The value-adding role of supervisory board members in SMEs
Gert Jan Nagel Student number: 1410636
University of Groningen Msc Human Resource Management Faculty of Management and Organization
Netelbosje 2 9747 AE Groningen g.j.nagel@student.rug.nl
Supervisor University: prof mr dr E.M. Kneppers-Heijnert Co-assessor University: dr M.J. Brand
Supervisory/field of study: mr H.J.E. van Balen Stichting Strategisch Ondernemerschap
ABSTRACT
Supervisory boards fulfil three major roles; a monitoring-, advice- and network role. The monitoring role is based on agency theory and the advice role is based on stewardship theory and the resource dependence theory. The resource-based-view is the foundation for the network role of supervisory boards. This study indicates that each particular board role adds value to the company, perceived by 57 owner managers and 32 supervisory board chairmen of 65 different Dutch SMEs. The advice role turned out to be most intensively executed and adds most value. The monitoring role is the second most intensively executed board role. It is also perceived as being the supervisory board role that adds second most value. The network role is perceived as being the least value-adding role and therefore least intensively executed. The relationship between the level of execution of these board roles and its corresponding activities turned out to be positive and significantly related to the added value. This indicates that more intensive execution of each board role adds more value to the company. It could also mean that board roles are more intensively executed when it becomes clear that board role activities add value.
Keywords: supervisory board, owner manager, small and medium-sized enterprises, monitoring, advice, network, innovation
PREFACE
This research concerns the added value of supervisory boards in 65 small and medium-sized enterprises in Friesland, Groningen and Drenthe, which are the three northern provinces of The Netherlands. The foundation called Stichting Strategisch Ondernemerschap started a project to improve the quality of general entrepreneurship in SMEs in these provinces. This foundation is in the possession of a database with potential supervisory board members which are highly qualified. Every company has the opportunity to obtain one or more of these supervisory board members, all through mediation of the Stichting Strategisch Ondernemerschap. The foundation makes entrepreneurs aware of the experience, strategic knowledge and network advantages supervisory board members can offer. Furthermore, it gives companies the opportunity to gain from these advantages. This research is done on behalf of a larger PhD-project and takes place within the boundaries of that particular study. Therefore, several decisions are made in order to act consistently with this PhD-project. These decisions will become clear later. The main goal of this research is to obtain insight into the activities of supervisory board members in northern SMEs and to assess to what extent these activities add value to the company, perceived by the owner manager and chairmen of the supervisory board.
TABLE OF CONTENT
1. INTRODUCTION 5
2. LITERATURE 9
2.1 Supervisory boards in small and medium-sized enterprises 9 2.2 Which roles do supervisory boards exercise according to literature? 11
2.2.1 Agency Theory 11
2.2.2 Stewardship Theory 13
2.2.3 Resource-Based-View 14
2.2.4 Resource dependency theory 16
2.2.5 MAN roles 17
2.3 What is the relationship between the MAN roles and added value
for the company? 17
2.3.1 Company performance and added value 17 2.3.2 Monitoring role, cost reduction and innovation 19 2.3.3 Advice role and decision-making 20 2.3.4 Network role and valuable resources 21 2.3.5 Moderator – and control variables 22
2.3.6 Perceived added value 25
2.3.7 Conceptual model 25
3. RESEARCH METHODOLOGY 27
3.1 Research setting and sample 27
3.2 Population and sample descriptives 27
3.3 Data collection 30
3.4 Measurement of variables 32
3.4.1 Supervisory board roles ` 32
3.4.2 Moderator variables 34
3.4.3 Control variables 34
3.4.4 Perceived added value 34
3.5 Method of analysis 36
4. ANALYSIS AND RESULTS 37
4.1 Descriptive statistics 37
4.2 Multiple regression requirements 39
4.3 Correlation analysis 40
4.4 Multiple regression analysis 41
1. INTRODUCTION
In The Netherlands, as well as in most other countries, small and medium-sized enterprises (SMEs) represent the vast majority (99%) of all companies (OECD, 1998). They are considered to be important engines to stimulate the economic growth of a country (Van Gils, 2005). The contribution of SMEs to economic growth, job creation and innovation has been widely recognised (Audretsch and Keilbach, 2004). In today’s highly changing, complex and unpredictable business environment managers must have the ability and skills to make decision quickly in order to adapt and remain competitive (Sadler-Smith, 2004). In the upcoming parts of this study the term owner manager will be used to indicate the person who is both the manager and in the possession of a majority of shares and therefore owner of the small and medium-sized enterprise. In The Netherlands, this person is often known as the director-majority shareholding. Outside The Netherlands, this term is not well known. Usually, terms like director or managing-director are used. In order to prevent misunderstandings, in the context of SMEs, owner manager is used as one single denomination.
In the context of a highly changing and complex business environment, a well functioning supervisory board could add value to the company by adding product, industry and strategic knowledge. Furthermore, it may offer access to new resources and networks as well as create legitimacy (Van Gils, 2005). According to Jain and Gumpert (1980) small companies must deal with managerial deficiencies. Therefore they stipulate that supervisory board members have to provide expertise to compensate for these deficiencies and help the company to survive in a highly changing business environment.
Empirical research in the field of supervisory boards often contains large listed companies. Therefore, research among SMEs is relatively new, although some research in this field already had been done in Scandinavian countries, Italy (Zona and Zattoni, 2007) and Belgium. In SMEs, corporate governance is often referred to as small business governance. ‘Small business governance is about the position and roles of different actors like general directors, employees, board members and other stakeholders in governing, monitoring and accountability’ (Hessels and Hooge, 2006:5). Huse (2005:42) defines corporate governance ‘as a set of interactions between various internal and external actors in directing a firm for value creation’. In this definition, the value-adding role, which is the focus of this research, is included.
Netherlands, supervisory boards are not always present in small and medium-sized companies because it is not a legal obligation to have one. Chapter 2.1 will elaborate on this. In the literature, the existence of supervisory boards is usually explained by agency theory. Research in this tradition typically emphasizes control mechanisms and formal incentives, with a focus on how boards of directors may protect shareholder interests from opportunistic and self-serving managers through monitoring activities (Van Ees et al. 2009). Central point here is the separation of ownership and control (Jensen and Meckling, 1976; Fama and Jensen, 1983). In this theory the principal-agent relationship is stressed. The shareholders act as principals and managers act as agents. The possible risk for shareholders is that managers have different interests in comparison with themselves. This is called the agency problem and the associated risk is translated into agency costs. Within the agency theory, the goal of supervisory boards is to reduce agency costs. From the owner’s perspective, the supervisory board has a monitoring role to effectively monitor the principal and reduce agency costs (Hillman and Dalziel, 2003).
