The influence of task conflict on board monitoring and board advice provision

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The influence of task conflict on board monitoring

and board advice provision

Jeroen den Hertog

University of Groningen, Faculty of Economics and Business

19-06-2017 – Utrecht

Abstract:

Building on an integration of corporate governance research with research on conflict and research on team dynamics, the aim of this study is to contribute to the existing need for studying actual board behavior. Using a unique dataset composed of individual peer ratings obtained from board members of Dutch not-for-profit organizations, this study examines whether and in which circumstances task conflicts are positively or negatively related to board monitoring and board advice provision. The findings of this study suggest that task conflict negatively impacts board monitoring, but that it does not have an impact on board advice provision. Furthermore, this study did not find an effect of task complexity on the relationship between task conflict and, both, board monitoring and board advice provision. Based on the findings of this study, I am able to demonstrate that the effect of task conflict is different for board monitoring as it is for board advice provision.

Keywords: Board of Directors; Corporate Governance; Task Conflict; Board Monitoring;

Board Advice Provision; Task Complexity

Name: Jeroen den Hertog

Student number: 2186799

Field of study: MSc Accountancy + MSc Controlling

Supervisor: Irene Mostert

Co-assessor: Joanna Gusc

Mail: j.w.den.hertog@student.rug.nl

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1. Introduction

Although boards1_{are assumed to have authority and control over the activities of top executives,}

we still know little about what happens inside the boardroom. Because of the confidential and highly interpretive nature of the activities of boards, it is very hard for researchers to collect data about the actual behavior within boardrooms (Forbes & Milliken, 1999). Therefore, variables such as board composition and board structure are prominent in current research, while variables that tell us something about the actual board processes are scarce. Yet, these variables about actual board behavior are presumed to be stronger predictors of board task performance than board composition variables (Roberts, McNulty & Stiles, 2005; Minichilli, Zattoni, Nielsen & Huse, 2012). The consequence is an urgent need to examine actual board behavior further (Van Ees, Gabrielsson & Huse, 2009).

A particular aspect of actual board behavior is conflict between members of the board. Intragroup conflict can broadly be defined as the awareness by individuals involved in the conflict that discrepancies, or irreconcilable desires, exist within the group (Boulding, 1963). This study focuses on a particular aspect of intragroup conflict: task conflict2_{. Task conflict is}

defined as an awareness of different opinions or values pertaining to a group task (Jehn 1995). According to the conflict literature, task conflict is inevitable in groups (Jehn, 1995) and theorists have differed about its consequences. On the one hand, early organizational conflict theorists suggested that task conflict has a negative impact on the performance of a team, because it reduces productivity and satisfaction within teams (Pondy, 1967; Brown, 1983). However, other early organizational conflict theorists found a positive impact of task conflict on team performance, because it stimulates more critical thinking (van de Vliert & de Dreu, 1994; Jehn, 1995; Amason, 1996). More recent work focused on the circumstances in which task conflict could have a positive impact on group performance. According to de Wit, Greer and Jehn (2012), task conflict has a positive impact on group performance when the overall performance is measured in terms of decision-making quality or in terms of financial performance. They also suggest that task conflict has a slightly positive impact on group performance for top management teams, compared to a negative impact for teams lower in the organization, because top executives are under great time constraints and therefore have a greater need to remain task focused.

1_{I refer to non-executive directors or supervisory board members as the board of directors or the board.}

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Forbes and Milliken (1999) examined the impact of actual board processes on board-level outcomes. They defined board task performance, which is one of their board-level outcomes, as “the board’s ability to perform its control and service3_{tasks effectively” (p. 492). In their}

study, they identified situations in which task conflict between board members has a negative impact on board task performance as well as situations in which task conflict has a positive impact on board task performance. These findings match with the findings of de Wit et al. (2012) that situations exist in which conflict could have a positive impact on group performance. One the hand, recent studies find a positive impact of task conflict on board task performance as well (Bailey & Peck, 2011), while other studies find this positive impact only for particular board tasks (Wan & Ong, 2005), or do not find a positive impact at all (Minichilli et al., 2012).

When studying boards, it is important to focus on board-level outcomes instead of organizational outcomes (Pugliese, Minichilli & Zattoni, 2014). According to these researchers, even in times when the organization is in trouble, a board can still perform well, because a lot of external circumstances influence the organization’s performance. Therefore, actual board behavior better predicts board-level outcomes than organizational outcomes. This study will focus on monitoring tasks and advice provision tasks, because these are the primary tasks of boards that together determine the performance of boards (Finkelstein & Mooney, 2003)

So even though there is the existence of a growing literature on actual board behavior, there is still little consensus whether, how, and in which circumstances conflict contributes to board monitoring and to board advice provision. The purpose of this study is to contribute to the existing puzzle about the impact of task conflict on the performance of these board tasks by examining particular circumstances that can extend our knowledge about whether and in which circumstances task conflict has a positive or negative effect on board monitoring and on board advice provision.

This study contributes to the literature in multiple ways. First, several scholars studied the effect of task conflict on board task performance, however, the findings of these studies differ considerably (cf. Forbes & Milliken, 1999; Wan & Ong, 2005; Bailey & Peck, 2011; Minichilli et al., 2012). An important reason for this inconsistency is caused by the operationalization of board task performance. Several studies in the past did not distinguish between the monitoring tasks and the advice provision tasks of a board (cf. Forbes & Milliken, 1999; Bailey & Peck, 2011). This study provides deeper insight in the effects of task conflict

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on the board of directors by studying its effect on board monitoring and on board advice provision.

