Gavin J. Nicholson

Board Composition and Corporate Performance: how the Australian experience informs contrasting theories of corporate governance

In many respects, Australian boards more closely approach normative “best practice” guidelines for corporate governance than boards in other Western countries. Do Australian firms then demonstrate a board demographic-organisational performance link that has not been found in other economies? We examine the relationships between board demographics and corporate performance in 348 of Australia’s largest publicly listed companies and describe the attributes of these firms and their boards. We find that, after controlling for firm size, board size is positively correlated with firm value. We also find a positive relationship between the proportion of inside directors and the market-based measure of firm performance. We discuss the implications of these findings and compare our findings to prevailing research in the US and the UK.

CAN DIRECTORS IMPACT PERFORMANCE? A CASE BASED TEST OF THREE THEORIES OF CORPORATE GOVERNANCE

We examine hypothesised links between the board of directors and firm performance as predicted by the three predominant theories in corporate governance research, namely agency theory, stewardship theory and resource dependence theory. By employing a pattern matching analysis of seven cases, we are able to examine the hypothesised link between board demography and firm performance expected under each theory. We find that while each theory can explain a particular case, no single theory explains the general pattern of results. We conclude by endorsing recent calls for a more process-orientated approach to both theory and empirical analysis if we are to understand how boards add value.

BREAKTHROUGH BOARD PERFORMANCE: HOW TO HARNESS YOUR BOARD'S INTELLECTUAL CAPITAL

To date, corporate governance research agendas have tended to concentrate on one particular role that a board performs. For instance, agency theory concentrates on the monitoring role, resource dependence theory concentrates on the board providing access to resources and stewardship theory concentrates on the board’s advice‐giving or strategic role. While these approaches provide practitioners with useful guidelines regarding issues such as board independence, we contend that practitioners need to take care not to act on the recommendations from a single theory in isolation from the others. To address this concern, we provide a model of board effectiveness that uses the construct of board intellectual capital to integrate the predominant theories of corporate governance and illustrate how the board can drive corporate performance. We further contend that boards that wish to improve their performance need to review their intellectual capital. We conclude by linking the model to a practitioner‐focused framework that identifies four key areas on which a board must concentrate to develop its intellectual capital.

Multiple Directorships and Corporate Performance in Australian Listed Companies

How many directorships are too many? Globally, normative advice emphasises the importance of limiting the number of directorships any individual should hold due to the workloads they entail. However, there is little empirical evidence to support this view. Rather, there is a strong tradition of supporting multiple directorships as a mechanism for the firm to co-opt external resources. To explore the issue of director workloads and multiple directorships, we first consider the issues related to multiple directorships and outline the conclusions of extant international and Australian studies into multiple directorships. We then detail our objectives in undertaking this research and our approach to data collection. Copyright (c) 2006 The Authors; Journal compilation (c) 2006 Blackwell Publishing Ltd.

Climate of Fear in Organisational Settings: Construct Definition, Measurement and a Test of Theory

This paper reports a study that explored a new construct: ‘climate of fear’. We hypothesised that climate of fear would vary across work sites within organisations, but not across organisations. This is in contrast a to measures of organisational culture, which were expected to vary both within and across organisations. To test our hypotheses, we developed a new 13-item measure of perceived fear in organisations and tested it in 20 sites across two organisations (N ≡ 209). Culture variables measured were innovative leadership culture, and communication culture. Results were that climate of fear did vary across sites in both organisations, while differences across organisations were not significant, as we anticipated. Organisational culture, however, varied between the organisations, and within one of the organisations. The climate of fear scale exhibited acceptable psychometric properties

The Role of the Board of Directors: Perceptions of Managerial Elites

We highlight how directors and senior managers perceive the roles of a board to involve overseeing risk and compliance, strategy, governance, developing the CEO and senior management and managing stakeholders. We find that managers and directors perceive board effectiveness as linked to different combinations of these roles and that there appear to be differences in perceptions between different types of firms. We conclude that clarity around the board’s role set is critical to furthering the corporate governance research agenda, and that the relationship between board roles and perceived board effectiveness differs between managers and directors.

An Observational Analysis of the Impact of Board Dynamics and Directors' Participation on Perceived Board Effectiveness

This study addresses calls for closer examination of board dynamics by offering an inside view of director interactions. Video-observations of three board meetings at each of two Australian corporations matched with director interviews and secondary data reveal distinct patterns of director interactions, their sources of variation and impact on perceived board effectiveness. Our data reveal that director interactions are multi-dimensional and dynamic: while group interactions across agenda items are similar, with a few directors leading the discussion, the contributing directors change across items. Moreover, directors’ inclusiveness and evenness of participation are associated with higher perceptions of board effectiveness. Last, we find that director interactions change with the nature of the items, board climate and board meeting arrangements. The study contributes to the literature by moving beyond the individual-level analysis of directors’ skills or independence, and offering a detailed view of how the joint group and individual dimensions of board dynamics affect board functioning.