In large companies, especially in Anglo-Saxon countries, the supervisory board fulfils a role of monitoring the management on behalf of the interests of the shareholder. In small companies like SMEs, where owner manager and is both shareholder and manager, the agency problem is less present. Here, the supervisory board fulfils a broader role (Van Gils, 2005) and monitors on behalf of more interests than solely shareholders’ interests. This will become clear in chapter two.
The main goal of this research is to obtain insight into the roles of the supervisory board members and to assess to what extent the activities, corresponding to the roles, add value to the company (figure 1). This added value is value perceived by both the owner manager and the chairman of the supervisory board. A choice for perceived added value instead of objective measures is made because operationalizing such a complex concept as organizational performance or added value is difficult, even when focusing on economic dimensions. Especially, in privately-held firm like SMEs, such data are frequently unavailable (Dess and Robinson, 1984). Dess and Robinson (1984) prove that subjective perceptions were strongly correlated with objective measures. Therefore, this study makes use of subjective measures, which is the added value of supervisory board activities perceived by owner managers and supervisory board chairmen.
other hand, the owner manager argues that extra resources are needed by using supervisory board member’s networks. In this particular case both supervisory board and owner manager have different opinions about the possible value supervisory board activities can add. In order to align their interests and increase the possible added value that derives from the supervisory board activities, they can discuss which role needs to be executed more often or intensively. This is not possible without knowing each other’s perceptions.
Furthermore, two respondents are used because it is assumed that the reliability of this study and its outcomes might improve by having two respondents for each case instead of only one.
Figure 1: Indication of the focus of this research
This research focuses on the relationship between the supervisory board roles and the perceived added value, which is pointed out by the bold arrow. As a result, the following research question will be answered:
Which roles do supervisory boards exercise in SMEs and to what extent do these roles add value to the company as perceived by owner managers and supervisory boards?
In order to answer this question, the following three sub-questions will be answered:
1. Which roles do supervisory boards exercise according to corporate governance literature? 2. What is the relationship between the roles and added value for the company?
Based on corresponding literature (Huse, 1994; Huse, 2004; Hillmann and Dalziel, 2003; Zahra and Pearce, 1989; Zona and Zattoni, 2007 etc.) a theoretical explanation will be provided for the existence of value-adding roles of supervisory boards. Furthermore, some hypotheses are developed and empirically tested by means of a correlation- and multiple regression analysis. A choice for correlation- and regression analysis instead of for instance case study research has been made because the larger PhD-project, of which this research is part, already uses a case study design. The results of this study will partly be used within the larger PhD research.
This report consists of five chapters. In the next chapter the main literature in the field of supervisory board roles will be discussed. This chapter will conclude with a conceptual model that forms the
2. LITERATURE
This chapter will elaborate on the main literature concerning supervisory board roles. It starts with a small introduction into the topic of supervisory boards in the context of SMEs. Furthermore, based on four different theories, three supervisory board roles are presented. These roles are the monitoring role, advice role and network role. Moreover, the relationship between these roles and the possible added value these roles can have is presented. Consequently, four hypotheses concerning this relationship are developed. Furthermore, some contingencies or moderators are described which are also influencing this relationship. In the end, the conceptual model is presented.
2.1 Supervisory boards in small and medium-sized enterprises
Supervisory boards are not very common in the context of SMEs. In general, the existence of supervisory boards is explained with help of the agency theory. Main assumption is the separation of ownership and control (Jensen and Meckling, 1976). The supervisory board is a supervising mechanism in order to solve the so-called agency problem that arises when agents (managers) behave opportunistically in order to maximize their own utility at the expense of their principals (shareholders). This opportunistic behaviour is the result of diverging interest of shareholders and managers. In order to prevent opportunistic behaviour, the supervisory board monitors the activities of the Board of Management on behalf of the shareholder. With this separation of ownership and control the ‘agency problem’ is tried to be solved.
According to the agency theory, the supervisory board can lower or minimize the agency costs that are the result of these conflicting interests (Hillman and Dalziel, 2003). Although, it has to be mentioned that supervisory board members receive payments. Therefore, supervisory boards also negatively effect cost reduction. Huse (2007) argues that in order to apply the agency theory to the context of SMEs, several adjustments need to be made. Firstly, the existence of asymmetric information streams. Secondly, there is the existence of different principals in the context of SMEs. External stakeholders like banks or venture capitals can act as principals. Thirdly, the fact that SMEs operate in markets where little control is present.
In The Netherlands, under the ‘structure regime’ every company is obliged to have a supervisory board when they meet the following criteria (Bakels et al. 2005; Van Ees et al. 2008):
- having equity capital of at least EUR 16 million
- being required by law to have a workers council (whether at the parent company or a subsidiary)
Companies, like most SMEs, that do not meet all three criteria are not required to install a supervisory board, but may do so on a voluntary basis. Nevertheless, if they opt to implement a supervisory board voluntarily, they must do so in the manner laid down by their regulations (Bakels et al. 2005). As said, this research focuses on small and medium-sized enterprises with a maximum of 99 employees. Within this category, most companies that have a supervisory board have voluntarily implemented it. Within these ‘smaller’ companies, the agency problem is of less concern. Owners and managers are often the same person which means that the principals are also the agents. As a result, conflicting interests and opportunistic behaviour are less present. In SMEs the supervisory board contains a broader role than solely monitoring on behalf of the principals. This will become clear in the upcoming parts of this chapter. Supervisory boards in SMEs usually consist of one or more persons and their members are appointed by the owner manager or general meeting of shareholders.
The definition of small and medium-sized enterprises is a controversial one. According to Nooteboom (2003) SMEs can be defined from two perspectives, namely a quantitative and qualitative approach. Firstly, the quantitative approach defines SMEs as companies with less than a certain number of employees. In The Netherlands, a definition of less than 100 employees is usually used to indicate small and medium-sized enterprises (Compeer et al. 2003). However, in Europe SMEs are usually defined as companies with less than 250 employees (Compeer et al. 2003). This research takes the Dutch definition of SMEs with less than 100 employees. A distinction can also be made between small companies and medium-sized companies. Companies with less than ten employees are considered to be small companies. Companies with a number of employees between ten and 100 are medium-sized companies (Compeer et al. 2003).
Secondly, from the qualitative perspective, SMEs are defined as companies with small market share and personal communication. Furthermore, they are often independently operating (Nooteboom, 2003). General agreements have not been made and discussion about the right definition or distinction between small- and medium-sized companies is also present here.