Second, task type has been used as a moderator of the relationship between task conflict and group performance in different studies (Jehn, 1995; de Dreu & Weingart, 2003; de Wit et al., 2012; O’Neill, Allen & Hastings, 2013). In these studies, task type is determined by whether the task of the group is routinized and simple or complex and uncertain. However, these studies considered all the tasks performed by boards as complex and all the tasks performed by teams lower in the organization as routinized. In the studies that examined the effects of task conflict on specifically boards, task complexity has not been used as moderator yet (cf. Forbes & Milliken, 1999; Zona & Zattoni, 2007; Bailey & Peck, 2011; Minichilli et al., 2012; Heemskerk, Heemskerk & Wats, 2015). Forbes and Milliken (1999) already argued that industry-based differences between boards of directors are able to impact their functioning as groups. These industry-based differences represents a distinction between relative routinized or simple tasks for boards and complex or uncertain tasks for boards. Therefore, task complexity of boards is added as a moderator in this study to satisfy the purpose of this study, which is to extend our knowledge of whether, and in which circumstances, task conflict enhances or undermines board monitoring and board advice provision.

These two main contributions of this study are both related to obtaining an enhanced understanding about actual board behavior and its consequences. Boards are able to have a significant influence on organizational performance, which makes studying board behavior and performance very interesting for practitioners. Therefore, the research question of this study is formulated as: What is the influence of task conflict on board monitoring and board advice provision in not-for-profit organizations and how does task complexity influence these relationships?

This paper proceeds as follows. First, I introduce the relationships between task conflicts and the monitoring and advice tasks of boards. Next, I discuss task complexity, leading to my hypothesis on the moderating effect of task complexity on the above relationships. In the following section, I describe the research method, and present sample, data collection and variables. After the research method, the results of this study are presented. In the final section of this paper, I conclude with a discussion of the main findings of this study, highlighting the limitations and the implications for future research.

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2. Theoretical Background

2.1 Board Monitoring and Board Advice Provision

According to Forbes and Milliken (1999), boards of directors are “large, elite, and episodic decision-making groups that face complex tasks pertaining to strategic-issue processing” (p.492). Boards of directors perform very important tasks that influence the performance of the organization (Zahra & Pearce, 1989). Following the traditional corporate governance literature, boards of directors have two primary tasks that form the performance of a board: the monitoring task and the advice task (Forbes & Milliken, 1999; Finkelstein & Mooney, 2003).

The monitoring task of boards, following an agency perspective (Jensen & Meckling, 1976; Fama, 1980; Fama & Jensen, 1983), refers to the potential of boards to monitor both the activities of top executives and the performance of the organization (Forbes & Milliken, 1999). Important activities include hiring, compensation and replacement of top executives of the organization and the approval of major proposals of top executives that together form the monitoring task (Forbes & Milliken, 1999). Heemskerk et al. (2015) argue that most of the monitoring tasks of boards are tied to the annual recurring budget cycle. According to this perspective, boards have the duty to ensure that the top executives are acting in the best interests of the shareholders in order to reduce agency costs. A reduction of agency costs leads to an improvement of firm performance (Fama & Jensen, 1983). The monitoring task could be seen as the primary task for boards, regardless of their organizational forms (Bainbridge, 2002). According to Blair (2012), board members are required to monitor all the activities of an organization, because it is their legal duty towards the organization and its stakeholders.

The advice task of boards, following a resource dependence perspective (Pfeffer & Salacnic, 1978), includes the provision of resources to the organization (Hillman & Dalziel, 2003). These resources contain expertise, experience and access to external information. According to this perspective, boards of directors can contribute to strategic decision-making by providing support and counsel to the management of the organization (Hillman, Cannella & Paetzold, 2000) or by providing feedback to the strategic proposals of top management (Westphal, 1999). The main difference between the advice provision task and the monitoring task of boards is that the advice provision tasks are less regulated and can span a wider variety of activities, leading to a focus to help executives rather than to monitor them (Mostert, Veltrop, van Veen-Dirks & de Haan, 2015).

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2.2 Task Conflict

Drawing on the conflict literature, task conflict is inevitable in groups (Jehn, 1995). As mentioned above, task conflict refers to task-oriented differences in judgment among group members, often manifested as “disagreements about the content of the task being performed, including differences in viewpoints, ideas and opinions” (Jehn, 1995, p. 258). Early scholars already studied the effects of task conflicts on the group level. The results of these studies differ considerably. Schweiger, Sandberg and Rechner (1989) argue that task conflicts contribute to the effectiveness of strategic decision-making groups, because it encourages a critical evaluation of one’s opinion. This argument is supported by Jehn (1995), who argues that task conflicts stimulate more critical thinking. Other studies also emphasize beneficial effects of task conflicts on groups. According to Wanous and Youtz (1986), solution diversity has a positive impact on group decision quality, as it is the result of different viewpoints of group members. In line with these researches, Watson and Michaelsen (1988) argue that groups perform better when they include multiple viewpoints and exchange positive as well as negative comments with each other. However, task conflict may also have negative effects for groups. Baron (1990) argues that critical opposing ideas cause negative affective reactions regardless of the performance of groups. Furthermore, high levels of task conflict are correlated with lower levels of satisfaction within the group (Schweiger, Sandberg & Ragan, 1986).

