mainly composed of independent, outside directors, whose task it is to discuss, review and approve various activities concerning the financial situation of the organization.
1 Cornforth, C., ‘Contextualising and managing the paradoxes of governance’, in; Cornforth, C. (ed.), The governance of public and non-profit organisations; What do boards do?, London: Routledge, 2003, p.11.
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• The two-tier board
In a two-tier board there is an absolute distinction between supervision and executive management. This model is in use by large organizations in countries like The Netherlands (Raad van Bestuur and Raad van Commissarissen) and Germany.
2.1.4 Principles and codes of good governance
Next to these principles there are various codes, codes of best practice, and laws in use that legally require organizations and their BoD’s to offer more information, transparency and accountability.
Various governance codes have been developed which are usually developed to be applied by stock exchange quoted companies. These codes and best practices have been developed on several aggregate levels. With regard to Belgium we can identify the following relevant codes:
• International: e.g. the OECD principals on corporate governance
• Europe: e.g. Winter report
• Belgium: Lippens Code
Since these codes are focused on stock exchange quoted companies the accountability towards shareholders is emphasized in these codes.
These codes, for example the Belgian Lippens Code, have a high degree of built in flexibility. This is done to enable the code to be adapted to organizations of varying size, activities and culture. It is based on a ‘comply or explain’ system, which allows organizations to deviate from the provisions of the Code when their specifications so justify, subject to providing adequate explanation.1
Although these codes are developed for organizations in the private sector, some provisions, e.g. provisions with regard to a BoD’s composition, can also be applied with regard to NGO’s.
2.1.5 Stakeholder approach
The in section 1.4 mentioned emphasis of AIVL on being a social responsible organization and the focus on the long-term well-being of the organization and its environment can be considered as an indication of following the stakeholder approach.
According to Goodijk (2001) this stakeholder approach implies listening to stakeholders, be open-minded towards their influence and critique, win their trust, balance various interests and to be accountable afterwards.
What would be the reason for an organization to take its stakeholders into account?
In general the expectation has emerged that stakeholder-inclusive organizations, organizations with long-term and active relationships with its stakeholders, will perform
1 Lippens, M. et al., Belgian Code on Corporate governance, 9 December, 2004, p.5.
18 better on a long term than stakeholder-exclusive organizations. Good relationships with stakeholders are essential for the quality of the organization’s operations, its image and being able to explain (being accountable: comply or explain), but also for creating a broadly based acceptance in case of changes.1
Organizations become redefined in stakeholder terms when they adopt and implement stakeholder-oriented policies and practices. This means, at minimum, recognition of the firm’s stakeholders, their issues, interests, and concerns; commitment to responsible policies and the institutionalization of appropriate processes and practices. Although public communication is an essential element of practice, rhetoric alone is insufficient.2 This social responsibility will only develop in a right way when organizations would conduct a dialogue with each of these different parties.
Hummels et al. (2003, p.95) stress the fact that this dialogue should not be focused on what the organization’s exact responsibilities are; it should stress the way in which these responsibilities are embedded in the policy of the organization. The discussion evolves from responsibility towards responsiveness. A responsive organization has the capability to anticipate adequate and in time on developments in its surroundings.
2.1.6 Points of departure
Keywords in the field of corporate governance are transparency and accountability with regard to the organization’s stakeholders. To whom does a BoD need to be accountable and offer transparency? How can this be done?
By mapping the organization’s environment an overview of the various stakeholders and relations can be described. This overview can be given by identifying important parties, their importance and the degree in which an interaction takes place. To what degree is the BoD looking at external issues such as its stakeholders? Is there an awareness of these external parties? An analysis of the functioning of the BoD can offer more clarity.
As was discussed earlier, another issue in corporate governance is the composition of the BoD. How can the composition of a BoD secure more accountability, transparency and independence towards the organizations stakeholders?
To govern effectively, the BoD needs to evaluate its functioning. What instruments are used to evaluate the BoD’s behavior? Which factors are hindering an effective functioning BoD?
The following issues thus play an important role in this research; the awareness of the stakeholders, the board’s functioning, the board’s composition and the degree in which the board’s behavior is evaluated.