2.2 Which roles do supervisory boards exercise according to literature?
This section describes three supervisory board roles based on four different theories. The monitoring role, advice role and network role are derived from agency theory, stewardship theory, resource-based-view and resource dependency theory (Jensen and Meckling, 1976; Fama and Jensen, 1983; Hooge and Hessels, 2006; Hillman and Dalziel, 2003; Huse, 2007; Arthurs and Busenitz, 2003; Boxall and Purcell, 2003; Zahra and Filatotchev, 2004; Pfeffer and Salancik, 1978; Huse, 2007; Wijbenga et al. 2007; McNulty and Pettigrew, 1999).
2.2.1 Agency theory
The basic assumption of agency theory is the separation of ownership and control in order to protect shareholders interests from opportunistic and self-serving managers (Jensen and Meckling, 1976; Fama and Jensen, 1983). Contradictory interests of shareholders (owner) and managers (control) are a common problem in this principal-agent relationship (Jensen and Meckling, 1976). The costs associated with this problem are referred to as agency-costs. These costs are incurred by the principals when the interests of principals and agents diverge, because given the opportunity, agents will rationally maximize their own utility at the expense of their principals. These agency-costs can be minimized or at least lowered by implementing monitoring mechanism as a supervisory board (Hillman and Dalziel, 2003). There are other instruments to lower agency costs, for instance, imposing a payment or bonus structure that prevents managers from opportunistic behaviour and are aimed at aligning principal-agent interests (Huse, 2004). Nevertheless, the model of the agent remains as inherently opportunistic, in that there is an ever present possibility of opportunism, because controls are imperfect.
From the shareholders’ point of view, the supervisory board is a mechanism that monitors the management. As a result of effective monitoring, agency-costs can be reduced and therefore the company performance improves (Hillman and Dalziel, 2003). The board is seen as an efficient and effective solution to the agency problem (Sundaramurthy et al., 1996). However, extra costs are also associated with using supervisory boards as a monitoring mechanism. For example, the costs associated with received payments of supervisory board members. Furthermore, there are costs as a consequence of planned meetings between supervisory board and management.
to the inefficient use of resources and the exploitation of the principals (Williamson, 1988). Secondly, in addition to the principals as described by the principal-agent theory, other stakeholders like banks or venture-capitalists can be perceived as ‘principals’ and are present in the context of SMEs (Huse, 2007).
Hooge and Hessels (2006) indicate that the monitoring-role is differently executed within the context of SMEs, as compared to larger businesses. It is still the same role, but acted on behalf of more stakeholders than shareholders alone. In small firms, however, the owner manager usually owns a major part of the share capital. Therefore, shareholders and managers are often the same individuals. As a consequence, their interests coincide and there is less of an agency problem.
According to Hooge and Hessels (2007) the agency conflict indeed is a central issue in SMEs. Whether agency theory is applicable in the context of SMEs depends on the degree to which the principal-agent relationship can be applied to other stakeholders. Because usually small companies are not in the possession of large equity capital, banks act as external financers (Pettit and Singer, 1985). From that perspective, the bank can act as a principal. On behalf of these principals, the supervisory board monitors the management in order to prevent opportunistic behaviour in order to, in the end, improve company performance. Pettigrew and Singer (1985) also argue that besides shareholders, there exist other residual claimants in small firms, for example, employees, local community and creditors as financial institutions and suppliers. Small firms will also, to a higher degree than larger firms, be characterized by debt financing (Pettigrew and Singer, 1985). The supervisory board is a monitoring mechanism on behalf of the interests of all these different stakeholders. Therefore, the monitoring role, as compared to the initial monitoring role in large corporations, has the same purpose but acts on behalf of different stakeholders.
Before continuing, it has to be mentioned that excessive monitoring can have an adverse effect on the performance of managers and ultimately on the overall company performance. Wijbenga et al. (2007) discuss the potentially negative effects of too much monitoring which is associated with lower performance. Too many monitoring activities, exercised by the supervisory board, might be interpreted as a signal for distrust of the board (Wijbenga et al. 2007). This can give rise to low management morale and attempts to inhibit the functioning of internal corporate governance mechanisms, e.g. via the manipulation of information (Roberts et al. 2005). As a result, this might consequently damage firm performance. Furthermore, Francis and Smith (1994) argue that too much monitoring inhibits innovation. Especially in technological sectors where innovation is important, too much monitoring prevents entrepreneurs from being innovative.
the context of SMEs, supervisory boards execute a monitoring role (Huse, 2007; Hooge and Hessels, 2007; (Jensen and Meckling, 1976; Hillman and Dalziel, 2003).
2.2.2 Stewardship theory
In SMEs, diverging interests in the principal-agent relationship, as assumed in agency theory, are not always present. Whereas agency theory has been developed in the context of publicly traded firms with managers with limited equity stake, it does not always fit the context of SMEs (Arthurs and Busenitz, 2003). Therefore, additional theory is needed to explain other types of human behaviour. Stewardship theory highlights that the principal (shareholders) and steward (managers) can have similar interests (Arthurs and Busenitz, 2003). Stewardship theory argues that individuals can ‘turn off’ self-interest. According to Davis et al. 1997: 21) ‘stewardship theory defines situations in which managers are not motivated by individual goals, but rather are stewards whose motives are aligned with the objectives of their principals. This alignment of goals is called goal congruence and therefore both the principal and agent profit from each other. This goal congruence is especially present in the context of SMEs where managers and owners are often the same persons with the same interests. Although, the presence of goal congruence does not count for all SMEs. Nevertheless, stewardship theory argues that when goal congruence is present, agency theory is silent. On the other hand, when there is goal incongruence, the agency theory is applicable.
The role of the supervisory board, according to this stewardship theory, is to give advice and support the management in order to achieve their aligned goals (Hillman and Dalziel, 2003). Advice can be given on both strategic and operational level. According to the stewardship theory, the supervisory board has an external focus on the environment, together with an internal focus to support, advice and coach the owner manager (Huse, 2007). A good cooperation between supervisory board and management is necessary to execute this advisor role in a good manner and contribute to better company performance. Supervisory board members can help to formulate both long- and short term goals by making use of their expertise and therefore execute an advisor role.
In sum, based on stewardship theory, a second role of the supervisory board can be distinguished. Where agency theory focuses on goal incongruence and emphasises the original monitoring role of the board, stewardship theory emphasises the potential existence of goal congruence. As a result, the supervisory board will fulfil a broader role. Supervisory board members will cooperate with the managers and give advice on both strategic and operational issues in order to achieve the shared goals. In this study, this is called the advice role.
