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Board contributions to organisational outcomes
Martin Laverty
Doctoral candidateBusiness School, Faculty of the Professions, University of New England
Doctoral thesis
“What, if any, corporate governance approaches might optimise organisational
performance within human service organisations utilising two tiered boards?”
Three objectives of this presentation
Summary of academic literature to consider:
1. The place of the Board of Directors within an organisation and board links to organisational performance (as distinct from board performance);
2. Factors shown to have some influence on a board’s contribution to organisational performance;
3. Translation of findings arising from the literature to a theoretical model not-for-profit board.
Three messages of this presentation
The academic literature indicates:
1. The real value of a board in practice is not obviously clear (Denis and McConnell 2003), and consequently not fully realised.
2. The link between boards and organisational performance is not well understood, and the complex relationship between the two has not yet enabled anything but mixed results and ongoing debate as to if such a link exists (Nicholson and Kiel 2007).
3. A corporate board’s exercise of strategic influence (Huse and Rindova 2001), its participative nature (Heeracleous 2001), its level of transparency (Mitton 2001), and its ownership of stock (Bhagat and Bolton 2008) are each factors that have been found to correlate with organisational performance in varying circumstances and to differing extents.
For-profit corporate governance practices
ArgumentContemporary governance is a response to needs of owners of for-profit companies.
• Corporate governance is the mechanism by which those providing capital to corporations satisfy themselves that a return on their investment will be provided (Shleifer and Vishny 1997).
• The design of a set of institutions to force or induce the welfare of shareholders to be pursued by management is what has come to be known as corporate governance (Tirole 2001).
• The key determinants of the development of a corporation’s governance system are said to be the legal protections a state gives to investors, and the presence of large investors in the corporation (Denis 2001).
QuestionAre for-profit corporate governance practices best suited to not-for-profit governance?
Not-for-profit corporate governance Argument
Governance of not-for-profits needs to accommodate the “multiple principal” framework.
• Academic knowledge of governance arrangements in not-for-profit organisations is not well known (Dyl, Frant, and Stephenson 2000; Jegers 2009).
• The non-distribution constraint prohibiting profits being paid to founders is at the core of the character of a not-for-profit organisation’s governance (Hansmann 1987).
• Stakeholders take on characteristics of the principal or shareholder within a not-for-profit organisation, such that there is a “multiple principals” framework; this type of not-for-profit theory has yet to be developed fully and little research has focused on the role of donors, volunteers, beneficiaries and staff members in non-profit governance (Jegers 2009).
QuestionDo not-for-profit governance practices adequately identify and sufficiently address the “shareholder like” needs of “multiple principals?”
The place of the not-for-profit Board
ArgumentBeyond performance of statutory obligations, there is some ambiguity in the literature as to what a Board’s purpose should be.
• Board’s purpose is ultimately to enable cooperation (van Ees, Gabrielsson and Huse 2009).
• Board is a group gathered for their ability to add value to the organisation through their collective actions (Ingley and van der Walt 2003).
• The real value of a board in practice is not obviously clear (Denis and McConnell 2003).
QuestionDo not-for-profit boards agree on their “other than legal purpose”, and how to fulfil this purpose?
Theories on governance purpose
ArgumentBoards can consider and adopt a desired governance approach as a clarifying motivation to help fulfil purpose
• Agency theory: Financiers assuring a return on investment and avoiding wasting or expropriation of their funds (Shleifer and Vishny 1997).
• Resource theory: Board is link between the organisation and external resources needed for the organisation to achieve best performance (Pfeffer 1972); the board’s key role is enabling the organisation to access resources it needs (Cowen and Marcel 2011).
• Stewardship theory: Management interest is linked to the attainment of the goals of the owners of the capital (Young and Thyil 2008), so that Board and management collaborate in enabling the organisation (Farrell 2005).
QuestionDo not-for-profit boards have sufficient knowledge of the differing governance approaches they can apply in response to organisational needs as they arise?
What governance theory works best?
ArgumentThere is no established ‘best’ method of corporate governance.
• Theoretical pluralism is required to understand the contributions that boards make to organisational performance because no single theory provides sufficient explanation of governance effectiveness (van Ees, Gabrielsson and Huse 2009).
• The absence of evidence supporting known theories of boards and links to organisational performance casts doubt on the utility of the agency, resource, and stewardship approaches (Lynnal, Golden, and Hillman 2003).
• There is ongoing debate and mixed evidence about the link between corporate governance and organisational performance (Nicholson and Kiel 2007).
QuestionIf a link between governance and performance is not certain, is it entirely up to management to ensure organisational performance?
The functionality of the BoardArgument
Before a board can contribute to an organisational outcome, it needs to be able to function properly as a board itself
• Three factors have been found to contribute to how a board functions: first, historical factors influence how a board is comprised; secondly, boards have a certain capability to apply; finally, interventions occur that alter this capability from time to time (Nicholson and Kiel 2004).
• Use of knowledge, skills, cognitive conflict, and effort norms enable board task performance (Forbes and Milliken 1999).
• Alignment of the resources of knowledge, experience, relationships and procedures with the Board’s required role set determine the ability of a board to achieve corporate objectives (Nicholson and Kiel 2004).
QuestionDo boards that review their own performance and functionality also review their contribution to organisational performance?
Not-for-profit performanceArgument
Assessing board contributions to not-for-profit organisational performance requires agreement on what constitutes organisational performance
• Accounting and market measures are the key methods of determining for-profit organisational performance (Wang and Clift 2009).
