Theory

Abstract

Chapter 3 addresses board theory, role theory, process theory, and disclosure theory.

Employing agency theory as the approach to board governance studies has become very popular (Carcello et al., 2011, p. 19). Yet, as boards feature multiple roles and face intricate tasks, using a single theory is insufficient, represents an incomplete picture, and ignores “a good bite of the complexity of organizations” (Eisenhardt, 1989a, p. 71). By introducing a holistic perspective, it is intended to better explain antecedents and consequences and justify measures for selecting chairs and disclosing information (Huse et al., 2011, p. 11; Ruigrok et al., 2006, p. 122).

Therefore, this dissertation considers the most relevant theories applicable to the research question pursued. It thereby follows DiMaggio’s (1995, pp. 391–392) principles on describing the corporate world as we see it (theory as covering laws), making room for artful and exciting insights (theory as enlightenment), and providing a basis to empirically test the plausibility of the perspectives and scopes applied (theory as narrative). Following that path helps to understand the inner workings of boards, their perception from outside, and to go “beyond the usual suspects in exploring board of directors” (Kim & Cannella, 2008, p. 283).

3.1 Board Theory

As stated in the introductory part, board theories are strongly dominated by agency theory. The main premise of the theory is the separation of ownership and its control dilemma (Fama & Jensen, 1983, p. 301). The principal (shareholder) agrees with the agent (board/senior management) on a contractual basis on a de facto delegation of services, where the theory presumes an asymmetric distribution of information and the parties follow opposing assumptions (Eisenhardt, 1989a, p. 59). Opportunistic behaviour and organisational conflicts are ensuing consequences (Lubatkin et al., 2005, p. 869). All this together leads to the principle of introducing corporate self-regulated mechanism and independence criteria to control the opportunistic behaviour of the agents (Hart, 1988, pp. 470–471).

In practice, board work goes beyond a pure control, monitoring, and shareholder perspective (Ruigrok et al., 2006, p. 122). Other contextual and processual determinants are also to be considered, including organisational, sociological, and psychological perceptions (Maitlis, 2004, p. 1280). Theories complementing agency theory, and of relevance for the chair role, are summarised in Table 3.1.

Table 3.1 Overview of Board TheoriesFootnote

The summary is not exhaustive; for an extensive review on all theories, including class hegemony theory and managerial hegemony theory, refer to Hung (1998) and Zahra and Pearce (1989).

Besides traditional board theories (Table 3.1), board governance scholars have recently paid considerable attention to value-adding boards. Such boards simultaneously create positive and sustainable economic value (financial performance) and social value (non-financial performance) (Huse, 2018, p. 15). To address that, scholars have put additional emphasis on behavioural theory and team production theory.

Behavioural theory builds on the fact that boards behave and decide facing a pluralism of influences and effects (Cyert & March, 1963, p. 4). The board is often forced to make decisions that deviate from the ideal of utility maximisation (van de Ven, 1992, p. 170). Such deviations occur due to the following reasons (van Ees et al., 2009, pp. 311–314): (1) boards are confronted with uncertainty and complexity, which requires them to simplify decision rules (bounded rationality); (2) boards behave opportunistically and thus accept choices that are good enough but do not maximise payoffs (satisficing behaviour); (3) boards rely on experience and manage operations with the help of past experiences of the decision-makers (routinisation of decision-making); and (4) boards are embedded in a complex social structure and solve conflicts through proactive communication and the formation of coalitions (political bargaining).

Team production theory (or group production theory) views stakeholders as organisation-specific resource (Blair & Stout, 1999, p. 265).² In that context, the board is an important mediating and coordinating body between the relevant value-adding, unique, risk assuming, and strategic information-possessing stakeholders (Huse, 2018, p. 23). Attributed to the behavioural corporate governance landscape, the theory assumes that organisations (1) are long-term oriented (based on cooperative game theory), (2) reject ex ante and ex post sharing and bargaining rules for free riding and shirking, and (3) centre on sustainable value creation upwards (Gabrielsson et al., 2016, p. 754).³ All factors suggest that board competence, impartiality, and willingness are crucial. For board succession planning, this means that boards should consist”of a diverse set of board members who can knowledgeably express their interests, perspectives and expertise to value-adding stakeholders” (Huse, 2018, p. 26). This leads to the demand that boards must achieve a greater productivity by working together as a team and not as a bundle of lone wolves (Huse et al., 2011, p. 14).

