Board task performance
We follow the tradition of boards and governance research by considering board effectiveness in relation to board task performance (Forbes & Milliken, 1999; Johnson, Daily, & Ellstrand, 1996; Stiles & Taylor, 2001; Zahra & Pearce, 1989). According to this tradition, boards are expected to perform control and advisory tasks. The control tasks follow predictions of agency theory (Fama, 1980; Jensen & Meckling, 1976), suggesting that the primary responsibility of corporate boards is to safeguard shareholders from management misappropriation (Shleifer & Vishny, 1997). From this perspective, boards are groups of independent people with the duty to actively control top executives and the incentives to operate in the interests of firm's shareholders (Fama & Jensen, 1983). To accomplish control tasks, board members should scrutinize top executives' behaviors and actively monitor firm performance to satisfy both shareholders' and stakeholders' expectations (Hillman & Dalziel, 2003). The attention to board control tasks is regaining interest in light of the current global financial crisis. As such, board control is increasingly considered a primary measure of boards' effectiveness, and is thus subject to severe public scrutiny.
At the same time, from a resource dependence perspective (Pfeffer & Salancik, 1978), board advisory tasks relate to the ability of board members to bring additional resources to the firm (Hillman & Dalziel, 2003). According to this view, corporate boards are groups of competent people contributing to boardroom debate by bringing in their experiences, competences and pluralistic perspectives (Forbes & Milliken, 1999). In this respect, board members contribute to strategic decision-making by providing valuable advice and counsel to firm top executives (Daily & Dalton, 1994; Hillman, Cannella, & Paetzold, 2000; Judge & Zeithaml, 1992). The advisory tasks are conceptually rooted in a collaborative model of board of directors, complementing the independent model according to which boards have the primary responsibility to control managers on behalf of shareholders (Westphal, 1999).
Board processes and board task performance
The understanding of board control and advisory task performance requires identifying predictors of board effectiveness. To this end, we follow calls to explore board behaviors beyond the reliance of demographics as proxies of actual processes (Daily et al., 2003; Forbes & Milliken, 1999; Pettigrew, 1992). The need to explore processes in boards and governance research has been recently advocated by Hambrick et al. (2008), who argue that “behavioral processes” represent the main determinants of governance at the micro-level of analysis. Accordingly, we build on the integrated model of board effectiveness proposed by Forbes and Milliken (1999), which identifies three main board processes as predictors of board task performance: Effort norms, cognitive conflicts and use of knowledge and skills. Grounded in organizational theory (Hackman & Morris, 1975), these processes have mainly been tested in different decision-making workgroups (see Bettenhausen, 1991; Cohen & Bailey, 1997 for a review). Notwithstanding, they are thought to have a peculiar meaning within the context of corporate boards, characterized as “large, elite, episodic decision making groups that face complex tasks pertaining to strategic issue processing” (Forbes & Milliken, 1999: 492). Several aspects characterize boards as peculiar decision-making groups. Specifically, boards are: (a) Larger than other workgroups; (b) made up of a majority of “outsiders”, with primary affiliation in other companies (and thus with a more limited knowledge of company issues); (c) episodic, since they meet from 6 to a maximum of 12 times per year and (d) without a concrete and “tangible” outcome, i.e., boards are not responsible for implementing decisions, and their outcome is entirely “cognitive” in nature. These characteristics make boards particularly vulnerable to “process losses” that prevent them from achieving their full potential (Forbes & Milliken, 1999; Steiner, 1972).
Effort norms is a “group-level construct that refers to the group's shared beliefs regarding the level of effort each individual is expected to put toward a task” (Forbes & Milliken, 1999: 493). Recent reviews emphasize the importance of the effort board members devote to preparation, analysis and participation in boardroom debates (e.g., Hambrick et al., 2008). Most board members are busy professionals who face competing demands for their time (Lorsch & MacIver, 1989). As such, the effort devoted to different tasks may vary considerably across boards, with the potential result that board members often act as a “rubber stamp” for managerial proposals (Lorsch & MacIver, 1989; Mace, 1971; Stiles & Taylor, 2001).