A crucial element in the effective functioning of a BoD is the individual functioning of directors. Because it is difficult to evaluate an individual director’s behavior as an outsider, due to the lack of instruments to measure this behavior, the earlier mentioned
1 Goodijk, R., Maatschappelijk verantwoord ondernemen via stakeholdermanagement; integratie van MVO in businessprocessen, in: Tijdschrift voor Management en Organisatie, nummer 4/5, juli/oktober 2004, Kluwer, Alphen aan de Rijn, 2004, p.134.
2 Post et al., Redefining the corporation: stakeholder management and organizational wealth, Stanford University Press, Stanford, 2002.
19 assumption has been made. Besides, when the other three issues are not present or functioning effectively, measuring individual behavior is not necessary at that stage.
2.2 Sub questions
Since the earlier discussed research-question covers rather broad and general aspects, this question has been divided into four sub questions. These sub questions are formulated as follow;
1.) “To what degree does the Board of Directors of Amnesty International Vlaanderen have an awareness of Amnesty International Vlaanderen’s stakeholders and to what degree is there interaction with these stakeholders?”
2.) “To what degree is the behavior of the Board of Directors of Amnesty International Vlaanderen focused on stakeholder relationships?”
3.) “What instruments does the Board of Directors of Amnesty International Vlaanderen employ to be accountable for its composition towards the organization’s stakeholders?”
4.) “What instruments does the Board of Directors of Amnesty International Vlaanderen employ to evaluate its behavior in order to function more effectively towards the organization’s stakeholders?”
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2.3 Applied concepts
This part of the chapter will clarify the theoretical framework that is covered by the four sub questions. Relevant theories and their relevancy for this research will be discussed.
2.3.1 Stakeholder interaction
As we saw in the preceding paragraph, sub question 1 is the following;
“To what degree does the Board of Directors of Amnesty International Vlaanderen have awareness of Amnesty International Vlaanderen’s stakeholders and to what degree is there interaction with these stakeholders?”
This question is focused on the environment in which an organization operates. This environment consists of various parties, the so-called stakeholders. The influence of this environment on the policy of organizations has increased through the years;
organizations are held accountable for past, recent and future behavior.
In literature, which has been published in the field of corporate governance, various instruments have been offered to map each of these parties’ influences. This mapping is based on various dimensions. Many instruments have been offered that explain the nature and relevance to interact with each of these parties.
Identification
The most relevant parties in an organization’s environment are called stakeholders.
Post et al. (2002, p.19) use the following definition for stakeholders:
“The stakeholders in an organization are the individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and that are therefore its potential beneficiaries and/or risk bearers. The common desire of the stakeholders is that the organization should be run in such a way as to make them better off, or at least no worse off, than they would be otherwise. ”
Because of the influence and the range of this influence, there are various ways in which the stakeholders of an organization can be identified. Wheeler (1997, p.5) describes a way to map stakeholders based on their position with regard to the organization:
Primary Social Stakeholders
Local communities
Suppliers and business partners Customers
Investors
Employees and managers
Secondary Social Stakeholders
Government and civil society Social and third world groups Media and commentators Trade bodies
Competitors Figure 2: Constellation of influences on the stakeholder organization
21 Classification
After having identified these various stakeholders, there is still some lack of clarity about the influence of each of these parties. To what degree does each of these stakeholders influence the organization’s policy? What is their claim? What parties are suitable for a dialogue? Issues concerning these questions are also called the normative side of stakeholder identification.
The strength of the claims
Many views have been developed with regard to this normative side of stakeholder identification. Van Luijk and Schilder (1997, p.35) for instance, describe three perspectives by which the stakeholders can be characterized:
• Characteristics of the organization
They discuss various sorts of organizations which all have a particular perspective on how to take their ‘business’ environment into account. These views can be classified as the shareholders theory, the economically funded stakeholder theory and the societal funded stakeholder theory.
• The strength of the claims
- The social legitimization of the claiming party - The moral weight of the claim
- The degree in which the party can do things independently
• The function of the contact person - Policy making functions
- Monitoring functions - Operational functions - Advising functions
Although these perspectives offer an interesting approach on the stakeholder classification, this approach is too much focused on the concerning organization instead of its stakeholders and some of the perspectives are difficult to make operational.
Post et al. (2002, p.19) have identified three criteria for classifying stakeholders:
They supply resources that are critical to the success of the organization.
- e.g. social acceptance, a license to operate, but also capital and labor
They place something of value at risk; that is, their own welfare is directly affected by the fate of the organization.
