An Introduction to the Board of Directors

Around the globe, different governance systems exist. In two-tier systems, separate supervisory boards control the firms‘ executives while in one-tier systems this task must be performed by the boards. One-tier boards are generally found among listed firms in the Anglo-saxon world, the USA, the UK and Canada, while continental European countries such as Germany, the Netherlands and Austria commonly prescribe two-tier systems. In Asian corporations, we see a more variegated picture as the one-tier board system is dominant amongst Singaporean companies, the two-tier board system is the prevailing model of governance for Chinese firms and Japanese companies have the possibility for a “hybrid”, i.e. to choose the structure that best matches their specific business situation. In two-tier boards, the roles of the chairman and the CEO are separated, although this so-called “CEO duality” also is in decline in one-tier systems, especially in the UK. To illustrate, the Dutch multinational beer brewer Heineken states on its website:

“Heineken N.V. is managed by the Executive Board who reports directly to the Supervisory Board. The Executive Board is advised by the Supervisory Board on an ongoing basis in accordance with law and the Articles of Association of Heineken N.V.” (Source: www.theheinekencompany.com)

For the Dutch producer of pleasure drinks, the CEO Jean-François van Boxmeer also chairs the meetings of the Executive Board, while the chairman of the supervisory board is currently being chaired by Hans Wijers. If we if we make the jump to the other side of the North Sea and look at the British retailer Tesco, the following describes its governing body:

“Our Board comprises the Chairman, our Group Chief Executive, our Chief Financial Officer and a number of  Non-executive Directors. Our Executive Committee comprises the Tesco PLC Executive Directors and a number of senior executives.” (Source: www.tescoplc.com)

Thus, the company that operates a multitude of supermarkets and hypermarkets, even far beyond the boundaries of the British island, features a one-tier board system. In full accordance with the previously indicated trend of declining CEO-duality, Tesco’s Group Chief Executive and the Chairman of the board are different persons (Dave Lewis and John Allan, respectively).

Despite the different governance systems, most board responsibilities resemble each other across settings. A generally accepted outline of the board’s roles is the following:

  • A decisive role in the selection of CEOs
  • Assessment of decisions and performance of the company’s management
  • Practicing control over the company in crisis circumstances
  • Cope with outside impacts and handle external contacts (e.g. with shareholders)
  • Promote the company to the outside world in order to better the organization’s image
  • Advise the company’s management and act as a sparring-partner

Concisely, the board can be illustrated as a monitoring authority within the corporate organization that is supposed to act in the interests of shareholders. The board’s position within the boundaries of the corporate legal entity, allows for formal approval to evaluate the development and execution of business plans originating from the managerial group and therefore assessing the performance of the firm’s management. In this regard, Vafeas & Theodorou (1998) mention that both non-executives and executive board members are legally liable against shareholders, but point out the particular importance of the non-executive directors with regard to monitoring, since they align their interests with that of shareholders by committing their reputation to a firm.

Notwithstanding this general acceptance of what a board formally should do, delineations of the actual functions that the board carries out are not always unequivocal and especially its role in firm-strategy is being heavily debated. Views on control over firms’ strategies range from managers to dominate directors to the control of managers by directors. In the first view, referred to as the managerial hegemony perspective, the board is ultimately being illustrated as a ceremonial institution that lacks a clear strategic mandate, while studies obtaining an agency perspective, in which controlling the managerial group is regarded as the main responsibility that boards have,  the board’s growing influence over strategic outcomes is being emphasized.

Further readings:

  • Baysinger, B., & Hoskisson, R. E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. Academy of Management review.
  • Cohan, J. A. 2002. “I didn’t know” and “I was only doing my job”: Has corporate governance careened out of control? A case study of Enron’s information myopia. Journal of Business Ethics.
  • Daily, C. M., & Dalton, D. R. (1997). CEO and board chair roles held jointly or separately: much ado about nothing?. The Academy of Management Executive.
  • Daily, C. M., Dalton, D. R., & Cannella, A. A. (2003). Corporate governance: Decades of dialogue and data. Academy of management review.
  • Dalton, D., Daily, C., Ellstrand, A., & Johnson, J. (1998). Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal.
  • Dalton, G. W., Barnes, L. B., & Zaleznik, A. (1968). The distribution of authority in formal organizations. Harvard University, Division of Research, Graduate School of Business Administration.
  • Demb, A. and Neubauer, F. (1992) The Corporate Board, Confronting the Paradoxes, Long Range Planning.
  • Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. Journal of law and Economics.
  • Herman, E. S. (1981). Corporate control, corporate power. Cambridge: Cambridge University Press.
  • Hung, H. (1998). A typology of the theories of the roles of governing boards. Corporate governance.
  • Jungmann, C. (2006). The Effectiveness of Corporate Governance in One-Tier and Two-Tier Board Systems–Evidence from the UK and Germany. European Company and Financial Law Review.
  • Maassen, G., & Van Den Bosch, F. (1999). On the Supposed Independence of Two‐tier Boards: formal structure and reality in the Netherlands. Corporate Governance: An International Review.
  • Mace, M. L. (1971). Directors: Myth and reality.
  • Nicholson, G. J., & Kiel, G. C. (2004). A framework for diagnosing board  effectiveness. Corporate Governance: An International Review.
  • Rindova, V. P. (1999). What corporate boards have to do with strategy: A cognitive perspective. Journal of management studies.
  • Stiles, P. (2001). The impact of the board on strategy: An empirical examination. Journal of Management Studies.
  • Vafeas, N., & Theodorou, E. (1998). The relationship between board structure and firm performance in the UK. The British Accounting Review.
  • Zahra, S. A., & Pearce, J. A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of management.