As board members often fail to do their “homework”, i.e., do not analyze documents and information provided before meetings (Forbes & Milliken, 1999), the probability of them merely acting as a passive audience in corporate boardrooms increase. The lack of effort is especially relevant in the board context, since boards are decision-making groups composed mostly of outsiders who bring substantial independence at the price of lower inside knowledge of the firm and its strategies (Mallette & Fowler, 1992). Hence, preparation for and participation in board meetings—in terms of carefully scrutinizing information provided by management before meetings, finding autonomously own information regarding issues relevant to the company and actively partaking during meetings with questions—can influence the board's ability to effectively perform its tasks (Forbes & Milliken, 1999; Wageman, 1995). Such efforts ensure constructive and fruitful discussions, thereby improving the quality of decision-making and contributing to the performance of cognitive and intellective tasks (Watson & Michaelsen, 1988). Based on arguments above, we contend that effort norms facilitate both control and advisory tasks. Finding their own information together with careful scrutiny of management reports favor board oversights, whilst in-depth preparation together with active participation during meetings facilitate board advice to management. Thus, we hypothesize the following:
Hypothesis. Hypothesis 1: Effort norms will have a positive impact on board control and advisory task performance.
Cognitive conflicts refer to task-oriented differences in judgment among group members, often manifested in “disagreements about the content of the tasks being performed, including differences in viewpoints, ideas and opinions” (Jehn, 1995: 258). As a result of the effects of conflicts on group effectiveness still being equivocal (De Dreu & Weingart, 2003), Jehn (1995, 1997) proposed an alternative perspective by differentiating between task and relationship conflicts. She noticed that, although relationship conflicts generally decrease satisfaction among group members and negatively interfere with task performance, task conflicts can be beneficial to task performance when the group is working on non-routine tasks (Jehn, 1995). The focus on boards of directors as decision-making groups emphasizes the difference between task and relationship conflicts. As groups of highly qualified individuals without hierarchical relationships and meeting only episodically, corporate boards represent a context in which relationship conflicts and personal antagonisms are less likely to take place than in other organizational teams. Rather, the non-routiness of tasks performed by corporate boards, along with the complexity of their decision-making process as well as the interdependence among board members, emphasizes the positive effects of task-related cognitive conflicts (Forbes & Milliken, 1999).
Cognitive conflicts can improve decision-making because they facilitate the exchange of information among board members (Amason & Sapienza, 1997). The presence of cognitive conflicts can increase the quality of debate, forcing board members to consider a broader range of alternatives (Forbes & Milliken, 1999). Moreover, cognitive conflicts increase the group members' tendency to scrutinize task issues and to engage in deliberate processing of task-relevant information (De Dreu & Weingart, 2003). This, in turn, may lead to the consideration of additional alternatives, as well as more careful evaluation of these (Eisenhardt et al., 1997). As such, the presence of disagreements and critical investigation among board members can force top managers to justify their strategic proposals and to consider alternative perspectives.
In other terms, while we recognize that conflicts can be either beneficial or detrimental to group performance depending on group characteristics (De Dreu & Weingart, 2003), we also argue that non-routiness of tasks performed in boardrooms emphasizes the positive sides of conflicts among directors. Based on arguments suggesting that cognitive conflicts may lead to better decision-making processes, we hypothesize the following:
Hypothesis. Hypothesis 2: Cognitive conflicts will have a positive impact on board control and advisory task performance.
Use of knowledge and skills refers to “the board's ability to tap the knowledge and skills available to it and then apply them to its tasks” (Forbes & Milliken, 1999: 495). The use of knowledge and skills is associated with the process by which board members' contributions are coordinated, and specifically refers to the flows of information among board members, the clear division of tasks and responsibilities, and the awareness board members should have of each others' competences and areas of expertise (Forbes & Milliken, 1999). This construct differs from the presence of knowledge and skills, which conversely refers to the presence of professional (e.g., finance, marketing, accounting, law) and/or firm specific knowledge and expertise. Boards are usually populated by highly competent and reputed individuals; however, the mere presence of knowledge, we argue, does not per se mean that board members will use their knowledge (Forbes & Milliken, 1999; Zona & Zattoni, 2007). Rather, effective boards require active use and integration of board members' expertise and skills to enhance group decisions. The collective use of knowledge and skills is particularly relevant when groups are highly interdependent, and when the group shares a sense of collective responsibility for performance outcomes (Wageman, 1995). It gains additional relevance when interdependent groups are also episodic, since the use of knowledge may prevent “process losses” and help board members build on each others' professionalism. Corporate boards represent such groups as board members “must elicit and respect each others” expertise, build upon each others' contributions, and seek to combine their insights in creative, synergistic ways' (Forbes & Milliken, 1999: 496). Hence, the proper use of knowledge and skills is believed to enhance task performance in both control and advice:
Hypothesis. Hypothesis 3: The use of knowledge and skills will have a positive impact on board control and advisory task performance.
