HomeChapter 4: Boards - Consensus Perspective4.4 A Consensus Perspective of Two-Tier Board Model Attributes

4.4 A Consensus Perspective of Two-Tier Board Model Attributes

Davis (1991) suggests that independent board structures may lead to more bureaucracy and information asymmetries between executive and non-executive directors. Independent structures may also have negative effects on risk taking behavior of management, innovation of the organization, the focus for objectives and the quality of decision making processes (Davis 1991). Interestingly, proponents of the stewardship theory suggest that the alleged opportunistic behavior of executive directors proposed by the agency theory not necessarily leads to information asymmetries.

According to the stewardship theory, the structure of the board itself may lead to dysfunctional information asymmetries. Or, as stated by Davis et al. (1997:25): “Stewardship theorists argue that the performance of a steward is affected by whether the structural situation in which he or she is located facilitates effective action. If the executive’s motivations fit the model of man underlying the stewardship theory, empowering governance structures and mechanisms are appropriate.”

Seen from this point of view, proponents of the stewardship theory suggest that the composition, the leadership structure and the organization of two-tier boards may imply disadvantages for the execution of boards’ strategic roles. These are explored in more detail in the following sections of this paragraph.

 

Two-Tier Board Composition

The two-tier board model provides supervisory boards that are entirely composed of non-executive directors. The management board is entirely composed of executive directors. According to the stewardship theory, the formal division of board roles through separate management and supervisory boards is negatively associated with the integration of decision management with decision control. Baysinger and Hoskisson (1990) indicate that information possessed by executive directors may be superior to information possessed by non-executive directors. Moreover, non-executive directors may rely mainly on financial control strategies to understand and evaluate the outcome of the strategic decision making process: “Such controls seem attractive because they are based on easily measured data and, therefore, little information about the complex decision making process leading to performance outcomes is needed” (Baysinger and Hoskisson, 1990:74).

Yet, due to information asymmetries, non-executive directors may lack the knowledge to completely understand the rationale of top management's strategic actions. The assessment of executive directors' managerial efforts can furthermore be complicated by time lags between managerial efforts and project's outcome and by difficulties of disentangling managerial and environmental origins of performance (Walsh and Seward, 1990; Baysinger and Hoskisson 1990). These observations suggest that the composition of supervisory boards in two-tier boards is negatively associated with the integration of board roles. Based on a consensus perspective of board organization, this observation may lead to the following assumption:

 

Assumption 4a: the composition of supervisory boards in two-tier boards is negatively associated with the integration of decision management with decision control.

 

Chapter eight in part II of this research further elaborates on the composition of supervisory boards in the Netherlands and the integration of decision management with decision control in two-tier boards.

          

Two-Tier Board Leadership Structure

The stewardship theory proposes that joint leadership structures lead to strong, unambiguous leadership of the corporation. CEO-duality also may lead to internal efficiencies through the unity of command and may eliminate potential conflicts between the CEO and the board chair. The management and supervisory boards in two-tier boards formally separate the leadership functions of the CEO and the chairman of the board. As such, the stewardship theory suggests that two-tier boards may not provide the benefits of a combined joint board leadership structure.

Based on a consensus perspective of board organization, the following assumption suggests:

 

Assumption 4b: the board leadership structure of two-tier boards is negatively associated with the integration of decision management with decision control.

 

In addition to research on the composition of two-tier boards, this study could not find research that has investigated the relationship between the formal independence of two-tier boards and the leadership structure of two-tier boards. To fill this gap in the literature, chapter eight in part II of this research further explores the composition and the board leadership structure of two-tier boards in the Netherlands.

          

Two-Tier Board Committees and Board Organization

Although the formation of board committees is not enforced by stock exchanges and other regulators in countries that operate with two-tier board models, the two-tier board model provides board committees as well. As previously noted in chapter three of this study, oversight supervisory board committees composed of executive and non-executive directors may support the integration of board roles (Maassen and van den Bosch, 1999a). Based on this observation, a consensus perspective of board organization may support the following assumption:

 

Assumption 4c: oversight supervisory board committees of two-tier boards that are composed of both executive directors and non-executive directors are positively associated with the integration of decision management with decision control.

 

The opposite rationale may be valid for the binary structure of two-tier boards. The organization, through separate supervisory and management boards, may facilitate the separation of board roles and responsibilities. As previously noted in chapter three of this study, the management board is in charge of decision management. The independent supervisory board is in charge of decision control. As such, based on a consensus perspective of board organization, assumption 4d suggests:

 

Assumption 4d: the binary structure of two-tier boards is negatively associated with the integration of decision management with decision control.

 

Chapter eight in part II of this research further explores the relationship between the formation of oversight board committees, the binary structure of two-tier boards and the integration of board roles.


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.