In a more recent study, de Wit et al. (2012) state that the effect of task conflict on group performance depends on the organizational level at which they occur. The higher in the organization the task conflicts occur, the more positive the effects of task conflicts are, because these teams – for instance boards - remain more task focused. According to Forbes and Milliken (1999), task conflicts are likely to arise in groups that are interdependent and face complex decision-making tasks (Forbes & Milliken, 1999). Boards are a particular example of groups that are interdependent and face complex decision-making tasks. Furthermore, the output of the work performed by boards is cognitive in nature. Therefore, board members are likely to hold different opinions and characterize issues differently (Dutton & Jackson, 1987). Different scholars studied the effects of task conflict on board task performance (cf. Forbes & Milliken, 1999; Wan & Ong, 2005; Zona & Zattoni, 2007; Bailey & Peck, 2011). Forbes and Milliken (1999) argue that task conflicts can have a positive impact on the performance of boards, because it creates a critical evaluation of more alternatives, which enhances strategic decision-making quality and helps in gaining a better picture of the organization’s performance. Bailey and Peck (2011) studied boards of publicly traded US companies and support the proposition

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of Forbes and Milliken (1999) by finding a positive relationship between task conflicts and board task performance.

However, it is important to distinguish between the different tasks boards have. This is because task conflicts may influence board monitoring in another way as it influences board advice provision (Wan & Ong, 2005; Zona & Zattoni, 2007). Several studies tested the effect of task conflicts on board monitoring, however, we still know little about this relationship. Zona and Zattoni (2007) studied manufacturing organizations in Italy, Wan and Ong (2005) studied listed firms in Singapore and Heemskerk et al. (2015) studied secondary schools in the Netherlands, and all studies did not find a positive relationship between task conflict and board monitoring. Minichilli et al. (2012), who studied industrial firms in Italy and Norway, even found a negative association between task conflicts and board monitoring. A possible explanation lies in the fact that the monitoring tasks of boards are allocated between members of the board. According to Upadhyay, Bhargava and Faircloth (2014), many boards have introduced different board committees. For example, the remuneration committee is responsible for the compensation of top executives; the strategic development committee is responsible for approving long-term investments; and the audit committee is responsible for monitoring the internal audit function. As mentioned above, these activities together form an important part of the monitoring function of boards. These board committees have derived much monitoring power from the board to perform the monitoring role effectively. Other board members do not attend the meetings of board committees and have, therefore, less knowledge about the activities executed by specific members or committees of the board (Reeb & Upadhyay, 2010). Discussions between members of the board, therefore, undermine the effectiveness of the allocation of monitoring tasks between board committees and specific persons. In other words, task conflicts between members of the board are not effective in order to fulfill the monitoring tasks of boards. Therefore, I hypothesize the following:

Hypothesis 1a: There is a negative relationship between task conflict and board monitoring

According to Minichilli et al. (2012), the effects of task conflict are similar for board advice provision as for board monitoring. They also found a negative association between task conflict and board advice provision. They argue that the customary reluctance toward discussion can make task conflict an anguished experience for board members. However, as mentioned above, several other studies in the conflict literature suggest that the effects of task conflict on board advice provision differ from the effects of task conflict on board monitoring

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(Wan & Ong, 2005; Zona & Zattoni, 2007). Wan and Ong (2005) found that task conflicts positively impact board advice provision. They argue that the consideration of more alternatives within the board, which is a result of task conflict, leads to a higher quality of the fulfillment of their advice task. Heemskerk et al. (2015) also found a positive relationship between task conflict and the advice task of boards. They note that in order to fulfill the advice tasks effectively, boards have to make sure that different viewpoints are discussed. This helps boards in providing better support and counsel to the management of the organization. A possible explanation that the findings of these studies differ from those of Minichilli et al. (2012) lies in the fact that the advice provision role of boards is a “grey area” (Wan & Ong, 2005). According to Wan and Ong (2005), strategic implementation is the role of top executives, but giving strategic direction is the role of the board of directors. However, these roles are often inter-linked. The discussions between board members that occur because of this “grey area” leads to the consideration of multiple viewpoints. As mentioned before, the consideration of multiple viewpoints helps in improving the quality of strategic decision-making needed for giving strategic direction (Schweiger et al., 1989). In line with these arguments, task conflicts between members of the board positively influence the advice provision tasks of the board. Therefore, I hypothesize the following:

Hypothesis 1b: There is a positive relationship between task conflict and board advice provision

2.3 Task Complexity

Task complexity finds its origin as a variable of interest by a study of Weick (1965). He argued that conflicting results might be traced to uncontrolled variation in the kind of tasks performed. Wood (1986) reacted to this insight and argued that tasks that have multiple steps before completion, that have interdependence between these steps and that change over time are more complex. More recent studies define non-routine tasks as tasks that are “novel, unfamiliar, involve uncertainty and problem solving, and often have no clear solution” (cf. O’Neill et al., 2013, p. 241). According to Forbes and Milliken (1999), board tasks are considered as non-routine and complex, because a high degree of decision-making is needed to fulfill these tasks, whereas tasks of teams lower in the organization are considered as routine and simple, because less decision-making is needed to fulfill these tasks. Nevertheless, board tasks also differ considerably in their level of complexity. Pirson and Turnbull (2011), for instance, argue that in complex business environments, boards have limited control over information flows. In such

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contexts, the monitoring tasks and board advice provision tasks of boards become more complex. Large organizations often operate in a complex environment with many diverse external elements: they have many competitors, many suppliers and many customers. On the other hand, small firms only have a few external elements, and government regulation as well as cultural change is minimal (Daft, 2006). As such, the complexity of performing the monitoring task and the advice provision task of boards differ between large and small organizations.