2.2.3 Resource-Based-View (RBV)
The origin of the Resource-Based-View (RBV) lies in a leading book of Edith Penrose (1959) in the strategy and management literature. According to Penrose (1959: 31) ‘an organization is an administrative organization and a collection of productive resources’. She distinguishes between physical- and human resources. Furthermore, Penrose emphasizes the importance of the knowledge and experience of managers in order to achieve competitive advantages. Her research made clear that ‘firms are heterogeneous’ (Penrose, 1959: 74). Regardless of any type of competition, every firm is unique. As a result of this heterogeneity, companies perform differently.
According to the RBV, the quality of the management can be important differentiating factor that affects the overall company performance (Boxall and Purcell, 2003). According to Wernerfelt (1984), the company is a bundling of resources. Specific knowledge and skills of the management are examples of intangible resources (Boxall and Purcell, 2003) Tangible resources can be financial assets of specific technology. Barney (1991) argues that the main goal is to search for those conditions that make resources inimitable and non-substitutable.
From a RBV, it can be argued that the unique combination of expertise and wider experience of the supervisory board and the quality of top management will positively contribute to the strategic decision-making and ultimately to successful company performance (Hillman and Dalziel, 2003; Wijbenga et al. 2007). According to the RBV, human capital is the most prominent resource of the supervisory board. Barney (1991) argues that resources exist for a great part of human capital or so called employee know-how. Experience, intelligence, specific insights and networks of individual managers of supervisory board members are examples of human capital (Barney, 1991). In this way, the supervisory board is a ‘service and strategic’ resource for the company (Huse, 2007)
Supervisory board members can make use of their expertise and capabilities in strategy development by giving advice and helping the management in setting both long-term and short-term goals. These capabilities are defined as “the bundles of complementary resources… administrative skills, routines, and physical assets with the flexibility to generate adaptive and valuable inputs (Miller, 2003: 964). Various observers have noted that entrepreneurial firms like SMEs have to maintain flexible in strategic decision-making by considering multiple approaches to resource assembly (Zahra and Filatotchev, 2004). According to Huber (1991) this requires organizational learning, meaning the acquisition of new knowledge and expertise. With the new capabilities of supervisory board members, the firm can “stretch its cognitive map” (Zahra and Filatotchev, 2004: 888) and begin to explore new strategic arenas and alternative ways of doing things. The board members can play an important role in helping the firm to expand its knowledge base. Westhead (1999) argues that non-executive independent directors, like in supervisory boards, play an important role in gaining access to resources from external sources and mapping firms’ strategic decisions.
From the perspective of the RBV, the supervisory board itself is an internally focused instrument. The board is seen as an inside instrument that a company can gain competitive advantage from (Penrose, 1959, Barney, 1991). Supervisory board members that provide access to valuable-, scarce-, expensive-or inimitable resources can be of great value fexpensive-or each company in comparison to its competitexpensive-ors. According to Huse (2007) the supervisory board is in this way a strategic resource. McNulty and Pettigrew (1999) refer to this strategic role, as those activities that either shape the strategic decision, or shape the content, context and conduct of strategy.
2.2.4 Resource Dependence theory
Resource Dependence theory suggests that supervisory boards, are effective mechanisms which help the firm to manage external resource dependencies (Pfeffer and Salancik, 1978). Daily et al. 2003: 372) argues that supervisory boards play the role of ‘boundary spanners’. They provide or facilitate access to external resources which are critical to the entrepreneurial firm’s success (Wijbenga et al. 2007). These external resources can be suppliers, customers, investors, regulatory agencies etc. (Wijbenga et al. 2007). By providing access to these new resources, supervisory board members play a crucial role in introducing new products and finding alternative financial resources.
According to Resource Dependence theory, the supervisory board can act as a bridge between the external environment through a network of social- and business relations (Pfeffer and Salancik, 1978). A firm has more probability of survival when it has links with its environment. Networks can ensure access to necessary resources. Through engaging in networks and relations, external influences like competition and regulations can be dealt with (Hillmann and Dalziel, 2003; Boyd, 1990). Zahra and Pearce (1989) argue that the provision of resources is an important role of supervisory boards. ‘The provision of resources includes a large variety of activities, ranging from providing a firm legitimacy, expertise, and counsel, and linking the firm to external stakeholders, and facilitating the firm’s access to resources to aiding in the formulation of strategy’ (Hillman and Dalziel, 2003: 386).
Hillman and Dalziel (2003) argue that competitors, regulations and other external powers have influence on the company and its performance. In order to deal with these powers, networks can be deployed. By making use of its network, the supervisory board can manage uncertainties from the market and environment (Boyd, 1990). This makes clear that a core competence of the supervisory board member is a high degree of environmental sensibility. Board members are not only bringing in knowledge and human capital, but also new relationships and social capital (Hillman and Dalziel, 2003). Social capital is a very dynamic concept: “Often who you know really is more important than
what you know, but who you know influences what you know” (Huse, 2007:46).
2.2.5 MAN roles
To sum up, based on the above described literature a general and covering acronym can be developed. This acronym consists of three supervisory board roles:
1. monitoring role (M) 2. advice role (A) 3. network role (N)
These board roles are the central focus of this research. As already mentioned the goal of this study is to obtain insight into these roles and to asses to what extent the activities, belonging to these roles, create value and lead to better company performance.
2.3 What is the relationship between the MAN roles and added value for the company?
The relationship between exercising the supervisory board roles and the potential value that it might bring is the central focus here. The described literature (Arthurs and Busenitz, 2003; Hillman and Dalziel, 2003; Gabrielsson and Huse, 2002; Pearce and Zahra, 1991; Sundaramurthy, 1996; Wijbenga et al. 2007 etc.) assumes that the MAN roles are potential value creators in terms of cost reductions, a higher quality of short- and long-term decision-making and more access to valuable resources.
2.3.1 Company performance and added value
board are asked about their perceptions of the importance and satisfaction of several supervisory board roles and corresponding activities. The added value each of each role is measured by combining both the perceived ‘level of importance’ and perceived ‘level of satisfaction’.
The aim of this study is to get insight in whether supervisory board activities add value to the company. For decades, discussion is going on about the conclusions drawn on research about the direct links between board roles and firm performance (Van Ees et al, 2008). The evidence concerning direct relationships between board roles and corporate performance is scant, ambiguous and not conclusive (Dalton et al, 1998). Van Ees et al. (2008) argue that the so-called black box has to be opened in such a way that meaningful insights can be generated. They focused on psychological processes as mediators between board roles and company performance.
Figure 2: Mediating outcomes
Figure 2 assumes that the execution of the supervisory board role activities is affecting the company performance through the mediating outcomes. If these mediating outcomes add value, they contribute to a better company performance. If they add no value or even have negative effects, they negatively affect the company performance. The following parts will describe the mediating outcomes and provide insight into the board role outcomes and added value which ultimately improve organizational performance.