For the board to be an effective mediator and coordinator, however, the chairperson must take an active leadership role on the board (Cascio, 2004, p. 97). Contrary to the agency theory, the team production approach presumes a skilled, independent, and leading person at the top of the organisation. A person who, as a representative of the board, has the power to make bilateral contracts with various value-adding contributors (Yar Hamidi & Gabrielsson, 2014a, p. 11).

3.2 Role Theory

Role theory conceptualises the characteristics of social role behaviour (Biddle & Thomas, 1966, p. 4). Roles are defined and predictable. At the same time, however, they depend on social structures and are thus most often occupied differently than expected (Biddle, 1986, p. 68). Role theory explores why individuals accept and perform a set of roles in a system and how they justify their actions to various stakeholders. The theory therefore assumes that actions are the result of expectations of role behaviour (demands on conduct) and role attributes (demands on appearance and personality) (Steiger, 2013, p. 37).

The Organisational Role Analysis is an advancement of the role theory on the business/organisational level. The concept “redefines the individual’s role in the system” (Borwick, 2006, p. 9), i.e. addresses the system where role, role senders, role receivers, and tasks are interrelated.⁴ In essence, the concept describes a set of role-specific normative expectations (e.g. rights, privileges, duties, obligations) directed at the holder of certain positions (e.g. the chairperson) in relation to other persons occupying a different position (e.g. board members, senior management, shareholder) (Rothwell, 2005, p. 127). Organisational Role Analysis represents the concept of roles as a “place where the formal role (as defined by the organisation/system) blends with the informal role (the specific way a specific person takes up his or her role)” (Winter & van de Loo, 2012, p. 243). In that sense, holders interpret explicit and implicit task perceptions of themselves and the role with the intention of meeting other people’s expectations. Roles are thus defined as “the position or purpose that someone or something has in a situation, organization, society, or relationship.”⁵

In management theory, the two traditional role concepts are from Mintzberg (1973) and Quinn (1988).⁶ In fact, Mintzberg’s (1973) empirical work on functional role description of managerial activities is considered the classical approach. In his study, during a one-week observation, the activities of five CEOs were categorised into (1) interpersonal role, (2) information role, and (3) decision-making role. They consist of the following ten role types (Mintzberg, 1973, p. 92): (1) representing the organisation (figurehead), guiding the employees (leader), and establishing and maintaining relationships (liaison); (2) managing the organisation (monitor), transmitting information (disseminator), and informing stakeholders (spokesperson); and (3) searching for opportunities (entrepreneur), managing unexpected tasks (disturbance handler), assigning responsibilities (resource allocator), and committing to actions (negotiator).

Quinn’s (1988) The Competing Values Framework (Figure 3.1) extends the functional role descriptions with leadership aspects. The study identifies eight leadership roles and allocates two of each to a quadrant, each representing a certain philosophy. In principle terms, the concept follows three elements: (1) the preference for organisational structure by differentiating between control and flexibility; (2) the overall fit with respect to internal socio-technical and external environmental systems; and (3) the temporal focus by representing the distinction “between means and ends or processes and outcomes” (Faerman et al., 1987, p. 311). To be successful, Quinn’s (1988) framework postulates that a member must show above-average behaviour in a specific role. Thereby, some roles complement each other, whereas others oppose each other. Effective leaders should thus do justice to all roles − a fact that is strongly reminiscent of the great man theory.⁷

Figure 3.1

(Source: modified from Denison et al. (1995, p. 527) and Quinn et al. (2015, p. 13))

The Competing Values Framework.

3.3 Process Theory

Process theory illustrates the interrelated links and paths of events or activities that disperse in the social, political, and economic context (Miebach, 2009, p. 11). It describes “how things change over time […] by an entity in dealing with an issue” (van de Ven, 1992, p. 170). In principle, researchers use process theory for planning, formulating, implementing, and guiding their design of study. Processual analysis, advancing to the generic term, explains and accounts for the what-, why-, and how-links between context, process, and relationships (Pettigrew, 1997, p. 340). It shows how incidents, activities, and stages unfold over time.