Early theorists already argued that the amount of disagreement about the content of the tasks should match the type of the task (Tushman & Nadler, 1978). According to Jehn (1995), groups that perform tasks in order to generate new ideas or to solve problems with no clear solution benefit more from diverse ideas or opinions of group members than groups performing routine tasks. These routine tasks demand solutions without disagreement, whereby task conflict is an unnecessary waste of time (Jehn, 1995). Besides, the creativity of group members is oppressed when they are pressured toward agreement. In complex tasks, creativity is of more importance than in routine tasks because creativity enhances the generation of new ideas, which are often needed to solve non-routine, complex tasks for which no pre-defined solution exist (Woodman, Sawyer & Griffin, 1993). Moreover, Jehn and Mannix (2001) argue that it is necessary in complex tasks to have conflicting perspectives. The synthesis that emerges from these conflicting perspectives improves decision quality in contrast to non-conflicting perspectives. In other words, groups that have to complete complex tasks benefit more from the effects of task conflicts than groups performing routine tasks. O’Neill et al. (2013) also suggest that the effect of task conflict on group performance is context dependent; the effects of task conflict are more positive for complex tasks.

As mentioned before, many monitoring tasks of boards are allocated between members or committees of the board. As long as these tasks are not novel, not unfamiliar and not uncertain, these tasks are considered as routine tasks and the allocation of these tasks among board committees will be effective (Upadhyay et al., 2014). Disagreements or conflicting perspectives within the board would only be a waste of time (Jehn, 1995). However, monitoring tasks like hiring a new CEO or the approval of an acquisition are unfamiliar and involve uncertainty. For these complex tasks it is more beneficial to consider the diverse opinions and ideas of all board members (Jehn & Mannix, 2001; O’Neill et al., 2013). Based on the above arguments on the effects of task complexity on the relationship between task conflict and board monitoring, I hypothesize the following:

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Hypothesis 2a: When the tasks to fulfill the monitoring task of boards are complex, the negative impact of task conflict on board monitoring will be mitigated

The other primary task of boards is to provide advice to top executives. As mentioned before, I expect that task conflicts are beneficial for board advice provision. When board members give support and counsel on recurring strategic issues to top executives, they are not faced with a novel or unfamiliar situation. In other words, they do not have to fulfill a complex task (O’Neill et al., 2013). Nevertheless, boards can improve the quality of their advice by discussing conflicting perspectives within the board (Wan & Ong, 2005; Heemskerk et al., 2015). However, when boards have to provide feedback to important strategic proposals from top executives, board members are exposed to a new, unfamiliar and uncertain situation. For those tasks, boards benefit even more from the consideration of diverse opinions and ideas, because they have to solve a strategic problem with no clear solution (Jehn, 1995). In line with these arguments on the effects of task complexity on the relationship between task conflict and board advice provision, I hypothesize the following:

Hypothesis 2b: When the tasks to fulfill the advice provision task of boards are complex, the positive impact of task conflict on board advice provision will be strengthened

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The research models discussed in this chapter are summarized in the following conceptual model: FIGURE 1 Conceptual Model H2a: H2b: - + H1a: - H1b: + Task conflict Board monitoring Task complexity Board advice provision

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3. Methodology

3.1 Research Setting and Sample

My research relies on data gathered from boards of directors at Dutch school communities, housing agencies, private health institutions and other not-for-profit organizations. Not-for-profit organizations fundamentally differ in their governance practices compared to for-Not-for-profit organizations (Fontes-Filho & Bronstein, 2010). First, because of the distinctive legal status of not-for-profit organizations, the monitoring role of boards of these organizations differ from for-profit boards (Forbes & Milliken, 1999). This is because not-for-profit organizations are generally not exposed to external control mechanisms and, therefore, monitoring top executives completely depends on its own board members (Fontes-Filho & Bronstein, 2010). Second, members of not-for-profit boards generally exert more influence over operating functions than do for-profit board members, causing another fulfillment of the advice provision role (Oster, 1995). Oster (1995) argues that not-for-profit board members are more involved in operating functions, because of the absence of market assurance that the organization is running well. Despite of an increased interest in boards of not-for-profit organizations, there is a gap in our understanding of actual board behavior in these organizations (Cornforth, 2012). Similar to Dutch for-profit organizations, Dutch not-for-profit organizations have a two-tier governance structure. In a two-tier governance structure, executive directors (including the CEO) form the management board and they are separated from non-executive directors, who form the supervisory board. Despite the formal difference between a one-tier governance structure and a two-tier governance structure, the tasks board members perform within a supervisory board are similar to the tasks non-executive directors perform within a one-tier governance structure (Veltrop, Molleman, Hooghiemstra & Van Ees, 2015). The management board is responsible for the organization’s daily operations and the supervisory board is responsible for the supervision of executives and the general organization as well as the provision of advice to the executives.

3.2 Procedure

Securing access to boards of directors and the actual behavior of board members within the boardroom is one of the most challenging aspects of research on boards of directors (Leblanc & Schwartz, 2007). I obtained endorsement from BoardResearch to get access to their survey data about actual behavior of boards of directors (BoardResearch, 2017). BoardResearch

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followed multiple steps recommended by Leblanc and Schwartz (2007) and Westphal and Stern (2007) to get access to this data. First, organizations like the Vereniging van Toezichthouders in Woningcorporaties (Association of Supervisors in Housing Corporations, VTW) support BoardResearch to reach not-for-profit organizations more directly. Without this endorsement, board members would be more hesitant to participate. Second, BoardResearch pre-tested the online survey on two boards of directors that were not included in the sample and, third, two rounds of personal reminders were sent to non-respondents. These procedures have been shown to improve response rates (Westphal & Stern, 2007). Moreover, all directors were assured absolute confidentiality in rating their peers.