It has to be mentioned, that these mediating outcomes are not part of the analysis. The mediating outcomes are just there to indicate that based on literature (Hillman and Dalziel, 2003; Sundaramurthy, 1996; Arthurs and Busenitz, 2003; Wijbenga et al. 2007; Harrison and Mason, 1992 etc.) each role and its activities are possible value creators for the company. Because of the unavailability of objective company performance measures and owner manager’s reluctance to provide such performance-related data, a more general application of ‘added value’ has been used. Resumed, the extent to which the owner manager and chairman of the supervisory board are satisfied with the execution of each role, together with the ‘level of importance’ of this role, indicates the added value the execution of the
supervisory board role has. Moreover, it is a component of both the perceived level of importance of the role and the perceived level of satisfaction about the way each role is executed.
2.3.2 Monitoring role, cost reduction and innovation
The supervisory board’s main role is monitoring the management of SMEs. In order to deal with the agency problem by preventing shareholders from opportunistic and self-serving behaviour of the owner manager, effective monitoring is necessary. As a result, agency-costs can be reduced (Hillman and Dalziel, 2003). Sundaramurthy (1996) argues that in this way the board is seen as an efficient and effective solution to the agency problem. Flynn (2000) also argues that while entrepreneurs tend to be particularly oriented toward the primary processes of the firm, the monitoring and cost controlling activities of supervisory boards may help the entrepreneurial firm to operate more efficiently. They often demand a tight discipline of procedures in order to direct the manager to more than just focussing on short-term profits. Furthermore, in the context of SMEs, the monitoring role includes some extra other monitoring activities like monitoring operational developments and product-market opportunities which are important in the field of innovation (Harrison and Mason, 1992; Barnhardt et al. 1994; Gabrielsson and Huse, 2002; Wijbenga et al. 2007). These monitoring activities affect, or at least are meant to affect, the operational performance in a positive manner. Consequently, it contributes to the overall company performance.
As pointed out earlier, the agency conflict between principal and agent is not always applicable in the context of SMEs. Owners and managers are often the same persons, so their interests are usually aligned. Nevertheless, Hooge and Hessels (2007) argue that the agency conflict indeed is a central issue in SMEs. Whether agency theory is applicable in the context of SMEs depends on the degree to which the principal-agent relationship can be applied to other stakeholders (Hooge and Hessels, 2007). Therefore, the monitoring role of the supervisory board is executed on behalf of more than shareholders’ interests alone. Other stakeholders like financial institutions and governments can act as principals as well.
As becomes clear, exercising the monitoring role of the supervisory board adds value to the company through cost reduction and helps the entrepreneurial firm to operate more efficiently. Furthermore, the execution of monitoring activities adds value by monitoring the owner manager on behalf of the interests of other stakeholders than shareholders alone. Therefore, the following hypothesis is developed:
Besides the positive effect of cost reduction, there are some downsides regarding the monitoring role which are interested to investigate. Wijbenga et al. (2007) emphasises the potentially negative effects of excessive monitoring. Excessive monitoring by the supervisory board might be interpreted as a signal for distrust of the board (Wijbenga et al. 2007). This can give rise to low management morale and attempts to inhibit the functioning of internal corporate governance mechanisms like the excessive usage of equity based compensation for the owner manager, e.g. via the manipulation of information (Roberts et al. 2005).
The board monitors operational activities and market-opportunities which are important in the field of innovation (Harrison and Mason, 1992; Barnhardt et al. 1994; Gabrielsson and Huse, 2002; Wijbenga et al. 2007). Innovation that links market and technological opportunities is central to entrepreneurship (Kirzner, 1997) especially in branches of industry where innovation is very important. Successful innovation is the basis for competitive advantage, which in turn leads to above-average rents. Growth and further innovation are the upcoming results (Markman et al. 2001). Thus, ‘a firm’s ability to manage innovation leads to sustainable competitive advantage, whereas low or failed innovation may mean early failure and bankruptcy’ (Markman et al. 2001: 279). According to Markman et al. (2001: 277) ‘innovation is the creation of new products or processes that create value’. Both product and process innovation have a strong influence on performance, particularly, though not exclusively, for entrepreneurial firms like SMEs (Markman et al. 2001). Many SMEs are motivated to innovate because of high competition and blurring industry boundaries.
Francis and Smith (1994) argue that too much monitoring might inhibit innovation. They assume that there is a negative relationship between exercising the monitoring role and the level of innovation. Their research indicates that excessive monitoring prevents entrepreneurs from generating new ideas and being innovative, especially in sectors where innovation is important like the medical sector. As became clear, innovation in SMEs is very important and could lead to sustainable competitive advantage (Markman et al. 2001). Therefore, the following hypothesis is developed:
H1b: More intensive execution of the monitoring role lowers the level of innovation
2.3.3 Advice role and decision-making
level (Hillman and Dalziel, 2003). Board members give advice in the field of management issues, legal issues, financial issues, personnel issues, technical issues and even market issues (Pearce and Zahra, 1991; Westphal 1999).
From a resource-based-view, it is assumed that the unique combination of expertise and wider experience of the board and the quality of top management will positively contribute to the strategic decision-making and ultimately to successful company performance (Hillman and Dalziel, 2003; Wijbenga et al. 2007). Supervisory boards give advice on strategic level and help formulating competitive strategies that produce sustainable competitive advantage. According to Wijbenga et al. (2003) the advice role is also about giving advice on a strategic level. Propose strategies and evaluating strategic decisions are important here. Wijbenga et al. (2003) argue that these value-adding activities have an impact on the firm’s performance by implementing a given competitive strategy more effectively. This adds value and ultimately improves the overall company performance. Furthermore, McNulty and Pettigrew (1999) refer to an extra activity of supervisory boards which are activities that either shape strategic decisions, or shape the content, context and conduct of strategy (Van Ees et al. 2008). As a result, a context is shaped were better strategic decisions are made.
In sum, supervisory board members can add value by making use of their expertise and capabilities by giving advice and helping the management in setting both long-term and short-term goals. The advice role helps the owner manager to deal with both strategic- and operation problems in cases where the owner manager’s knowledge or expertise lacks (Harrison and Mason, 1992). Moreover, with the expertise and advice of supervisory board members, operational activities and strategic goals are more easily reached what positively contributes to organizational performance. Therefore, the following hypothesis is developed:
H2: More intensive execution of the advice role leads to more perceived added value
2.3.4 Network role and valuable resources
theory, the board’s network role is of significant importance. Board members provide or facilitate access to external resources which are critical to the entrepreneurial firm’s success (Wijbenga et al., 2007). These external resources can be suppliers, customers, investors, regulatory agencies etc. (Wijbenga et al., 2007). By providing access to these new resources, the board plays a crucial role in introducing new products and finding alternative financial resources. Moreover, the network role and accompanied value-adding activities like resource acquisition, strengthen the firm’s capabilities and resources, and thus impact upon the firm’s performance indirectly (Wijbenga et al., 2003).