- e.g. financial exposure but also employment and career opportunities, the quality of products and services
22 They have sufficient power to effect the performance of the organization, either favorably or unfavorably.
- e.g. the ability to mobilize social and political forces as well as their ability to withdraw resources from the organization
Based on these criteria, we can describe why stakeholders are relevant. What aspects of the organization can these parties influence?
Relationship with the core-activities
To what degree does the stakeholder have a say in the organization? What is its relation with the (core) activities of the organization? In the discussion about the classification of the organization’s stakeholders, we mentioned the existence of many views on stakeholder identification. Here we will apply, in a slightly adapted way, the four perspectives van Luijk and Schilder (1997, p.47) used in their clarification of the relationship with stakeholders.
Van Luijk and Schilder identified the following functions to describe the relationship with stakeholders:
Policy making functions Monitoring functions Operational functions Advising functions
Each of the identified stakeholders can somehow be related to one or more of these functions. This classification instrument thus clarifies to what degree and on what aspects parties are involved and can influence the organization.
Nature of interaction
After having described how we can identify and classify the various parties in an organization’s environment, we still face the problem of how to characterize the relationship between the stakeholder and the organization. Is there a real dialogue or can we only speak of a unilateral relationship in which one party is accountable towards the other party?
Hunt et al. (2001, p.4) describe several ways in which the communication towards stakeholders can take place. Besides these two a third way in which communication can take place will be added; communication in the form of the distribution of information. In this case no real dialogue or interaction takes place; parties only inform each other.
Hunt et al. thus describe the following instruments in which interaction can take place:
• Consultation
A situation in which a consultation takes place implies that stakeholders are offered the opportunity to comment upon issues and proposals during the course of their development. Crucially, consultation implies that the power to make decisions, and the extent in which comments are taken into account, remains at the discretion of the authorizing institution.
23 Dialogue
Dialogue can be defined as interaction and mutual learning. Agents, often traditionally opposed, are brought together for the purpose of finding common ground, redefining the terms in which they operate, identifying areas of agreement and disagreement, and, crucially, developing enhanced understanding of each other and of potential ways forward.
Dialogue thus takes place in a mutual way; both involved parties have an equal part in this form of interaction. For the distribution of information and consultation one of the involved parties plays a less dominating role; this can be the concerning organization and its stakeholder or vice versa. In the analysis of the degree of interaction of AIVL and its stakeholders there are thus five ways in which these relations can be characterized.
The following table summarizes the aspects and elements that help to clarify the organization’s stakeholders:
Aspects Elements
Identification WHO ARE THE STAKEHOLDERS?
Primary stakeholders Secondary stakeholders
Classification
Strength of the claim
Relationship with the organization’s core activities
WHY ARE THEY STAKEHOLDERS?
• Supply of critical resources
• Welfare is affected by the fate of the organization
• Sufficient power to affect the performance of the organization
HOW DO THEY INFLUENCE THE ORGANIZATION?
• Policy making functions
• Monitoring functions
• Operational functions
• Advising functions
Nature of interaction WHAT IS THE DEGREE OF INTERACTION?
• Distribution of information (2x)
• Consultation (2x)
• Dialogue
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2.3.2 Functioning of the Board of Directors
As was discussed in an earlier stage, sub question 2 is formulated as follows:
“To what degree is the behavior of the Board of Directors of Amnesty International Vlaanderen focused on stakeholder relationships?”
According to Cornforth (2003, p.13) the main tensions facing boards are;
• Professionality vs. Representativity
Does a BoD need to have members representing its most important stakeholders or does the BoD have to consist of professionals? This tension will be discussed in the next sub question that discusses the composition of the BoD.
• Conformance vs. Performance
Does the main focus of attention of the BoD have to be its monitoring role and being accountable for its performance (conformance), or does the BoD have to keep its attention for policy and strategy formulation (performance)?
• Controlling vs. Partnering
Does the management have to be held accountable for its results or should the management and the BoD consider themselves as partners?
In this paragraph, relevant literature with regard to the functioning of a BoD will be structured according to these three paradoxes.
