The effects of board tenure on board
advice and board monitoring
Master thesis Accountancy, Msc A&C, Rijksuniversiteit
Groningen, Faculteit Economie en Bedrijfskunde
Pieter Mook
S2780437
20 June, 2016
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The effects of board tenure on board
advice and board monitoring
Name: Pieter Mook
Student number: S2780437
Faculty: Economics and Business
Subject: Master Thesis Accountancy
Code: EBM869B20
Supervisor: drs. I. Mostert Co-Supervisor: dr. D. B. Veltdrop
Abstract
This thesis discusses the different effects of board tenure on the two tasks of the board: board monitoring and board advice. By building upon a unique dataset of behavioral dynamics operating between outside directors and top managers of Dutch housing corporations and educational institutions is argued that board tenure will differently affect board monitoring and advice. Consistent with previous literature, results show that board tenure will positive effect board advice. However, inconsistent with government reformers concerns, board tenure is also found to be positive effecting board monitoring. Furthermore, results showed no relationship between board reflexivity and the board tenure and board monitoring and advice relationships. The results suggest a “one-size-fits-all” regulation for limiting board tenure may not lead to the intended income.
Keywords: Board of directors, tenure, board advice, board monitoring, reflexivity, agency theory, resource dependency theory
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Table of Contents
1. INTRODUCTION... 4
2. THEORY AND HYPOTHESES ... 5
2.1 Board monitoring and board advice provision ... 5
2.2 Positive and negative effect of board tenure ... 7
2.3 Board tenure and monitoring ... 8
2.4 Board tenure and board advice ... 8
2.5 Board Reflexivity ... 9
3. RESEARCH METHODOLOGY ... 11
3.1 Research setting ... 11
3.2 Measures ... 11
3.3 Aggregation to group levels ... 12
4. RESULTS... 13
5. DISCUSSION ... 16
5.1 Conclusion ... 16
5.2. Limitations and Future Research ... 16
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1. INTRODUCTION
In response to the well-known corporate scandals like Enron, WorldCom and Ahold, government reformers have developed new laws and regulations, including the Sarbanes-Oxley-Act (SOX) and the Dutch corporate governance code. The board of directors plays a crucial role in this development because boards perform a dual role of both advising and monitoring the top management team (TMT) on behalf of shareholders (Hillman & Dalziel, 2003).
On February 2016, the Dutch Monitoring Committee Corporate Governance Code published a proposal for the current Dutch corporate governance code. One of the proposed revisions relates to reducing board tenure from a maximum of 12 years to a maximum of 8 years, assuming that longer-tenured boards lose their independence because they grow entrenched with the company (Vafaes, 2003; Hwang & Kim, 2009). In doing so, the Dutch Committee follows other revisions of European countries like Italy and the United Kingdom (Dutch Corporate Governance Code, 2016). Where governments’ reforms argue mostly the negative effects of increased tenure, there is a lack of information on the potential positive effects of increased tenure. Lorsch and Carter (2004) already indicated that governance revisions of laws and regulations lead to more focus on the board’s monitoring role, but they ignore the board’s advisory role.
Prior literature indicates a contradictory effect of increased board tenure on board effectiveness. Board effectiveness depends on both its independence from TMT as well as its knowledge of the firm (Armstrong et al, 2010). Hwang and Kim (2009) argue that social ties influence board monitoring because increased familiarity has the potential to reduce independence between the board and TMT. Thus, board tenure undermines board independence over the years, and, thereby, will decrease board effectiveness. However, other literature suggests that board tenure has a positive effect on board effectiveness because directors are likely to obtain higher levels of firm-specific knowledge and skills (Forbes & Milliken, 1999). In addition, “their familiarity with other directors is likely to lead to higher levels of cohesiveness and, possibly, to the better use of their knowledge and skills” (Forbes & Milliken, 1999: p.499).