Summarizing, the supervisory board’s network role adds value by providing access to new resources. Resources are the foundation of a firm’s capabilities, which are the main source of competitive advantage. Therefore, the following hypothesis is developed:
H3: More intensive execution of the network role leads to more perceived added value
2.3.5 Moderator - and control variables
In the following part, two moderators and two control variables are distinguished based on literature (Huse, 2005; Van Ees et al., 2008; Berggren et al., 2008; Eisenhardt et al., 1997; Blau and Schoenherr, 1971). As figure 3 assumes, the level of trust and conflict between supervisory board members and owner managers affects the way the supervisory board roles are executed and therefore affect the mediating outcomes (Huse, 2005). As a result of board role activities, mediating outcomes as cost reduction or access to new resources arise. The perceptions of both supervisory board members and owner managers concerning the added value that arises from these activities are based on these mediating outcomes. For instance, if cost reduction is a result of effectively executing the monitoring role, owner managers or supervisory board members probably have a positive perception about the added value that arises from executing the monitoring role.
Figure 3: Variables of this research
MAN roles Monitoring role Advice role Network role
Finally, as described by the above literature, the level of innovation may be influenced by executing the board roles, especially the monitoring role. Furthermore, two control variables are included. Company size and the type of industry the company operates in are directly or indirectly influencing the way each board role is executed and the added value that arises from the board role activities. Ultimately, the perceived added value might be influenced. Therefore, these additional variables are taken into account in this research.
Trust
According to Huse (2005) trust between board members and managers is a prime condition for both to function effectively. Trust is defined in several ways. Mayer et al. (1995: 712) defines trust as ‘the willingness to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party’. This definition is consistent with earlier conceptualizations of trust proposed by influential trust theorists, Deutsch (1962) and Zand (1972). Rousseau et al. (1998: 395) drew on Mayer et al.’s (1995) work to define trust as, “…a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behaviour of another”.
Currall and Judge (1995:151) definee trust as ‘an individual’s behavioural reliance on another person under a condition of risk’. Gillespie (2003: 10) identifies two domains of trust behaviour. Firstly,
reliance that is, “… relying on another’s skills, knowledge, judgments or actions including delegating
and giving autonomy. Secondly, disclosure that is, “…sharing work-related or personal information of a sensitive nature”. In this research we only take into account reliance trust. This is done in order to prevent a questionnaire which is too extensive. A very extensive questionnaire will probably be an extra burden to complete the questionnaire and might lower the response rate.
Van Ees et al. (2008) argue that trust may make supervisory board members and owner managers more confident to share information and knowledge and make them more active in board decision-making. A high degree of trust between owner manager and the supervisory board facilitates their cooperation. As a result of their improved cooperation, the added value that arises from executing the board role activities might rise. This affects company performance (Berggren et al. 2008). Based on this, it is expected that trust affects the relationship between exercising the board roles and the mediating outcomes like access to resources, better decision-making etc. Trust plays a facilitating role here and positively moderates the relationship between exercising the board roles and the benefits that arise from exercising those roles. It is assumed, that a high degree of trust between supervisory board and owner manager positively contributes to the cooperation between both entities.
counterargument may be that rust may lead to a certain complacency and even cognitive blindness when supervisors are familiar with the managers” (Van Ees et al., 2008: 90). This might negatively affect the execution of the monitoring role. Therefore, the level of trust is taken into account in this research.
Conflict
Conflict is the second variable that moderates the relationship between exercising the board roles and the added value that arises from it. It refers to disagreements between supervisory board members and owner manager. There may be different opinions or ideas. Generally, two types of conflict can be distinguished which are conflict over interests and cognitive conflicts (Septer and Dijkstra, 2008). Conflict over interests occurs when actors have different priorities concerning ultimate goals. Cognitive conflict occurs if actors have different causal beliefs about how effective a certain means is to reaching those goals (Septer and Dijkstra, 2008).
Cognitive conflict adds to the quality of strategic decision-making in uncertain environments (Van Ees, 2008). Cognitive conflict calls for critical thinking and results in more alternatives and better evaluation of these alternatives. Finally it may lead to higher quality decision making processes (Eisenhardt et al. 1997). The essence of the relationship between the level of conflict and the execution of the board roles is somewhat different than with trust. The presence of conflict is fine, but too much conflict may not be beneficial at all. There is a non-linear relationship. Based on this, it is assumed that conflict affects the cooperation between supervisory board and manager. It influences the execution of the board roles and therefore also the added value that arises from these roles. Ultimately, firm performance is influenced.
Company size
As in many studies, company size is taken into account as a control variable. According to Blau and Schoenherr (1971) organizational size may affect the complexity and style of strategy-making processes and influences the added value and ultimately the company performance.
Industry
2.3.6 Perceived added value
Chapter 2.3.1 - 2.3.4 already indicated that executing the activities concerning the supervisory board roles can lead to added value for the company. For instance, agency costs can be reduced by effectively executing the monitoring role (Hillman and Dalziel, 2003). Added value that arises from board role activities is measured by the perception(s) of owner managers and supervisory board chairmen. To clarify, there are three different added values. Each role and its corresponding activities add a particular and different kind of value. For instance, the value that arises from executing monitoring activities is a different kind of value that comes from executing activities concerning the advice role. A more detailed description of this procedure is pointed out in the research methodology section.
2.3.7 Conceptual model
Figure 4 presents the conceptual model which is the foundation of this research. The conceptual model distinguishes 9 different variables. Firstly, the dependent variable ‘perceived added value’. As becomes clear from the arrow, perceived added value is influenced by the mediating outcomes. Moreover, these mediating outcomes are the result of executing the three board roles and its corresponding activities. Therefore, the dotted arrow indicates that added value arises through the mediating outcomes, which are the result of executing the board roles. The board roles are independent variables. Two moderator variables, that influence or moderate the relationship between the board roles and the mediating outcomes, are included. Furthermore, two control variables are present.
Figure 4: Conceptual model
As mentioned, the mediating outcomes are here to indicate that, based on the described literature, exercising the MAN roles can add value to the company. However, in the empirical part of this research, concrete mediating outcomes like ‘cost reduction’, ‘better decision-making’ and ‘more
MAN roles Monitoring role Advice role Network role
3. RESEARCH METHODOLOGY
This chapter will describe the research setting, sample and data collection of this research. Furthermore, the method of measurement of each variable is described.
