Beyond Agency Conceptions of the Work of the Non‐Executive Director: Creating Accountability in the Boardroom
| Date | 01 March 2005 |
| Published date | 01 March 2005 |
| DOI | http://doi.org/10.1111/j.1467-8551.2005.00444.x |
Beyond Agency Conceptions of the Work of
the Non-Executive Director: Creating
Accountability in the Boardroom
John Roberts, Terry McNulty
*
and Philip Stiles
The Judge Institute of Management, University of Cambridge, Trumpington Street, Cambridge, CB2 1AG,
UK, and
*
Leeds University Business School, Maurice Keyworth Building, University of Leeds, Leeds, LS2 9JT, UK
Corresponding author email: j.roberts@jims.cam.ac.uk
This paper examines board effectiveness through an examination of the work and
relationships of non-executive directors. It is based on 40 in-depth interviews with
company directors, commissioned for the Higgs Review. The paper observes that
research on corporate governance lacks understanding of the behavioural processes and
effects of boards of directors. Whilst board structure, composition and independence
condition board effectiveness it is the actual conduct of the non-executive vis-a
`-vis the
executive that determines board effectiveness. Data about behaviour and relationships
on boards suggest that traditional theoretical divisions between agency and stewardship
theory, and control versus collaboration models of the board do not adequately reflect
the lived experience of non-executive directors and other directors on the board.
Developing accountability as a central concept in the explanation of how boards operate
effectively enables the paper to both challenge the dominant grip of agency theory on
governance research and support the search for theoretical pluralism and greater
understanding of board processes and dynamics. Practically, the work suggests that
corporate governance reform will be undermined by prescription that supports distant
perceptions of board effectiveness but not the actual effectiveness of boards.
Introduction
This paper addresses the effectiveness of boards
through an examination of the work and
relationships of non-executive directors. Recent
reviews of corporate governance in the economic
and management literatures conclude that despite
considerable empirical work there remains very
limited understanding of the working processes
and effects of boards of directors (Daily, Dalton
and Cannella, Jr, 2003; Hermalin and Weisbach,
2003). Many researchers and those in the policy
domains continue to focus on issues of board
structure and composition, particularly non-exe-
cutive independence, as proxies for understand-
ing board effectiveness. Better understanding of
the inner workings of boards is necessary both to
advance management research and to promote its
relevance to corporate governance practice and
reform.
The field research reported here was conducted
for an independent review of the role and effec-
tiveness of non-executives led by Derek Higgs, at
the behest of the UK government in 2002. While
other countries such as the USA responded to
recent governance scandals and shocks by intro-
ducing legislation (Sarbanes-Oxley Act, 2002)
and new listing rules – the UK’s response was
to conduct a review to explore, what, if anything
could be done to strengthen to the Combined
Code on Corporate Governance (Financial Report-
ing Council, 2003) in relation to the role and
effectiveness of non-executive directors. Having
contributed to the process of governance reform
in the UK (Higgs, 2003; McNulty, Roberts and
Stiles, 2003), we seek in this paper to locate our
British Journal of Management, Vol. 16, S5–S26 (2005)
DOI: 10.1111/j.1467-8551.2005.00444.x
r2005 British Academy of Management
findings within the wider theoretical debates
about corporate governance, and enhance knowl-
edge about the work of non-executives and the
conditions under which they contribute to board
effectiveness.
The paper begins with a review of the treat-
ment of the non-executive within the existing
literature on governance and boards. We argue
that this literature has been dominated by the
assumptions of agency theory, and that these
continue to have a profound influence on
governance reform and practice. It is a literature,
however, increasingly subjected to criticism, by
both economists and management scholars, for
equivocal empirical findings, doubtful theoretical
assumptions and a methodology that remains too
distant from governance phenomena. There are
calls for greater theoretical pluralism and more
detailed attention to board processes and
dynamics. Whilst we support these moves, we
argue that purely theoretical models of board
dynamics that typically retain a polarized view of
the non-executive role and remain at an empirical
distance from board conduct and director beha-
viour are inadequate. Instead, we suggest that a
more appropriate conceptual focus is to be found
in attention to dynamic processes of account-
ability within boards, albeit in a way that goes
beyond the narrow view of accountability implied
by the emphasis within agency theory on non-
executive monitoring and control.
The empirical part of the paper explores this
fuller concept of accountability and how it is
enacted in practice through presenting some of
our primary research data. We suggest that the
work of the non-executive director is indeed vital,
both for enhancing the actual effectiveness of
boards and as a source of confidence to distant
investors as to the effectiveness of what goes on in
boards. Whilst board structure, composition and
independence condition board effectiveness, we
argue that it is the actual conduct of the non-
executive vis-a
`-vis the executive that determines
board effectiveness. Non-executives can both
support the executives in their leadership of the
business and monitor and control executive
conduct. Rather than discover an inherent ten-
sion in these two aspects of the role, our research
suggested that the key to board effectiveness lies
in the degree to which non-executives acting
individually and collectively are able to create
accountability within the board in relation to
both strategy and performance. Such account-
ability is in practice achieved through a wide
variety of behaviours – challenging, questioning,
probing, discussing, testing, informing, debating,
exploring, encouraging – that are at the very
heart of how non-executives seek to be effective.
We present the section of our report that explores
such accountability in terms of three linked sets
of behaviours that suggest the non-executive
should be ‘engaged but non-executive’, ‘challeng-
ing but supportive’ and ‘independent but
involved’.
In the concluding part of the paper we reflect
on the methodological, theoretical and policy
contributions and implications of our work. We
argue that both governance theory and govern-
ance reform need to be informed by primary
qualitative research on key governance relation-
ships. We question both the theoretical utility
and empirical robustness of established distinc-
tions in the literature about the service, control
and resourcing roles of boards and the adequacy
of theoretically derived models of board
dynamics in the literature. We also observe some
of the present dangers in the tendency for agency
assumptions to dominate corporate governance
debate and reform. Instead, we suggest the merits
of a focus, both theoretical and empirical, on the
practical challenges that non-executives and
boards face in creating and sustaining account-
ability. We also explore the potential of such a
focus on accountability for our understanding of
governance relationships beyond the board, in
particular relationships between boards and
investors. Lastly, we offer some reflections on
the process of governance reform as illuminated
in the response of some to the draft recommen-
dation of the Higgs Review. Rather than conceive
of governance reform as a struggle over the
divided loyalties of the non-executive – a
conception encouraged by agency theory – we
propose a different conception. Governance re-
form, we suggest, should have two different but
related objectives – to enhance actual board
effectiveness and to enhance the confidence of
distant investors and others as to the effectiveness
of what goes on in boards. The response to the
Higgs Review suggests that at times these
objectives conflict with each other, and we point
to the dangers within reform of undermining the
conditions for actual effectiveness for the sake of
distant perceptions of effectiveness.
S6 J. Roberts, T. McNulty and P. Stiles
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