The survey data is gathered in the period between May 2013 and February 2017. In contrast with previous studies on actual board behavior, BoardResearch questioned all the members of a board. Previous studies have often only questioned the CEO or key members of the board to evaluate the functioning of the whole board (Wan & Ong, 2005; Zona & Zattoni, 2007; Minichilli et al., 2012; Heemskerk et al., 2015). In total, 1020 board members of 155 organizations participated in the survey, of which 823 (81%) are non-executive directors. I combine the data from the survey of BoardResearch with data from the annual reports of the organizations that participated in the survey of BoardResearch. Together with six other students, who are all writing their Master thesis in Accounting, I collected data from these organizations’ annual reports. Strict guidelines were developed beforehand by our supervisors in order to guarantee the validity and reliability of our data collection process. Furthermore, the data from the annual reports of every organization in the survey were collected twice by two different students to test inter-rater reliability. The data from the annual reports were collected for the end of the financial year closest to the date of participation in the survey of BoardResearch (t=0) and for the year previous to participating in the survey (t=-1).

3.3 Measures

Board monitoring. Board monitoring was measured by the survey of BoardResearch. Three

items from Carpenter and Westphal (2001) were used to measure board monitoring. Board members rated “To what extent does the board monitor the management board’s strategic decision making?”, “To what extent does the board formally evaluate the management board’s performance?” and “To what extent does the supervisory board defer to the management’s board judgment on final strategic decisions?” These questions were carefully translated in

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Dutch questions for the board members of the Dutch not-for-profit organizations.4_{These items}

were rated on a seven-point scale (1=minimally, 7=very much so). The Cronbach alpha was .78.

Board advice provision. Board advice provision was measured by the survey of

BoardResearch. Three items from Carpenter and Westphal (2001) were used to measure board advice provision. Board members rated “To what extent does the management board solicit the supervisory board’s assistance in the formulation of corporate strategy”, “To what extent have supervisory board members provided advice to the management board in non-strategic issues?” and “To what extent have supervisory board members provided advice and counsel to the management board on strategic issues?” Again, these questions were carefully translated in Dutch questions for the board members of the Dutch not-for-profit organizations.5_{These items}

Task conflict. Task conflict was measured by the survey of BoardResearch. Two items

from Jehn and Mannix (2001) were used to measure task conflict. Board members rated “How frequently do you have job related disagreements with [name]?” and “How often do you have differences of professional opinion with [name]?” These questions were carefully translated in Dutch questions for the board members of the Dutch not-for-profit organizations.6_{These items}

Task complexity. Task complexity was measured by data gathered from the annual

reports of organizations that participated in the survey. Firm size is used as a proxy to determine the complexity of tasks a board has to perform. Consistent with the theory section, I suggest that large organizations are faced with many external elements leading to a complex business environment and complex tasks for the board. On the other hand, small firms are faced with less external elements and, consequently, board tasks are less complex in these organizations. March and Simon (1958) also suggested that as firms grow in size they become more complex. In accordance with previous studies, I measured firm size as the amount of total assets at t=0 (Cho, Roberts & Patten, 2010).

Control variables. I included several control variables. At the organizational level, I

control for firm performance. According to Francis, Hasan and Wu (2012), the impact of firm

4_{Appendix A: Survey translations} 5_{Appendix A: Survey translations} 6_{Appendix A: Survey translations}

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performance on the role of boards of directors is more evident in times of poor performance than in times of good performance. Firm performance is measured as the EBIT at t=0 multiplied by -1, in order to control for the effects of poor firm performance. I collected this data from the annual reports of the organizations in my dataset. At the board level, I control for the frequency of board meetings, which may influence the fulfillment of the board monitoring tasks and the board advice provision tasks (Blokdijk & Goodijk, 2012). Frequency of board meetings is measured as the total number of board meetings within one year and is collected from the annual reports. Moreover, I control for board tenure, because highly tenured board members have gained specific organization’s knowledge and skills, causing to a better fulfillment of the monitoring and advice provision tasks (Forbes & Milliken, 1999). Board tenure is measured as the tenure of board members in years.

3.4 Aggregation of Board Member’s Responses

I aggregated the individual scores of the survey items at the board level. With respect to board monitoring and board advice provision, board members were asked to evaluate their board rather than their own personal attitudes (Van der Vegt & Bunderson, 2005). The individual scores on task conflict, however, consist of the aggregated intrapersonal evaluations per board member. I calculated the intra-class correlation coefficient (ICC1) to determine whether aggregation to the board level was accurate. The intra-class correlation coefficient shows the extent to which the evaluations of board members are interchangeable within the board (Klein & Kozlowski, 2000). For monitoring the ICC1 score was .14 (p<.001), for advice provision the ICC1 score was .10 (p<.001), and for task conflict the ICC1 score was .32 (p<.001).7_{Since these}

scores are significant, the evaluations by multiple board members from the same board converge.

3.5 Data Analysis

In this study, I have built two models: a model in which I hypothesized a negative effect of task conflict on board monitoring and a model in which I hypothesized a positive effect of task conflict on board advice provision. I conducted a regression analysis on board monitoring and a regression analysis on board advice provision to test these hypotheses. To test the moderating effect of task complexity on the above models, I estimated the following regression models:

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(1) Board monitoring= β0 + β1(X) + β2(Z) + β3(XZ) + e

(2) Board advice provision = β0 + β1(X) + β2(Z)+ β3(XZ) + e

where the effect of task conflict is estimated by including X, the effect of task complexity is estimated by including Z and the interaction effect of task complexity on the relationship between task conflict and board monitoring and board advice provision by including the interaction term XZ. The control variables, mentioned in Section 3.3, are not included in these regression models. All the variables in the above regression equation are standardized, following the recommendations of Aiken and West (1991).