Furthermore, this thesis examines how board reflexivity affects the relationship between board tenure and board effectiveness. Reflexivity is defined as: “the extent to which group members overtly reflect upon, and communicate about the group’s objectives, strategies and processes and adapt them to current or anticipated circumstances” (West, 1996: p.559).
5 Reflexivity is an important influence on the effectiveness of complex decision-making teams (West, 1996). Teams will become more effective when group members collectively reflect upon their objectives, strategies, processes and environments and consequently plan to adapt these aspects (West, 2000). This study expects that board reflexivity will have positive effects on the relationships between board tenure and both board monitoring and board advice.
In sum, this thesis aims to provide a more comprehensive understanding of the manner in which board tenure influences board monitoring and board advice. Moreover, by building upon a unique set of questionnaire data of behavioral dynamics operating between outside directors and TMT, this thesis shows how board reflexivity influences the boards’ decision-making process. This thesis hopes to provide a new perspective on the relationship between the board and TMT by discussing the two functions of the board separately. Due to the fact that the elite nature of boards makes access to these boards challenging, there is hardly any literature available on the relationship between the board and TMT (McNulty & Pettigrew, 1999; Pettigrew, 1992).
A second important contribution of this study is to add new insights to the existing debate on whether to place legal limits on the tenure of outside directors. The decision by countries such as the United Kingdom and Italy to reduce board tenure from 12 years to 9 years leads to more focus on the board’s monitoring role, but ignores the board’s advisory role (Lorsch & Carter, 2004).
The remainder of the thesis is organized as follows: Section 2 describes the theoretical framework used to investigate the relationship between board tenure and both board monitoring and board advice. Also, relevant literature will be discussed to link board reflexivity to these relationships. Section 3 describes the research methodology and section 4 introduces the results. Finally, section 5 includes a discussion of the results and implications for future research and practice.
2. THEORY AND HYPOTHESES
2.1 Board monitoring and board advice provision
The board of directors performs a dual role of monitoring and advising TMT (Hillman & Dalziel, 2003). The monitoring role of boards has been the dominant object of study in corporate governance research, which is derived from the agency theory (Jensen, Meckling, 1976). According to the agency theory, the primary function of the board is to monitor
6 management on behalf of shareholders (Adams & Ferreira, 2007). Outside directors add value to the firm by being independent from the firm itself, which is the case when a director is not currently being or has not recently been employed by the firm. Independent boards act as a mechanism that reduces information asymmetry between shareholders and management by establishing appropriate incentives for management (Jensen & Meckling, 1976). The agency theory is built on the separation of ownership and control, which potentially leads to self-interest of management (Eisenhardt, 1989). Management has an advantage over shareholders because they have access to firm-specific knowledge where shareholders have not (Eisenhardt, 1989). When boards monitor effectively, they reduce information asymmetry between shareholders and management (Jensen & Meckling, 1976).
Beside the monitoring role, boards have an important second role as provider of resources (advice) to management (Hillman & Dalziel, 2003). By advising management, boards help to reduce dependency between the organization and external contingencies (Pfeffer & Salancik, 1978). The advisory role of boards is based on Pfeffer and Salancik’s (1978) work in resource dependence theory. According to their theory, outside directors’ primary function is to provide four main resources to the firm: (1) advice and counsel, (2) legitimacy, (3) channels for communication between the firm and (4) external organizations and access to commitments or support from important elements outside the firm.
To effectively perform their monitoring and advisory tasks, boards have to be independent from TMT as well as possess knowledge of the firm (Armstrong et al, 2010). Where boards are better able to monitor TMT on behalf of shareholders by being independent of TMT, they can provide advice to management by providing TMT’s with their resources (Adams & Ferreira, 2007). Furthermore, other literature indicates that focusing on the monitoring role of boards comes at the expense of the advisory role of boards because the two roles compete for time and task focus. That is, an increase of time spent on the monitoring role reduces the time available for the advisory role (Faleye et al, 2011). Besides, Adams and Ferreira (2007) argue that executives are less willing to share strategic information with outside directors when the board monitors too much, which leads to a decrease in information exchange. Yet, since outside directors’ advisory role depends critically on information provided by TMT, this will result in a lower quality of board advice (Adams & Ferreira, 2007). Holmstrom (2005) argues that this effect occurs because intense board monitoring destroys trust, which is necessary for executives to share relevant strategic information with outside directors.