3.1 Research setting and sample
This empirical research is part of a larger PhD-research on supervisory board roles. Mostly, research in this field has been conducted within the context of large companies. Research about supervisory board roles within SMEs is a relatively new area of research.
Data comes from a sample among a population of 636 SMEs with all a registered supervisory board at the Chamber of Commerce. In the first instance, the total population existed of 673 companies. However, some companies were excluded for the fact that they are cooperative societies or foundations. Furthermore, in order to make sure no one would be notified twice, owner managers who were represented more than once were excluded. As a result, the final sample existed of 636 usable SMEs.
All companies are located in the provinces Groningen, Friesland and Drenthe and have a maximum of 99 employees. Based on the literature study, four hypotheses are developed and will be tested. The hypotheses will be tested by means of correlation and multiple regression analyses. A correlation and regression analysis is used in order to estimate a linear relationship between the dependent variable and one or more independent variables (Brewerton & Millward, 2001). The dependent variables in this research are the ‘perceived added value’ and ‘level of innovation’. The independent variables of this research are the three different board roles and the moderator- and control variables.
Overall, this research can be considered as being a deductive research because a conceptual framework and theoretical structure has been developed prior to its testing through empirical observation (Gill and Johnson, 2002).
3.2 Population and sample descriptives
Based on the three available criteria among the total population of 636 SMEs, we can conclude that 96 % are private limited companies and 4 % are public limited companies. These percentages are closely comparable with the sample (94 % private and 6 % public). When taking a look at the different industries, it is interesting to see that the three biggest represented groups (2, 8 and 9) among the population are also the biggest groups among the sample. Obviously, the biggest represented type of industry is ‘financial services’. This is the case within the population as well as in the sample. In order to be able to include the variable ‘type of industry’ in the regression analysis, this variable is turned into a dummy variable. The original 12 different types of industry are brought back to only 2 classes. Since the role of supervisory boards, especially monitoring, is particularly a hot issue in the financial industry and this is also the biggest represented group, a choice has been made for ‘financial services’ to be one distinctive class. The other types of industry are all taken together. Moreover, this makes is possible to compare the results between the two groups and to investigate whether the role of supervisory boards is different within the financial sector. Within the population 44.5% of all companies are operating in ‘financial services’ and 55.5% are operating in other types of industries. Within the sample 36% of all companies are operating in ‘financial services’ and 64% in other industries.
Finally, table 1 shows that the distribution of companies between provinces is almost similar among both the population and the sample.
Population (636) Sample (65) Type of
company
1. Private limited company 96 % 94 %
2. Public limited company 4 % 6 %
Industry 1. Agricultural sector 1.7 % 5.6 %
2. Industrial sector 11 % 16.9 %
3. Production/distribution/trade of electricity/natural gas/ water
0.3 % 2.2 %
4. Building industry 2.7 % 4.5 %
5. Consumer product repair and trade 8.3 % 6.7 %
6. Catering industry 1.8 % 2.2 %
7. Traffic, storage and communication
3 % 4.5 %
8. Rent/trade of real estate, movable
property and services to business 20.6 % 15.5 %
9. Financial services 44.5 % 36 %
10. Education 0.8 % 0 %
11. Healthcare 1.1 % 2.2 %
12. Environmental services, culture and recreation
4.2 % 3.8 %
Province 1. Groningen 35 % 34.8 %
2. Friesland 46.6 % 46.1 %
3. Drenthe 21 % 19.1 %
Overall, the size of all companies varies from 1 to 99 employees. It is not possible to compare company sizes because exact figures or classes about company sizes among the population are not available. The different types of industry were originally classified according to the classification used by the Chamber of Commerce (BIK, 2005). In the analysis, two different classes are used to indicate the ‘type of industry’. One class is representing the companies that are operating within ‘financial services’ and one class that represents the companies that operate in other types of industry.
In order to analyse whether there is non-response distortion, the difference between early- and late response analysed (Lahaut et al. 2003). Early respondents are those who returned their questionnaire between April 7thand May 7th. As a result of the low response, phone calls were made on May 7th, 8th and 9th. Late respondents are those who returned after the phone calls. All variables that are part of this study (see conceptual model) are analysed by performing a Levene’s Test for Equality of Variances and T-Test for Equality of Means. The results indicate that the means of all variables of the early respondents and late respondents do not significantly differ. Therefore, it can be assumed that the non-response bias is not substantially influencing the results of this study.
Next to the answers derived from the questionnaires, the owner manager’s perception about which supervisory board role was most intensively executed and which board role added the most and least value was asked during the phone calls. A number of 64 owner managers were willing to answer this open-ended question. Table 2 shows the results in comparison with the answers of the 89 respondents to the same open-ended question that was in the questionnaire.
Non-respondents N = 64 Respondents N = 89
Owner managers Owner managers Chairmen Most intensively
executed
Monitoring role 38 = 59.3% 24 = 28% 14 = 16.2%
Advice role 26 = 40.7% 28 = 32.5% 16 = 18.6%
Network role 0 = 0% 4 = 4.7% 0 = 0%
Most added value Monitoring role 20 = 31.2% 16 = 18.6% 10 = 11.6%
Advice Role 44 = 68.8% 39 = 45.3% 20 = 23.3%
Network role 0 = 0% 1 = 1.2% 0 = 0%
Least added value Monitoring role 0 = 0% 5 = 5.8% 1 = 1.2%
Advice role 0 = 0% 3 = 3.5% 2 = 2.3%
Network role 64 = 100% 48 = 55.8% 27 = 31.4%
Table 2: results open-ended questions
managers, who answered this question by phone, indicate that the monitoring role is most intensively executed (59.3%). On the other hand, the owner managers and chairmen who filled in the questionnaire, point out the advice role as being most intensively executed (32.5%). A possible explanation could be the fact that these owner managers have no clear perception about the activities concerning the advice- and network role. As a result, they might stick to their original and familiar idea about the monitoring role that is often directly linked to the role of supervisory boards. Furthermore, both non-respondents (68.8%) and respondents (45.3% and 23.3%) indicate that the advice role adds most value. Moreover, they both perceive the network role as the least value-adding role.
Since the concerning data is of nominal measurement level, a Chi-Square test is used to analyse whether the answers of early- and late respondents significantly differ. Since only owner managers are contacted by phone, only the answers of owner managers are compared. The results indicate that early-and late respondents’ answers significantly differ concerning the questions about what supervisory board role is most intensively executed (p-value of .023) and what board role adds least value (p-value of .024). The answers concerning which board role adds most value (p-value of .467) do not significantly differ among early- and late respondents. Nevertheless, these results indicate a certain degree of non-response distortion.