I controlled the dataset for non-response and outliers. First, multiple boards in the sample did at least have one non-response. However, the aggregation of the individual scores to board level did not cause problems, because the evaluations of the other board members were still representative for the whole board (also see Section 3.4). Furthermore, 18 organizations in my dataset had one or more missing values. Therefore, I disregarded these organizations from my regression analysis. Moreover, I tested the data from the annual reports on outliers, by equalizing observations that distant more than 3 standard deviations from the other observations to 3 standard deviations. Therefore, the final sample consists of 137 boards.

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4. Results

Table 1 provides the correlations between the variables of this study. Since my data consists of standardized variables, the means and standard deviations of these variables are not presented in Table 1. The frequency of board meetings is positively correlated with task conflicts in a board. Furthermore, board tenure is positively related to board monitoring and task conflicts are negatively related to board monitoring. There are no multicollinearity issues for these variables as the Variance Inflation Factors (VIF) are far below 10 (Sinan & Alkan, 2015).

TABLE 1 Correlations

Note. n = 137. *p < .05; ** p < .01.

The results for the regression analysis of board monitoring and board advice provision are reported in, respectively, Table 2 and Table 3. In both tables, Model 1 includes the control variables, Model 2 shows the main effect and the interaction effect is included in Model 3.

In support of hypothesis 1a, I find that there is a negative relationship between task conflict and board monitoring (Table 2, Model 2, b = -.12, p < .05). The results according to the effect of task conflict on board advice provision are not consistent with hypothesis 1b. I expected a positive relationship between task conflict and board advice provision. However, Table 3 shows that task conflict is not significantly related to board advice provision (Model 2, b = -.02, p = n.s.).

According to hypothesis 2a, task complexity mitigates the negative relationship between task conflict and board monitoring. However, results in Table 2 show no support for this

Variable 1 2 3 4 5 6 1. Firm performance 2. Board meetings -.00 3. Board tenure -.10 -.03 4. Task conflict .11 .34** .08 5. Task complexity -.60** .01 -.04 .01 6. Board monitoring -.17* -.13 .20* -.18* .13

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hypothesis (Model 3, b = .14, p = n.s.). According to hypothesis 2b, task complexity strengthens the positive relationship between task conflict and board advice provision. Results in Table 3 neither show support for hypothesis 2b (Model 3, b = .27, p = n.s.).

To gain further insight into the nature of these interaction effects, I plotted the relationship between task conflict and task complexity for board monitoring and board advice provision. Figure 2 shows how the effect of task conflict on board monitoring changes for different values of task complexity. Despite the fact that I did not find support for hypothesis 2a, Figure 2 shows a negative association between task conflict and board monitoring at low levels of task complexity, whereas task conflict and board monitoring are less negatively associated at high levels of task complexity. Similarly, Figure 3 shows how the effect of task conflict on board advice provision changes for different values of task complexity. In accordance with hypothesis 2b, I expected that the positive effect of task conflict on board advice provision would be strengthened at high levels of task complexity. Despite the fact that I did not find support for hypothesis 2b, Figure 3 shows that the effects of task conflict on board advice provision are positively associated for high levels of task complexity, but not for low levels of task complexity.

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TABLE 2

Results of the Regression Analysis for Board Monitoring

Model 1 Model 2 Model 3

Intercept -.19 (.10) † -.21 (.10) * -.20 (.10) * Controls Firm performance -.06 (.04) † -.03 (.05) -.06 (.06) Board meetings -.06 (.04) -.04 (.04) -.03 (.05) Board tenure .05 (.02) * .06 (.02) * .06 (.02) * Main effects Task conflict -.12 (.07) * -.11 (.07) Task complexity .11 (.11) .05 (.15) Two-way interaction

Task conflict x task complexity .14 (.23)

R² .08 .11 .11

∆ R square .08 * .03 .00

† < .10. * p < .05, ** p < .01. *** p < .001. t-tests are one-tailed for hypothesized effects, two-tailed for control variables. Standard errors are in parentheses

TABLE 3

Results of the Regression Analysis for Board Advice Provision

Model 1 Model 2 Model 3

Intercept -.14 (.10) -.15 (.10) -.14 (.10) Controls Firm performance -.03 (.04) .00 (.05) -.05 (.07) Board meetings -.04 (.04) -.04 (.05) -.03 (.05) Board tenure .04 (.02) † .05 (.03) † .04 (.03) † Main effects Task conflict -.02 (.07) .00 (.07) Task complexity .15 (.12) .04 (.16) Two-way interaction

Task conflict x task complexity .27 (.24)

R² .04 .05 .06

∆ R square .04 .01 .01

† < .10. * p < .05, ** p < .01. *** p < .001. t-tests are one-tailed for hypothesized effects, two-tailed for control variables. Standard errors are in parentheses

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FIGURE 2

Graphical presentation of the Interaction between Task Conflict and Task Complexity for Board Monitoring

FIGURE 3

Graphical presentation of the Interaction between Task Conflict and Task Complexity for Board Advice Provision

-1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1

Low Task conflict High Task conflict

B oar d m on itor in g Low Task complexity High Task complexity -1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1