Inside the boardroom: exploring board member interactions

This study aims to open-up the black box of the boardroom by directly observing directors’ interactions during meetings to better understand board processes. Design/methodology/approach: We analyse videotaped observations of board meetings at two Australian companies to develop insights into what directors do in meetings and how they participate in decision-making processes. The direct observations are triangulated with semi-structured interviews, mini-surveys and document reviews. Findings: Our analyses lead to two key findings: (i) while board meetings appear similar at a surface-level, boardroom interactions vary significantly at a deeper level (i.e. board members participate differently during different stages of discussions) and (ii) factors at multiple levels of analysis explain differences in interaction patterns, revealing the complex and nested nature of boardroom discussions. Research implications: By documenting significant intra- and inter-board meeting differences our study (i) challenges the widespread notion of board meetings as rather homogeneous and monolithic, (ii) points towards agenda items as a new unit of analysis (iii) highlights the need for more multi-level analyses in a board setting. Practical implications: While policy makers have been largely occupied with the “right” board composition, our findings suggest that decision outcomes or roles’ execution could be potentially affected by interactions at a board level. Differences in board meeting styles might explain prior ambiguous board structure-performance results, enhancing the need for greater normative consideration of how boards do their work. Originality/value: Our study complements existing research on boardroom dynamics and provides a systematic account of director interactions during board meetings.

The Contribution of Social Norms to the Global Financial Crisis: A Systemic Actor Focused Model and Proposal for Regulatory Change

Manuscript Type: Conceptual. Research Question/Issue: Conventional regulatory reforms of the financial system focus on standard economic assumptions of self‐interested, rational actors. The Global Financial Crisis (GFC) and similar financial failures highlight that there are limits to this approach. Instead we use a norm‐based (or soft law) perspective to examine how the systemic problems underlying the GFC lay not so much in neo‐classical economic assumptions of self‐interest, but in unchecked financial innovation exploited by norms of buyer beware and ratings agency reliance among market participants. Fueled by sector‐wide remuneration practices, these norms created information asymmetries that fundamentally undermined the integrity of the market. Research Findings/Insights: We present a model that highlights how investment banks, as professional service firms, have superior information to their clients. This presents an information asymmetry problem whereby they can exploit the market norm of caveat emptor (buyer beware) when developing innovative financial transactions. We propose a model highlighting how flawed financial innovation can lead to widespread, systemic problems of assessing and pricing risk because market participants can actively develop and promote flawed transactions. This problem is exacerbated where there is an over‐reliance on credit ratings agencies (due to the high information and search costs facing buyers) and a reduced emphasis on director fiduciary duties in financial Special Purpose Entities. Theoretical/Academic Implications: Social norms that underpin financial markets are central to market regulation. Our approach provides a re‐examination of the often unquestioned use of universal norms for differing market transactions in the financial sector. Researchers need to explore the interaction between social norms and market contexts (such as financial innovation) to better understand the behavior of financial markets. We contend that a mismatch between norms and market mechanisms can lead to significant unintended outcomes. Our approach of combining soft law (norms) and hard law (regulation) approaches to regulation provides added insights into agency, stewardship, and institutional theories. Practitioner/Policy Implications: Regulators need to understand norms and financial market contexts to develop better legislative interventions. Specifically, differentiating between transaction types in financial markets will address the problems associated with information and search costs facing buyers of flawed financial innovation. We also provide proposals for policy makers seeking to embed accountability for risk taking across the key participants in the financial system to minimize market distortions in the majority of the financial sector.

The importance of group-fit in new director selection

Purpose Director selection is an important yet under-researched topic. The purpose of this paper is to contribute to extant literature by gaining a greater understanding into how and why new board members are recruited. Design/methodology/approach This exploratory study uses in-depth interviews with Australian non-executive directors to identify what selection criteria are deemed most important when selecting new director candidates and how selection practices vary between organisations. Findings The findings indicate that appointments to the board are based on two key attributes: first, the candidates’ ability to contribute complementary skills and second, the candidates’ ability to work well with the existing board. Despite commonality in these broad criteria, board selection approaches vary considerably between organisations. As a result, some boards do not adequately assess both criteria when appointing a new director hence increasing the chance of a mis-fit between the position and the appointed director. Research limitations/implications The study highlights the importance of both individual technical capabilities and social compatibility in director selections. The authors introduce a new perspective through which future research may consider director selection: fit. Originality/value The in-depth analysis of the director selection process highlights some less obvious and more nuanced issues surrounding directors’ appointment to the board. Recurrent patterns indicate the need for both technical and social considerations. Hence the study is a first step in synthesising the current literature and illustrates the need for a multi-theoretical approach in future director selection research.