Summarizing, based on the results of the Levene’s Test for Equality of Variances and T-Test for Equality of Means, it can be assumed that the sample of 65 SMEs and its 89 respondents is on the one hand a proper representation of the population of 636 SMEs. On the other hand, the results on the open-questions and the Chi Square Test show some opposite results. Therefore, this certain degree of non-response distortion has to be taken into account when drawing conclusion in the end.
3.3 Data collection
The data for this study comes from a questionnaire (appendix 1). This questionnaire is based on the described literature and is sent by postal mail to both the owner manager and the chairman of the supervisory board. The total number of sent questionnaires was 1272. The questionnaires for both the owner manager and supervisory board chairman are sent in one envelope but are slightly different (see appendix 1). This in order to make the questionnaire clearer, shorter, more pleasant and consequently solely applicable to the corresponding respondent.
Before sending the questionnaires, the companies were informed by a phone call. Phone numbers were derived from the database called DM Markselect. A choice has been made for sending the questionnaires by postal mail because email addresses were not available. Complete anonymity was guaranteed to the respondents in advance. This is done in order to cope with the problem that board members are very reluctant to cooperate with this kind of research. For instance, because identifiable information about their personal functioning in boards can be used in court (Van Ees et al., 2008). The questionnaires were coded in order to follow non-response and to be able to assign owner manager and supervisory board chairmen to the same company in order to compare their perceptions.
The first mailing round, from April 7th2009 until May 7th2009, resulted in a response of 70 usable questionnaires; a response rate of only 5.5%. Four returned questionnaires turned out to be not usable because the respondent had only answered about one-third of the questions. Subsequently, on May 7th, 8th, and 9thall remaining companies who did not return the questionnaire were approached by phone. This second attempt resulted in another 19 usable questionnaires. As a result, the total number of usable questionnaires is 89; 57 of owner managers (response rate: 8.9%) and 32 of supervisory board chairmen (response rate: 5%). The total response rate was 7%. A closer look at the data concludes that 53 owner managers are male and only 3 owner managers are female. Furthermore, 29 male chairmen have responded and only 2 female chairmen. Two respondents have not defined their gender type. From 24 companies both the owner manager and supervisory board chairmen returned their questionnaire. A comparison of the perceptions of both persons from the same company is possible here. Since these respondents are related to each other and therefore are paired samples has to be taken into account in the analysis. This comparison will be done in the analysis part.
Data inspection indicates that 86% of the 65 companies have supervisory boards of one, two or three board members. A total number of 14 companies have a supervisory board that contains of only one person. Furthermore, 25 companies have supervisory boards of 2 persons and 17 companies have supervisory boards on 3 persons. Moreover, one supervisory board even contains of 9 board members. This is uncommon in small and medium-sized enterprises with a number of less than 100 employees. Usually, supervisory boards contain of two of three persons. After investigating their website, it became clear that this company is related to a firm that recently merged. This might be the reason for such a relatively big supervisory board.
though, the database of the Chamber of Commerce indicated the opposite. Furthermore, five companies returned a blank questionnaire because it was sent to the wrong address. Moreover, 12 owner managers were no longer working for the relevant company. One person actually already died. Three companies were already bankrupt and one company was recently taken over. Furthermore, two were private limited companies where the owner manager’s pension was stationed. These companies have no commercial activities and no supervisory board. Based on this information, it can be concluded that the Chamber of Commerce’s database was not totally up-to-date and reliable. As a result, a total number of 33 companies were not supposed to be part of this survey. These 33 companies represent 66 potential respondents. After correction, the final response rate is 7.4%. Several other reasons for non-response were found. Eight owner managers were on holiday and two were suffering from a disease. On the other hand, the most prominent reason was self selection. The owner manager pointed out that they were ‘too busy’, so not interested to participate. Nine companies indicated that they would like to receive the questionnaire a second time. Ultimately, two of them still returned the questionnaire. As already mentioned, 19 usable questionnaires were returned as a result of the phone calls.
3.4 Measurement of variables
All variables in the analysis, except the control variables, are constructed on the basis of statements in the questionnaire. All statements are measured on a Likert scale ranging from 1 to 5 (see appendix 1). The respondents were asked to indicate the extent to which they agree or disagree with particular statements about board role activities. Furthermore, respondents are asked to indicate the extent to which they agree with several statements, regarding the level of trust and conflict between the owner manager and the supervisory board chairman. Finally, they had to indicate to what extent several statements about the level of innovation are applicable to their specific situation. In the next part the method of measurement of each variable is described. Figure 5 gives an overview of all these variables and the way of measurement.
3.4.1 Supervisory board roles
Firstly, the role intensity of the monitoring role is based on 5 items, Cronbach alpha is 0.60. Since a Cronbach alpha of 0.7 or higher is considered as ‘acceptable’, 0.60 is not (Huizingh, 2002). After deleting item 1 and 5, Cronbach alpha ultimately rises to 0.81. Secondly, the role intensity of the advice role consists of 11 items, Cronbach alpha is 0.86. Finally, the network role variable consists of 9 items, Cronbach alpha is 0.79. For the advice role and network role, the Cronbach alphas of respectively 0.86 and 0.79 are not improved by deleting specific items.
Figure 5: Measurement model
The ‘level of execution-unweighed’ is calculated by simply taking the mean of the items concerning the board roles. A score between 1 and 5 will indicate how intensive the particular board role is executed by the supervisory board.
Secondly, ‘the level of execution-weighed-standardized’ also takes into account the respondents’ perceptions about ‘the level of importance’ of the board role activities. This is done in order to be able to assign a weigh factor to these activities. Respondents can have a different perception about which activity is more important and therefore adds more value. For clarification, the items of each board role are similar to the activities that are representing the board roles. The terms ‘activities’ and ‘items’ are used interchangeably. Each respondent is asked to indicate their perception about how important the execution of each particular board role activity is. The ‘level of execution-weighed-standardized’ is measured by multiplying the scores on the items concerning ‘the level of execution’ by the scores on the items concerning ‘the level of importance’. Furthermore, this score is divided by the sum of scores of ‘the level of importance’. The following example will clarify both the procedure of ‘the level of execution-unweighed’ and ‘the level of execution-weighed-standardized.
Board roles’ execution levels:
unweighed
weighed-standardized
Role satisfaction x Role importance
Level of innovation Role intensity Trust Conflict Size Industry - Added value monitoring role
- Added value advice role - Added value network role - Total added value