Low Task conflict High Task conflict

B oar d ad vice p rovisi on Low Task complexity High Task complexity

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5. Discussion

5.1 Findings

Despite of the presence of numerous corporate governance studies, little attention has been paid to actual board behavior. This study was conducted to obtain an enhanced understanding about actual board behavior and its consequences. I studied the impact of task conflict on board monitoring and board advice provision to extend our knowledge about whether and in which circumstances task conflict has a positive or a negative effect on board monitoring and board advice provision. Besides, the interaction effect of task complexity on the relationship between task conflict and, respectively, board monitoring and board advice provision was introduced to satisfy the purpose of this study. I integrated corporate governance research with research on conflict and team dynamics to hypothesize on the above effects. Building on arguments of Minichilli et al. (2012) and Upadhyah et al. (2014), I hypothesized that task conflict would have a negative impact on board monitoring. On the other hand, I hypothesized that task conflict would have a positive impact on board advice provision. Furthermore, building on arguments of Jehn (1995) and O’Neill et al. (2013), I hypothesized that task complexity would mitigate the negative effect of task conflict on board monitoring and strengthen the positive effect of task conflict on board advice provision.

The results of this study demonstrate a negative impact of task conflict on board monitoring. This suggests that task-oriented disagreements between board members about monitoring executives are not effective. Therefore, it could be necessary to have a clear monitoring policy in the organization that does not lead to many discussions or disagreements within the board in order to monitor executives effectively. Moreover, one could argue that the allocation of monitoring tasks between board members or committees, as suggested by Upadhyay et al. (2014), is effective for monitoring executives because board members will discuss less diverse viewpoints and ideas about the fulfillment of their monitoring tasks.

In contrast to the negative effect I found on the relationship between task conflict and board monitoring, I did not find the expected positive effect of task conflict on board advice provision. A possible explanation is given by Forbes and Milliken (1999) who argue that the emergence of negative emotions among board members diminishes the positive effects that the consideration of multiple viewpoints, ideas and opinions have for the provision of advice to executives. According to Mace (1986), these negative emotions could even lead to a reduction of board member’s commitment to the board. In a broader perspective, Minichilli et al. (2012)

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argue that the effects of task conflict on board advice provision are more positive in high power distance cultures. Since my dataset only consists of Dutch not-for-profit organizations in a low power distance culture, the potential positive effects of task conflicts could also be diminished by the culture of the organizations in my dataset.

The results of task complexity on the relationship between task conflict and board monitoring and board advice provision also are not in accordance with the hypotheses stated in Section 2.3. A possible explanation is given by de Dreu and Weingart (2003), who argue that task conflict takes needed resources away from the performance of complex board tasks, whereas those resources are already less available in complex tasks than in routine tasks. Therefore, board performance is less likely to be harmed in routine board tasks. If board members have less resources to monitor top executives, information asymmetry between board members and top executives increases (Jensen & Meckling, 1976). However, I hypothesized that the negative effect of task conflict on board monitoring was mitigated in complex tasks, because it is more beneficial for these tasks to consider multiple viewpoints. The argument of de Dreu & Weingart (2003) is in contrast with my hypothesis and could be the reason that I did not find an effect. Furthermore, if board members have less resources to provide advice to top executives, they are not able to provide the same quality of expertise and advice (Hillman & Dalziel, 2003). This argument is also in contrast with the hypothesized effect of task complexity on the relationship between task conflict on board advice provision and could be a reason that I did not find an effect. Another possible explanation arises from the proxy that has been used in this study to measure task complexity. Firm size is used in this study as a predictor of the complexity of board tasks, because large organizations operate in complex business environments (Daft, 2006). In these complex business environments, board monitoring and board advice provision are more complex, because boards have limited control over information flows (Pirson & Turnbull, 2011). However, this method to determine task complexity could be the reason that the results of this study are not in accordance with the hypotheses of task complexity on the relationship between task conflict and board monitoring and board advice provision.

5.2 Theoretical Implications

This study has several theoretical contributions. First, this study contributes to the corporate governance literature by separating the monitoring tasks and the advice provision tasks of boards. Despite of the recognition of both board tasks as a determinant of board task performance, the advice provision role of boards has received less attention in the literature

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(Adams & Ferreira, 2007). By considering monitoring and advice provision as two separate board tasks, I am, on the one hand, able to demonstrate how task conflict impacts board monitoring negatively and, on the other hand, able to demonstrate that task conflict does not have an impact on board advice provision.

Second, scholars are still unaware of a lot of internal processes inside the boardroom and its consequences (Roberts et al., 2005). This study provides a deeper understanding of internal processes inside the boardroom by examining actual board behavior using surveys. This research method contributes to our knowledge and understanding of actual board behavior as a predictor of board performance (Minichilli et al., 2012).