Conformance vs. Performance
What does the attention of the BoD need to be focused on; outlining future behavior or taking accountability for its present policy? According to Cornforth (2003, p.247) these two concepts can be defined as follows;
“The conformance role requires attention to detail, the exercise of care, and skills in monitoring, evaluation and reporting. In contrast, the performance role demands forward vision, strategic thinking and risk-taking, and require boards to be more pro-active”.1
The conformance role thus relates to monitoring and accountability, the ‘performance’
role is more concerned with developing strategy and policy.
Garratt (1995, p.244) argues with the help of his Learning Board Model that there should not be an either/or discussion; the board’s attention should be equally divided between these two aspects. This model will be discussed elsewhere in this section.
1 Cornforth, C., ‘Contextualising and managing the paradoxes of governance’, in Cornforth, C. (ed.), The governance of public and non-profit organisations; What do boards do?, London: Routledge, 2003.
25 Controlling vs. Partnering
In the discussion about the functioning of the BoD in relation with the management, the earlier discussion about controlling vs. partnering plays a part. Is the management only accountable for its results or do the BoD and the management have to treat each other like partners?
In the discussion about the relationship between the BoD and the management the concept of internal governance emerges. Internal governance refers to the relation between the BoD and the management of operational units like divisions, subsidiaries and business units.1
Internal governance and corporate governance are, as we already saw in Garratt’s model, interrelated. A BoD can’t function optimally without adequate information from the management and the management needs to get directions from the BoD to work goal- oriented. Internal governance and corporate governance are getting more intertwined.
This will result in a shift in the attention for management from control to value-creation, and a development towards a more participative organization. Security and control will be replaced by transparency and creativity.2
Learning Board
Garratt has developed a model, which is also suitable for NGO’s, in which the preceding tensions have been processed; the model consists of two short term, conformance related processes - accountability and supervision – and two long term, performance related processes – policy making and strategy formulation.3
Figure 3: Learning Board Model
1 Strikwerda, J., Internal Governance; Leiding en organisatie in de nieuwe economie, Amsterdam, Vossiuspers AUP, 2000.
2 Goodijk, R., Partnerschap op ondernemingsniveau; de betekenis van het stakeholdermodel, Van Gorcum: Assen, 2001.
3 Garratt, B., ‘Helicopters and rotting fish: developing strategic thinking and new roles for direction- givers’, in Garratt, B. (ed.), Developing strategic thought: rediscovering the art of direction giving, Berkshire: McGraw-Hill, 1995.
Accountability Policy making
Strategy formulation Supervision
external
internal
Short term Long term
26
• Policy making
According to Garratt (2000) policy making refers to the way in which the organization faces changes in its environment and tries to adapt the policy of the organization to these changes. The policy should ensure that the organization can;
- Designate goals
Determine a vision of what ultimately should be achieved Designate norms and values within which this should take place
Develop an effective climate and culture in which these visions and goals can be realized
• Strategic thinking
Garratt (2000) states that strategic thinking is related to the long term of the internal processes. A fit should be realized between the organizational capacities and its environment.
Strategic thinking means;
Positioning in a changing market
Assign a direction and business processes Review and determine the operational resources
• Management supervision
The management supervision involves activities which apply to issues on policy level, strategic processes and daily life activities;
- Supervising daily life activities Monitoring budget control
Reviewing the main business results
• Accountability
This part of the model focuses on the accountability towards the various stakeholders that are qualified to examine the functioning of the business and the BoD.
Once a year the policy cycle will be discussed, twice a year the strategic thinking cycle, once a month the operational cycle, management supervision, and at least once a year the total accountability cycle including the issues that involve the governance of the organization. This cyclical continuous learning process has been developed to break the cycle of non-learning boards.1
The reason to stress the governing cycle in this research is to make sure that the BoD governs the organization from a broad vision instead of only from a managerial point of view. From this broad vision issues concerning the external environment, and thus the stakeholders, will be picked up in an earlier stage.
1 Garratt, B., De veranderende context van Corporate governance; ontwerp van het takenpakket van de bestuurder, ZM magazine, nr. 10, oktober 2000.
27
2.3.3 The composition of the Board of Directors
As was discussed before, sub question 3 is as follows:
“What instruments does the Board of Directors of Amnesty International Vlaanderen employ to be accountable for its composition towards the organization’s stakeholders?”
This part of the theoretical framework will discuss the instruments a BoD should implement to offer a certain amount of transparency with respect to its composition.
To what degree does the composition of a BoD play a part in its functioning? Tricker (1994, p.14) and Dehaene et al. (2001, p.383) have identified several variables that play an important role in this discussion.