7 However, other literature suggests that the dual role of the boards does not compete for time and task focus. Brickley and Zimmerman (2010) argue that both advising and monitoring occur simultaneously because directors need to have an understanding of the firms’ strategy before they can provide advice. Gaining such an understanding then facilitates their monitoring role. Therefore, it is important for directors to acquire knowledge of the firm and to have the ability to exercise the right judgments (Brickley & Zimmerman, 2010). In addition, Hillman and Dalziel (2003) suggest that directors’ knowledge impacts both board advice and board monitoring because the skills, experience, expertise, and knowledge of outside directors are likely to affect both their effectiveness at monitoring TMT as well as providing resources to TMT.
2.2 Positive and negative effect of board tenure
Prior literature which discusses the positive effects of increased board tenure suggests that the replacement of directors leads to a waste of talent and experience (Forbes & Milliken, 1999). Forbes and Milliken (1999) argue that longer-tenured boards are likely to obtain higher levels of firm-specific knowledge and skills. In addition, “their familiarity with other directors is likely to lead to higher levels of cohesiveness and, possibly, to the better use of their knowledge and skills (Forbes & Milliken, 1999: p.499)”. Firm-specific knowledge gives outside directors the opportunity to obtain knowledge of the firms’ internal control systems and business operations over time, and establish working relationships with TMT to acquire more useful information for their judgments on accounting issues (Chan, 2013).
Besides, in longer-tenured boards, outside directors have worked together for a significant period of time. Gilson et al (2013) argue that knowledge sharing within groups has the potential to influence the individual explicit knowledge of outside directors. Individual explicit knowledge refers to the knowledge developed to a deeper understanding rather than a general idea of how things work (Gilson et al, 2013). Increased knowledge about organizational culture and firm-specific procedures and practices especially could increase the task performance of outside directors (Nonaka, 1994; Forbes & Milliken, 1999).
However, government reformers have concerns that outside directors may lose their independence as their tenure increases. The implication is that directors grow entrenched with TMT, and, therefore, are unable to monitor TMT adequately (Vafeas, 2003). Board tenure will therefore undermine board independence over the years because increased familiarity with the organization has the potential to reduce independence between the board and TMT (Hwang & Kim, 2009).
8 Other literature argues that longer-tenured directors are associated with greater psychological commitment, including organizational commitment to the organization's current strategy and goals (Buchanan, 1974). In addition, Salancik (1977) suggests that organizational commitment increases with tenure, because directors develop confidence and competence in doing their job over years (Vafeas, 2003).
2.3 Board tenure and monitoring
Longer-tenured boards are likely to obtain higher levels of firm-specific knowledge and skills (Forbes & Milliken, 1999). By obtaining more firm-specific knowledge, boards reduce the information asymmetry between the board and TMT, resulting in lower agency costs, and better monitoring. However, as boards obtain firm-specific knowledge, they grow entrenched with TMT (Vafeas, 2003). Entrenchment has the potential to reduce independence between the board and TMT (Hwang & Kim, 2009). By growing entrenched, boards become more dependent on TMT, resulting in higher agency costs.
The discussion above suggests that increased board tenure impacts board monitoring both positively by obtaining a higher level of firm-specific knowledge (Forbes & Milliken, 1999), and negatively by undermining independence due to increased familiarity with the organization (Hwang & Kim, 2009). Where independent boards act as a mechanism that reduces information asymmetry between shareholders and management, board tenure undermines independence of the board, and therefore is unable to monitor TMT adequately, despite their higher levels of firm-specific knowledge (Vafeas, 2003; Jensen & Meckling, 1976). The following hypothesis is proposed:
Hypothesis 1: There is negative relationship between board tenure and board monitoring.