Conceptionally, process theory with regard to board nomination is closely related to teleological theory. The theory encompasses an end state that an organisation or people of an organisation strive for after developing a vision/plan and taking action to achieve it (van de Ven, 1992, p. 178). The teleological view does not impose a necessary sequence of events. However, it postulates to move forward to its final state via “cycle of goal formulation, implementation, evaluation, and modification of goals based on what was learned by the entity” and what was constrained by its environment (van de Ven & Marshall, 1995, p. 520). Processual research thus includes environmental constraints that force the organisation to continuously replace and adapt their practices (Drazin & van de Ven, 1985, p. 516; Scott, 1961, p. 20). This is why processual analysis requires to inform in which context a person, a group, or an organisation is embedded (Walther, Calabrò, & Morner, 2017, p. 2208).

There are four central requirements underlying process theory (Miebach, 2009, pp. 14–16): (1) the elimination of the dichotomy between structure and process (alignment of structure and processes); (2) the integration of micro-diversity aspects (incorporation of mechanisms that enable change); (3) the modelling of time dependence in process chains (linking mechanism to process); and (4) continuous learning (adaption to social and organisational change).

To meet the four conceptual expectations, Pettigrew (1992a, p. 9) and Cock and Sharp (2007, p. 234) provided a checklist for process research to consider: (1) referencing a number of micro-levels (embeddedness); (2) indicating when and where the process begins and ends (temporal interconnectedness); (3) describing context and actions in a holistic rather than a linear manner (role and explanation); and (4) taking into account findings and the research objective (outcome).

3.4 Disclosure Theory

Disclosure theory Involves providing relevant, credible, and timely information to outsiders (Healy & Palepu, 2001, pp. 408–409). With the provision of information to stakeholders (based on agency theory), the theory intends to reduce uncertainty and sends a signal about the quality of an organisation (Lev, 1992, pp. 14–15). The aim is to diminish adverse selection.

In explaining corporate governance disclosure, many authors have endorsed legitimacy theory as an attempt to explain more background on social and environmental policies (Deegan et al., 2002, p. 318). The theory suggests that an organisation “aims to certify its survival and continuity through disclosing detailed information voluntarily so as to confirm that it is a good citizen” (Khlifi & Bouri, 2010, p. 68). To be more specific, it is about aligning corporate goals, methods, and outputs with the evolving expectations of the public. All this is done in order to shape the social image of the organisation (Deegan et al., 2002, p. 320). Thus, corporate disclosure is a post-activity reaction (Guthrie & Parker, 1989, p. 344).

How much to disclose? The disclosure spectrum is a question of disclosure costs (Beyer et al., 2010, p. 301). In general, listed organisations are obliged to publicly provide information. However, to attract investors and fend off defamation by activist stakeholders, organisations are willing to disclose more information than necessary. Yet, organisations choose to not be fully transparent because, beyond a certain limit, the costs of disclosure exceed the benefits, potentially putting them at a competitive disadvantage (Grossman & Hart, 1980, p. 333; Raffournier, 1995, p. 263). Loss of competitive position (secrecy), disclosure efforts (gathering and processing), and litigation costs (uncertainty of outcome) are examples of why organisations cap the content of information provided (Elliott & Jacobson, 1994, pp. 83–84). Full transparency is consequently not a practical but a theoretical concept.

3.5 Review

The theories mentioned in Chapter 3 form the theoretical basis for the study. Each theory on its own conveys one single perspective. Since a theory is a simplification of reality, it makes sense to combine them to create a complementary, multidimensional, and holistic view. To conclude the theoretical insights from Chapter 3:

• Board theories, with agency theory being the most prominent in governance research, indicate that information asymmetry may occur, leading the principal to establish control and monitoring mechanisms. However, a pure shareholder view is insufficient; a multi-theoretical view is considered more adequate. Also, the board is not static, but rather dynamic. Behavioural theory and modern team production theory revealed, first, why boards are no utility maximizers and, second, that the impact of boards is value-adding and long-term oriented. That is why boards need the necessary competences.

• Role theory emphasised certain role behaviours and role attributes that come with a board seat. Mintzberg (1973) and Quinn (1988) identified managing and leadership responsibilities that can be used to reinforce role understanding.

• Process theory highlighted the interrelated and dynamic relationships in board appointments. It emphasised that nomination is the result of behavioural structures and a set of comprehensive decisions, shaped by environmental constraints, time, and ongoing learning mechanisms.

• Disclosure theory promoted the implementation of legitimacy standards in organisations. However, disclosure is caught between costs and benefits, which is why organisations do not aim for full transparency when disclosing information.