One of the variables Tricker describes, age of directors, only a small part of the characteristics of a director is mentioned. By only looking at a director’s age the competences of the directors are neglected. Therefore we will broaden this last variable by also adding the earlier discussed professionality vs. representativity perspective that will be labeled as background.
The following variables are important in the composition of a BoD:
Board size
Inside vs. outside directors
Background (age of directors + professionality vs. representativity) Distinction between supervision and executive management Board size
The opinions on an optimal board size are divided. According to Coulson-Thomas (1993, p.92) this issue depends on a few factors such as the board composition and its dynamics, the directors’ characters, priorities, the chairman’s qualities and the way in which the BoD formulates its policy.
According to Coulson-Thomas (1993, p.94) a constant evaluation has to take place in deciding on the size of the BoD;
To what degree does the size of the board fit its context and the situation in which the organization works?
How does the size of the BoD relate to benchmark organizations; does it hinder discussions or decision-making?
What is the influence, or potential influence, of the non-executive directors on the board size; what are the advantages of a larger or smaller number of directors?
28 The figure below describes the tensions with regard to the size of the board and its effectiveness;
Better cohesion
More fellowship Active deliberation
Better feeling of responsibility
More discussion Bigger involvement
More participation
Good consultation
Figure 4: Maximum size BoD: the virtuous circle 1
The statutory minimum number of directors in Belgium consists of three members (art.
518 Venn.W.); in practice this minimum number varies between companies. The maximum number of directors varies from ten to twenty members; benchmarks and best practices prescribe a maximum between seven and sixteen directors. As was said earlier;
the size of the BoD is situation dependent.
Inside vs. outside directors (executives vs. non-executives)
An issue in the composition of the BoD is the debate on inside vs. outside directors (United States), or executives vs. non-executives (rest of the world). Executive directors are the directors that oversee operations and management and implement the policy decisions of the BoD. Non-executives have no work-relationship with the organization.
Executives bring in their expertise and detailed knowledge of the organization to the board meetings, non-executives are directing more from a monitoring-function.2 Non- executives are able to operate more independently and offer more objectivity compared to executives who are heavily dependent on the destiny of the organization with regard to their daily living, their career and in many cases their income.3
In various corporate governance publications the issue of the independency of the directors is being scrutinized; the dependent vs. independent issue. According to Tricker (1994, p.43) a non-executive director isn’t necessarily independent. For example a retired employee who is offered a position as a non-executive director in the BoD is not totally objective when looking at his history. Lippens et al. (2004, p.12) state that to be considered an independent director, a director should be free from any business, close
1 Het Instituut voor Bestuurders, IvB-opleiding, uit: Instrumenten voor deugdelijk bestuur;
basismodule, sheets; Van den Berghe, L., Sint Niklaas, 2002
2 Tricker, R., International Corporate governance; text, readings and cases, Prentice Hall, Signapore, 1994, p.14.
3 Coulson-Thomas, C., Creating excellence in the boardroom, Mcgraw-Hill, London, 1993.
Effective functioning
Board of Directors
29 family or other relationship with the organization, or the management of either that creates a conflict of interest such as to affect that director's independent judgment.
The criteria for the proportion of executive and non-executive members are varied. This discussion is mainly an issue in countries where the one-tier board model is being used.
In general, a majority of outsiders, non-executives, is recommended. The Lippens Code, Lippens et al. (2004, p.12), for instance states that at least half the board should comprise non-executive directors and at least three of them should be independent. This amount of non-executive and independent directors enables an optimal degree of independence in case of a conflict of interests.
Background
In the diverse codes and recommendations with regard to corporate governance the issue of diversity gets little attention. Corporate governance literature puts an increasing focus on an indispensable degree of diversity within the BoD.
Where diversity in the age of directors encourages diversity with regard to experience, diversity with regard to the background is encouraging directors with various backgrounds.
Diversity with regard to the ages of directors can have as an advantage the fact that it can bring a combination of experience and creativity. Diversity with regard to the background of the members can bring diversity in the form of knowledge and expertise and the combination of knowledge of the business environment and managerial experience.
Cornforth (2003, p.13) discusses whether directors should have a professional background or that directors should represent stakeholders. This brings several tensions to the fore. Are the representative directors to represent particular stakeholders or to give expert guidance? The professional role also demands a close involvement with the organization. This may clash with the directors’ unpaid status in most non-profit organizations.