2.4 Board tenure and board advice
Longer-tenured boards obtain higher levels of firm-specific knowledge and skills (Forbes & Milliken, 1999). Furthermore, individual board members obtain higher levels of explicit knowledge when groups share knowledge (Gilson et al, 2013). By obtaining knowledge over years, boards grow entrenched with TMT (Vafeas, 2003). However, where entrenchment has negative effects for board monitoring, the undermined independence does not affect board advice.
Strategic decisions depend on specific capabilities and limitations, whereby boards need to have firm-specific knowledge to effectively advise TMT (Armstrong et al, 2010).
9 Furthermore, board advice depends critically on information provided by TMT, which implies that boards should have a close relationship with TMT (Adams & Ferreira, 2007). Firm-specific knowledge gives outside directors the opportunity to establish working relationships with TMT to acquire more useful information for their judgments on accounting issues (Chan, 2013). Since boards obtain higher levels of firm-specific knowledge as tenure increases and strategic decisions depend on specific capabilities and limitations to effectively advice TMT, the following hypothesis is proposed:
Hypothesis 2: There is a positive relationship between board tenure and board advice.
2.5 Board Reflexivity
West (2000) asserted that when groups have high levels of reflexivity, teams will be more effective. Reflexivity is thereby an important influence of the effectiveness of complex decision-making teams because openly discussing with group members about the firm’s opportunities and risks stimulates new cognitive representations and allows for a more comprehensive and systematic understanding of these items, which helps groups to perform their tasks more effectively (West, 2000).
Prior literature about reflexivity found a positively association of team reflexivity with team innovation (De Dreu, 2002), team effectiveness (Hoegl & Parboteeah, 2006) and team creativity (Carter & West, 1998). Reflection is an important instrument for teams to recognize how certain activities can be necessary or not, because of environmental changes, which suggests that reflection is crucial in learning from experience (Tjosvold, 1991). When members collectively reflect on the way they work and the environment they work in; plan to adapt these aspects and make changes accordingly, teams will be more effective (West, 2000).
Longer-tenured boards grow entrenched with TMT, and, therefore are unable to monitor TMT adequately (Vafeas, 2003). Entrenchment has the potential to reduce independence between the board and TMT, as familiarity increases (Hwang & Kim, 2009). However, team reflexivity requires teams to reflect upon their preferred work methods and adapt them to current needs of their tasks and environment (West, 2000), which implies that board reflexivity has the potential to reduce the costs of entrenchment. Since entrenchment ensures that boards are unable to monitor TMT adequately, board tenure should be negative related to board monitoring. However, when board reflexivity exists; boards collectively reflect on the way they work and adapt changes to the current needs of their tasks and
10 environment, and, therefore board reflexivity should reduce the costs of entrenchment. The following hypothesis is proposed:
Hypothesis 3a: Board reflexivity decreases the negative effect of board tenure on board monitoring.
Reflexivity is more than just reflecting on what has already taken place. (West, 2000). Reflexivity is a diverse concept involving: questioning, reviewing, evaluating, debating and adapting (West, 2000). Reflexivity enables boards to develop new meanings and a shared understanding (Hoegl & Parboteeah, 2006). Furthermore, the development of this new distributed information should allow boards to make higher quality decisions (De Dreu et al, 2008).
Board advice depends on specific capabilities and limitations to effectively advise TMT (Armstrong et al, 2010). Boards with high levels of reflexivity will exchange information, discuss the information, and integrate the distributed information to come to a higher quality advice. Therefore, the following hypothesis is proposed:
Hypothesis 3b: Board reflexivity strengthens the positive effect of board tenure on board advice.