5.3 Practical Implications

This study also has several implications for practitioners and policy makers. First, the mainstream of studies in the corporate governance literature and the main topics in the reports of the Dutch Monitoring Commission Corporate Governance Code have a focus on board composition variables. Therefore, best practices composed by policy makers are predominantly based on findings from board composition studies (Dutch Corporate Governance Code, 2016). The Dutch Monitoring Commission Corporate Governance Code state that board composition diversity contributes to better board performance. They argue that board composition diversity contributes to better decision-making, because of the consideration of multiple viewpoints, ideas and opinions (Dutch Corporate Governance Code, 2016). However, while scholars and regulators focus on the impact of board composition variables, this study shows a contrasting point of view. This study shows that task-oriented disagreements, including the consideration of multiple viewpoints, ideas and opinions have a negative impact on the quality of board monitoring. Furthermore, the hypothesized positive effect of task conflicts on the provision of advice to executives has not been found. Therefore, policy makers and practitioners should have more attention for actual board behavior, and in particular for task conflicts between members of the board, to evaluate the quality of board monitoring and board advice provision. Furthermore, they should also take task conflicts in consideration for composing best practices. Second, this study shows that the effect of task conflict on board monitoring is different from the effect of task conflict on board advice provision. However, boards are expected to combine both board tasks by looking forward and advising executives on strategic issues (Heemskerk et al., 2015). Therefore, policy makers should realize in composing best practices that monitoring tasks differ from advice provision tasks, but that these tasks should not be viewed in isolation from each other.

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5.4 Limitations and Future Research

This study has several limitations that should be acknowledged. First, my sample consists of Dutch not-for-profit organizations with a two-tier board structure. Therefore, my results may not be generalizable to organizations in countries where a one-tier structure is commonly used. However, the tasks of non-executive directors in a one-tier board structure are very similar to the tasks of the supervisory board members in a two-tier board structure (Bezemer, Peij, Maassen & Halder, 2012; Veltrop et al., 2015). Therefore, I expect that my results can be generalized to countries with one-tier board structures. Additionally, my results may also not be generalizable to not-for-profit organizations. According to Forbes and Milliken (1999), boards of not-for-profit organizations differ from boards of for-profit organizations regarding diversity, structure and commitment. They argue that not-for-profit organizations generally have larger boards with relatively more women and more outside directors. Furthermore, board members of not-for-profit organizations generally have more commitment to the organization, because they share organizational objectives. Future research should investigate whether the results of this study can be generalized to for-profit organizations.

Second, the results of this study could be biased by the use of a common source (board members) in determining the perception of task conflict and the perception of board monitoring and board advice provision. According to Podsakoff, MacKenzie, Lee and Podsakoff (2003), this method has the potential to diminish the validity of the relationships between task conflict and, respectively, board monitoring and board advice provision. However, the format of the questions in the survey were set up in such a way that the validity of the measurements are ensured. Furthermore, the interaction effect of task complexity was measured by the use of another source (annual reports). Future research on actual board behavior should also consider a different set of sources in measuring the independent and dependent variable.

Third, past work often studied the effects of conflict in groups, by differentiating between task conflict and relationship conflict (Jehn, 1995). Jehn (1995) defined relationship conflict as an awareness of interpersonal incompatibilities such as differences in norms and values, and tensions among members within a group. This study focused on the effects of task conflict on board monitoring and board advice provision. Boards are groups with highly qualified members, without hierarchical relationships and which meet only episodically. Therefore, relationship conflicts are less likely to take place in boards of directors (Minichilli et al., 2012). However, relationship conflicts could also have an impact on the relationship between task conflict and board monitoring and board advice provision. According to de Wit et al. (2012), the effects of task conflict on group performance are more negative when task conflicts and

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relationship conflicts are highly associated. Future research should investigate whether these effects also occur in boards of directors.

Finally, this study measured the interaction effect of task complexity by using the proxy firm size. The use of a proxy is not the most common method in the literature to measure task complexity. Other studies often conducted a survey to measure task. For instance, the frameworks of Maynard and Hakel (1997) and Mosenthal (1998) are used in the literature to determine task complexity by conducting a survey. For this study, I was not able to gather survey data that determines task complexity. Future research could contribute to the existing literature on actual board behavior by examining the interaction effect of task complexity on the relationship between task conflict and, respectively, board monitoring and board advice provision with the use of survey data to determine task complexity.

5.5 Conclusion

The purpose of this study was to enhance our understanding of the impact of actual board behavior by extending our knowledge of whether, and in which circumstances, task conflict enhances or undermines board monitoring and board advice provision. My findings suggest that task conflict negatively impact board monitoring, whilst not having an impact on board advice provision. Furthermore, by examining the complexity of board tasks, I did not find circumstances in which the effect of task conflict on board monitoring and board advice provision differ. Therefore, this study provides in the need for studies on actual board behavior by demonstrating that the effects of task conflict are different for board monitoring and board advice provision.

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Appendix A: Survey Translations

Board monitoring

1. To what extent does the board monitor the management board’s strategic decision making?

In welke mate houdt de RvC toezicht op het bestuur?

2. To what extent does the board formally evaluate the management board’s performance?

In welke mate vraagt de RvC informatie van het bestuur ter evaluatie van de prestaties van het bestuur?

3. To what extent does the supervisory board defer to the management’s board’s performance?

In welke mate levert de RvC opbouwende kritiek op voorstellen van het bestuur?

Board advice provision

1. To what extent does the management board solicit the supervisory board’s assistance in the formulation of corporate strategy

In welke mate voorziet de RvC het bestuur van advies bij het formuleren van de strategie?

2. To what extent have supervisory board members provided advice to the management board in non-strategic issues?

In welke mate voorziet de RvC het bestuur van waardevol advies op andere gebieden dan strategische kwesties?

3. To what extent have supervisory board members provided advice and counsel to the management board on strategic issues?

In welke mate voorziet de RvC het bestuur van raad en advies?

Task conflict

1. How frequently do you have job related disagreements with [name]?

Hoe vaak heeft u inhoudelijke verschillen van inzicht met [naam]?

2. How often do you have differences of professional opinion with [name]?

Hoe vaak heeft u meningsverschillen met [naam]

The influence of task conflict on board monitoring and board advice provision