Distinction between supervision and executive management
The distinction between supervision and executive management, also called CEO-duality, comprehends the fact that the general manager also functions as chairman of the BoD;
the responsibility for the executive and the monitoring tasks are combined in one person.
In their article Baliga et al. (1996, p.41) discuss opposing opinions on this issue.
According to proponents of separation, duality constrains board independence and reduces the possibility that the board can properly execute its governance role.
Proponents of duality conversely argue that the combination of the two positions provide a better strategic visioning, consistency in goals, objectives and strategies and clear-cut leadership and managerial responsibility.
According to Lippens et al. (2004, p.11), the chairman of the board and the general manager should not be the same individual;
30
“There should be a clear division of responsibilities at the head of the organization between the running of the board and the executive responsibility for the running of the organization’s business.”
2.3.4 Evaluation of the Board of Directors
As was discussed before, sub question 4 sounds as follows:
“What instruments does the Board of Directors of Amnesty International Vlaanderen employ to evaluate its behavior in order to function more effectively towards the organization’s stakeholders?”
In striving for a BoD that complies with all of its tasks and responsibilities an evaluation of the functioning of the BoD is an instrument to achieve this.
After having discussed the functioning and the composition of the BoD, more structurally oriented elements and more attention should be paid to the internal functioning of the BoD. This can be done by adopting a formal evaluation process. An advantage of the formal evaluation process is the fact that a BoD is aspiring for an effective working BoD, the improvement of the corporate governance process and that a clear view of the responsibilities and liabilities of the BoD emerges.1
For outsiders it is rather difficult to evaluate the performance of a BoD. According to West (2002, p.20) there exists no external instrument to assess to what degree a BoD complies with its main tasks and responsibilities. A second problem in evaluating the behavior of a BoD is the fact that there are no standards to compare the performance of a BoD with.
West (2002. p.21) discusses the model the National Association of Corporate Directors Blue Ribbon Commission has developed by which the performance of a BoD can be evaluated. The goal of the model is to strive for a BoD that has an added value for the organization; measured by the added value the BoD and its directors have for the long- term success of the organization. This model uses the following performance criteria:
• A call to action
• The right people
• The right culture
• The right issues
• The right information
• The right process
• The right follow-through
Conger et al. (1998, p.136) describe five variables that are needed to function effectively as a BoD;
• Knowledge
1 Het Instituut voor Bestuurders, IvB-opleiding, uit: Instrumenten voor deugdelijk bestuur;
basismodule, sheets; Van den Berghe, L., Sint Niklaas, 2002
31
• Information
• Power
• Motivation
• Time
The goal of this sub question is to make an inventory of the degree in which and on what aspects an evaluation of the functioning of the BoD and its directors takes place and to identify aspects which might need more attention. The seven variables the NACD uses are rather abstract and hard to make operational. The variables Conger et al. use are in such clear terms and easy to make operational that the further analysis will be based on these variables.
The relevancy to research each of the elements mentioned above is briefly explained below:
• Knowledge
An important aspect of board functioning is the availability of a certain degree of knowledge shared by the directors. Knowledge that fits with the various tasks the board performs, its environment and knowledge that complements.
• Information
To make sure the BoD can make well thought-out decisions, it is important that the BoD has a sufficient amount of relevant information at its disposal.
• Power
The functioning of a BoD is heavily influenced by the degree in which behavior is structured. Relevant issues are the relation with the management, well-structured meetings and the procedure behind the selection of potential directors.
• Motivation
A BoD functions best when its directors have a certain dedication to its membership.
Since the directors are not financially rewarded, what drives them to be a member of the BoD? What incentives are there for directors?
• Time
Since a BoD doesn’t have weekly meetings, an efficient use of time is crucial in its functioning. How is the use of time managed?
The main objective on this subject will thus be to research whether the BoD of AIVL has a formal system to evaluate its behavior. The elements above will be researched to analyze whether the working of the BoD of AIVL is effective or not. What are the hindering aspects in the functioning of the BoD?
2.4 Research Domain
The theories discussed in the preceding paragraphs have resulted in the research domain represented below. A clear distinction has been made with regard to issues related to the stakeholders and issues related to the more internal aspects of AIVL.