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3. RESEARCH METHODOLOGY
3.1 Research setting
This thesis relies on data gathered from boards of directors at Dutch housing corporations and educational institutions. Although practical information about boards is easy to obtain, access to board-specific behavior is very difficult to obtain. Gaining access to information on this behavior is the most challenging aspect in research of the board of directors (Leblanc & Schwartz, 2007).
This thesis uses a unique dataset which consists of data on behavioral dynamics operating between the board and TMT. Both TMT and board members are asked to fill in a survey which helps boards with their self-evaluation by giving insight into the group processes, relationships, culture and behavior in the boardroom. For this reason, is it very difficult to involve stock listed companies in this research, because any statement about board functioning has the potential to affect share prices (Veltdrop et al, 2015).
The first sample consists of 84 boards. The behavioral dynamics data are obtained from the BoardResearch database. This database was designed to provide new insights to existing corporate governance research by obtaining data on the inner workings of the board, which examines the behavioral dynamics operating between board and TMT.
Furthermore, this data is supplemented with archival data, which is available from annual reports. These reports are obtained from the company.info database and provide information on accounting data as the starting date of outside directors in the company.
3.2 Measures
Board tenure. Board tenure is defined as the average number of years of all board
members who are working for the board.
Board monitoring. Board monitoring was measured with Carpenter and Westphal’s
(2001) measure of board monitoring. Board members rated: “To what extent does the board monitor TMT?”, “To what extent does the board criticize on the proposals of TMT?” and “To what extent asks the board information of TMT to evaluate the performance of the board?”. These questions were rated on a seven-point scale (1=minimally, 7= very much so). The Cronbach’s Alpha was .81.
Board advice. Board advice was measured with Carpenter and Westphal’s (2001)
measure of board’s provision of advice. Board members rated: “To what extent does the board provide advice and counsel to TMT?”, “To what extent does the board provide advice to TMT
12 in formulating the strategy?” and “To what extent does the board provide advice to TMT in other areas than strategic issues?”. These questions were rated on a seven-point scale (1=minimally, 7= very much so). The Cronbach’s Alpha was .89.
Board Reflexivity. Reflexivity was measured with Carter and West’s (1998) measure
of reflexivity. This measure consists of eight items. Board members were asked to rate the following statements: “The objectives (1), work process (2) and decision-making process (3) of the board are regularly critically discussed”, “We regularly discuss how we as a board cooperate (4) and share information (5) effectively”, “The work process (6) and decision-making process (7) are rarely changed” and “In the board we adjust our goals in lights of changed circumstances (8)”. These questions were rated on a seven-point scale (1=totally disagree, 7= totally agree). The Cronbach’s Alpha was .83.
Control variables. The sample includes two control variables. First of all, board size is
measured because board size has the potential to increase the available knowledge pool and expertise in the board (Taylor & Greve, 2006). Board size is measured at the number of directors in the board. Furthermore, board age is added, because older board members are related to higher levels of task performance (Warr, 1994). Board age is measured at the average age of board members.
3.3 Aggregation to group levels
As mentioned before, individual board members are asked their personal opinion about different statements about board functioning. However, these individual ratings are aggregated to group-levels, because individuals don’t make decisions on their own, but the board does as a group.
Because board-specific behavior consists of very sensitive information, the BoardResearch database provides us with anonymous standardized data. To compare this data with the archival data, this data is also standardized before testing the results.
Besides, the data is verified on both non-responses and outliners, which have the potential to affect the results. Multiple boards in the sample did have at least one non-response, but this didn’t affect the results. However, two boards are excluded of our final sample because at least one-third of board members did not respond, reducing the quality of the data. Furthermore, firms are required by law to publish board members tenure. Nonetheless, two boards did not publish complete information. As this undermines the quality of the data, it resulted in an outliner. Therefore, the final sample consists of 80 boards.
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4. RESULTS
This section provides the results of the regression analyses. First, correlations between the variables are being examined. After that, the regression analyses of both board monitoring and board advice are conducted and two figures are shown, illustrating the interaction effect of board reflexivity.