• Not for profit organisational performance is often only able to be assessed by perception of board members and its executive (Brown 2005).
• Not-for-profit performance has alternatively been described as assessable by consideration of organisational management and program effectiveness, with program effectiveness best assessed through capacity provision and service outcomes (Sowa, Coleman-Seldon and Sandfort 2004).
QuestionDo not-for-profit organisations have clarity on what constitutes performance?
Standard governance-performance links
Argument‘Garden variety’ good governance practice enables organisational performance
• Boards contribute to value creation when their director members both individually and collectively are able to effectively fulfil their board roles (Huse, Gabrielsson, and Minichilli 2005).
• An effective board will execute its four roles of monitoring, providing strategy, providing advice, and enabling access to capital; ultimately organisational performance is influenced by board effectiveness (Nicholson and Kiel 2004).
• Boards require resource providers, advisors, mentors, decision makers, evaluators, and negotiators, and each of these skills must function simultaneously in order for value creation to follow (Huse, Gabrielsson, and Minichilli 2005).
QuestionDoes not-for-profit board director selection widely deliver contributors able to fulfil these roles?
Current governance-performance links
ArgumentRecent focus on board size, independence, and composition has not always improved organisational performance
• Size: Boards of smaller sizes have been shown to have a positive impact on organisational performance (Hermalin and Weisbach 2001).
• Independence: Anglo-American studies do not support independent directors as adding value (Lawrence and Stapledon 1999), and a United Kingdom study found dominance of outside directors actually impeded management (Franks, Mayer, Renneboog 2001).
• Composition: A study of more than 6,000 firms between 1991 and 2003 found no causal link between board structure and current firm performance (Wintoki, Linck, and Netter 2009), and the impact of race and gender diversity is not a significant influence on performance, but does not lead to poor performance (Wang and Clift 2009).
QuestionHave not-for-profit boards assessed the benefits of smaller boards and composition?
Emerging governance-performance evidence
ArgumentOrganisational performance is ultimately determined by strategy
• Strategic input is the key method by which a board can influence firm performance (Huse and Rindova 2001). Organisational performance has been found to be ultimately linked to strategy, such that board attributes might be of little consequence except to the extent they influence strategic thinking and its implementation (Heracleous 2001).
• Educational attainment and diverse functional backgrounds have been found to enable better contribution to strategic decisions (Erhardt, Werbel, and Shrader 2003).
• Unfortunately, boards have been found in practice not to be deeply involved in strategy setting, with many involved only in strategy ratification rather than its formation, with CEOs playing the leading role in strategy development (Finkelstein and Hambrick 1996).
QuestionDo not-for-profit boards enable, by way of capacity development and time allocation, a sufficient contribution to strategic inputs?
Emerging governance-performance evidence
ArgumentThe more participative a board, the more able it is to impact organisational performance
• Participative boards correlate with higher financial performance (Heeracleous 2001).
• Group dynamics drive team effectiveness (Nicholson and Kiel 2004); improved dynamics better enable boards to contribute to organisational outcomes.
• Political, legal, moral, and class roots are neglected in assessing corporate performance, as is the difference between how people behave and how companies are advised to behave; companies would be well served to consider techniques of motivation (Donaldson 2012).
QuestionDo not-for-profit boards sufficiently prioritise participation of each director in board affairs?
Emerging governance-performance evidence
ArgumentOwnership stakes in an enterprise incentivise directors to contribute to organisational performance
• Stock ownership by board members correlates with improved operating performance; efforts to improve operating performance through governance might seek to focus on stock ownership by board members (Bhagat and Bolton 2008).
• Dated evidence indicates directors on average may not be sufficiently rewarded to fulfill their functions adequately (Denis 2001).
• Alternatives to stock ownership would need to be considered in relation to not-for-profit organisations.
QuestionDo not-for-profit organisations sufficiently induct and reward board directors as “owners” of the enterprise so as to incentivise their contribution to performance?
Emerging governance-performance evidence
ArgumentCorporate transparency might relate to corporate performance
• Disclosure per se does not correlate with firm performance but does enable better functioning markets and protection of minority shareholder interests (Berglof and Pajuste 2005).
• Firms that have higher levels of corporate transparency demonstrate better performance (Chiang, H-tsai 2005).
• Governance transparency has also been found to correlate with analyst forecast accuracy, but it is not clear if disclosure of governance or the governance structure itself drives this association (Bhat, Hope, and Kang 2006).
QuestionNoting the transparency-governance-performance link is not clearly established, do not-for-profit boards demonstrate sufficient transparency?
Translating findings into a limited theoretical not-for-profit board model
For-profit governance practice refined to suit needs of not-
for-profit organisation
Governance practice to recognise “multiple principals” or organisational “shareholder
interests”
Board to determine its purpose and approach (ie,
agency, resource, stewardship) with same clarity of
understanding of its legal obligations
There is no single “best” method; Board to actively
determine its own structure and approach
Basic board functionality is the first step towards being able
to contribute to organisational outcomes
Define organisational performance, adopt
framework to assess defined performance, monitor board’s contribution to organisational
performance
Determine board size in knowledge of evidence of benefit of fewer directors
Develop board capacity to actively engage in strategy and
strategic decisions
Develop board director’s capacity to participate
Empower and reward board directors as “owner
shareholders”
Adopt transparent governance processes
BoardContribution toorganisationalperformance
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