Table 1 presents the correlations between the variables. As mentioned before, the dataset consists of standardized data, so both the mean and standard deviation of the variables have been omitted. As shown, board advice, board tenure and board reflexivity are positively related to board monitoring. This suggests that board monitoring is influenced positively when a board provides better advice to TMT, is longer-tenured, or when the board is more reflexive. Besides, there is a positive relationship between board advice and board tenure, which suggests that longer-tenured boards have greater boards advice. Board tenure is also positively related to the average age of board members (board age) and board reflexivity, which indicates that longer-tenured boards are composed of older board members and that longer-tenured board are more reflexive. Furthermore, board size and board reflexivity are negatively related, indicating that larger boards are less reflexive.
Table 1
Correlations of variables dataset
Variables 1 2 3 4 5 1. Board Monitoring 2. Board Advice .71** 3. Board Tenure .29** .29** 4. Board Age .16 .15 .31** 5. Board Size -.07 -.18 .01 .03 6. Board Reflexivity .32** .18 .26* -.07 -.27* Note: N = 80, *p < .05, **p <.01.
The results of the regression analyses for both board monitoring and board advice are presented in Table 2 and Table 3. For both Tables, the control variables were added in Model 1. Further, the main effects were added in Model 2. Finally, the two-way interaction terms were added in Model 3.
Table 2 presents a positive relationship between board tenure and board monitoring (Table 2, Model 2, b = 0.20, p < .05). However, hypothesis 1 is rejected because it expected a negative relationship. This finding suggests that board monitoring increases when boards are longer-tenured. Furthermore, in support of hypothesis 2, board tenure is also positive related
14 -1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1
Low Board Tenure High Board Tenure
B oar d M on itor in g Low Board Reflexivity High Board Reflexivity to board advice (Table 3, Model 2, b = 0.30, p < .05). The results in Table 2 show that the interaction effect of board reflexivity is negative, but non-significant. (Model 3, b = -0.41, p < .10). Therefore, hypothesis 3a is not supported. Furthermore, the results of table 3 found no support either for hypothesis 3b, which posited that board reflexivity would strengthen the positive relationship between board tenure and board advice. (Table 3, Model 3, b = -0.04).
Table 2
Results of the Regression Analysis for Board Monitoring
Model 1 Model 2 Model 3
Intercept 0.01 (0.06) 0.02 (0.06) 0.04 (0.06) Controls Board Age 0.17 (0.12) 0.13 (0.12) 0.11 (0.12) Board Size -0.04 (0.06) -0.00 (0.06) -0.02 (0.06) Main effects Board Tenure 0.20 (0.13) 0.23 (0.13)* Board Reflexivity 0.37 (0.15)** 0.28 (0.17)* Two-way interaction
Board Tenure x Board Reflexivity -0.41 (0.30)
R2 0.03 0.17 0.19 ΔR2 0.03 0.13** 0.02 Note: N = 80. *p < .05. **p <.01.
Significance levels are one-tailed for hypothesized effects and two-tailed for control variables. Standard errors are in parentheses.
Figure 1: Graphical presentation of the interaction between Board Reflexivity and the Board Tenure and Board Monitoring relationship.
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Table 3
Results of the Regression Analysis for Board Advice
Model 1 Model 2 Model 3
Intercept 0.01 (0.06) 0.04 (0.06) 0.04 (0.06) Controls Board Age 0.16 (0.12) 0,09 (0.12) 0.09 (0.12) Board Size -0.11 (0.07) -0,10 (0.07) -0.10 (0.07) Main effects Board Tenure 0.28 (0.14)* 0.28 (0.14)* Board Reflexivity 0.10 (0.16) 0.09 (0.18) Two-way interaction
Board Tenure x Board Reflexivity -0.04 (0.32)
R2 0.06 0.13 0.13
ΔR2
0.06 0,07* 0.00
Note: N = 80, *p < .05, **p <.01.
Significance levels are one-tailed for hypothesized effects and two-tailed for control variables. Standard errors are in parentheses.
Figure 2: Graphical presentation of the interaction between Board Reflexivity and the Board Tenure and Board Advice relationship
-1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1
Low Board Tenure High Board Tenure
B oar d Advi ce Low Board Reflexivity High Board Reflexivity
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5. DISCUSSION
5.1 Conclusion
This thesis started with the notion that outside directors play a crucial role in both monitoring and advising TMT. However, corporate governance research still knows relatively little about the relationship between board tenure and board effectiveness. This thesis was designed to provide a more comprehensive understanding of board effectiveness by separating the two functions of the board. Besides, board reflexivity was introduced as an important influence of board functioning. Thereafter, multiple hypotheses were conducted, where the first propositions related to the main effects of increased board tenure. Increased board tenure was hypothesized to be negatively related to board monitoring, because of reduced independence. Board tenure was also hypothesized to have a positive effect on board advice because of increased knowledge. Furthermore, board reflexivity was hypothesized to weaken the negative relation between board tenure and board monitoring, and, strengthen the positive relation between board tenure and advice.
On the one hand, the results showed that board tenure is positively related to both board monitoring and board advice. This suggests longer-tenured boards both are better able to monitor TMT as providing advice to TMT. However, the positive relationship between board tenure and board monitoring is not as expected. These findings suggest that longer-tenured boards are better able to monitor TMT, which that suggests increased firm-specific knowledge reduces information-asymmetry between the board and TMT, and that firm-specific knowledge does not come at the expense of board independence in the early stages. This finding is consistent with the results of Katz (1982), who found that group performance reflects the learning curve. Board effectiveness should increase with tenure because learning has the potential to increase directors’ task performance. After a certain period of time, this positive effect will decrease, resulting in lower task performance. For this reason, future research should investigate the point where board tenure becomes negative related to monitoring. Furthermore, the results show that board reflexivity does not statistically influence the relationship between board tenure and both board monitoring as board advice.
5.2. Limitations and Future Research
There are some limitations that should be considered at this thesis. First of all, the organizations of our sample have a two-tier board structure. This could give limitations to other countries where the one-tier structure is commonly used. However, the actual
17 differences between a one-tier and a two-tier board structure are quiet small, because the two functions of board monitoring and board advising are performed by outside directors within a two-tier board structure, and are performed by non-executive directors in a one-tier board structure (Hooghiemstra & van Manen, 2004).
Another potential limitation is the generalization to different types of organizations. The sample consists of Dutch housing corporations and educational institutions, which are non-profit organizations. Generalization to other organizations which for instance are profit organizations is limited because of the fundamental differences between these types of organizations. This potentially limits the results of this thesis, but it also gives room for future researchers to examine the relationship between board tenure and both board monitoring and board advice for other types of organizations.
Furthermore, for other types of organizations the results could be different, because of differences in learning needs and costs of entrenchment. For example, a pharmaceutical organization potentially needs more learning then for instance a trading company (ASN Bank, 2016). This result in different learning curves and other costs of entrenchment, which suggests a “one-size-fits-all” regulation, may not lead to the intended outcome.
Finally, this thesis provides some implications for future research. First, if the relationship between board tenure and board effectiveness reflects a trade-off between firm-specific knowledge and costs of entrenchment, then the same trade-off should be reflected in the corporate policies and decisions. Therefore, future research could focus on the different effects of longer-tenured boards on for instance, strategic chance and innovation or financial reporting quality.
Second, this thesis discusses the effects of increased board tenure. Another direction of research on the tenure of outside directors is tenure diversity. For example, future researchers can investigate the relationship between tenure diversity and board monitoring and board advice, or the effects of tenure diversity on other corporate policies and decisions, like financial reporting quality.
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