Board effectiveness in control and advisory task performance is also relevant in relation to firm-level outcomes. As discussed above, both control and advice tasks of boards are believed to influence performance by preventing management misappropriation (Shleifer & Vishny, 1997) and bringing qualified advice and counsel to firm top executives (Daily & Dalton, 1994; Judge & Zeithaml, 1992). In doing so, effective boards of directors avoid “distraction” of value by managerial expropriation (through effective control) and, at the same time, allow for maximization of value creation (through effective advice). Hence, we contend that board tasks, as the sole board-level outcome to directly influence corporate financial results (Forbes & Milliken, 1999), are important predictors of firm financial outcomes (Zahra and Pearce, 1989):
Hypothesis. Hypothesis 4: Board control and advisory task performance will have a positive impact on firm financial performance.
Governance systems and institutional settings
Governance systems are embedded in national institutional environments (Aguilera et al., 2008; Aguilera & Jackson, 2003; Buck & Shahrim, 2005). Despite law harmonization, financial market integration, and diffusion of codes of best practice, are pushing corporate governance practices to become increasingly similar around the world, they continue to formally and substantially differ across contexts (e.g., Aguilera & Cuervo-Cazurra, 2004; Aguilera & Jackson, 2003; Roe, 2003). Hence, at the macro-level, national contexts potentially exert a significant influence on board task performance and internal processes.
Following institutional arguments, sources of contextual differences are formal institutions and constraints (North, 1990; Whitley, 1992) as well as informal or background institutions (DiMaggio & Powell, 1983). Among the formal institutions, legal regimes are rooted in the legal traditions of nations (La Porta et al., 1998). From a legalistic perspective, Scandinavian (Norway, Sweden, Denmark, and Finland) and French (e.g., France, Spain, Italy, etc.) legal traditions have been shown to differ along several dimensions (La Porta et al., 1998). For instance, national context has been shown to significantly influence the financial systems and consequently the local patterns of corporate ownership (Pedersen & Thomsen, 1997; Thomsen & Pedersen, 1996, 2000; Whitley, 1992).
As for background institutions, different contexts are characterized by specific national cultures. Culture has been defined as ‘a shared meaning system […], during a specific historic period, and in a definable geographic region’ (Triandis, 2000: 146). Culture refers to the “complex of meanings, symbols, and assumptions about what is good or bad, legitimate or illegitimate that underlie the prevailing practices and norms in a society” (Licht et al., 2005: 233). As such, national culture has the potential to influence and shape business practices and styles, and work-related values and behaviors. Based on their national origin, for instance, managers “not only contribute to the collective formulation of cultural norms and views, they experience social reinforcement pressures which bring their individual-level assumptions and preferences into close alignment with those of their native culture” (Geletkanycz, 1997: 617).
Board task performance and processes in different institutional contexts
From a legal perspective, board task performance is dependent on requirements by corporate laws and voluntary codes of good governance based on a “comply or explain” principle. Thus, board task performance may vary in different legal regimes. In this regard, the Scandinavian system is characterized by higher legal protection and efficiency of the judiciary system compared to the Latin system (La Porta et al., 1998). Hence, in Scandinavian countries corporate boards are likely to feel greater pressures on task performance, especially in control; such pressures stem from both disclosure requirements and legal responsibilities that board members must adhere to.
Besides legal constraints, board task performance may be influenced by cultural traits characterizing different national contexts. Comparative studies on cross national differences in cultures show strong dissimilarities among work-related individual values and behaviors as a consequence of the broader political, sociological and psychological influence of nationality (e.g., Hofstede, 1983, 1984, 2001; Hofstede et al., 2002; see also Egri and Ralston, 2004; Kirkman, Chen, Farh, Chen, & Lowe, 2009; Man and Lam, 2003). For instance, in a study of the perceived goals of business leaders within organizations, Hofstede et al. (2002) show how Latin leaders emphasize family interests, personal wealth and power, while the northern European model of business is driven by responsibility toward employees and society at large. Consistent, we argue that the consideration of stakeholders' interests in Latin countries is relatively lower compared to Scandinavia.
Thus, Scandinavian boards are more involved in both control and advisory tasks. Higher performance in control tasks is grounded in the higher institutional pressures Scandinavian board members experience in terms of disclosure and enforcement of their legal responsibilities. Higher performance in advisory tasks is predicated by a business culture in Scandinavia which traditionally emphasizes an active role of boards within firms (Huse, 1990). Hence, we hypothesize the following:
Hypothesis. Hypothesis 5: Board performance in both control and advisory tasks will be higher in Scandinavian countries compared to Latin countries.
The impact of context is not limited to board task performance. Isomorphic pressures related to inertial rules and routines embodied in institutional environments (McNulty & Pettigrew, 1999; Ocasio, 1999) and in different national cultures (Hofstede, 2001) also have the potential to significantly influence board processes (Hambrick et al., 2008). In this respect, intriguing insights emerge from the comparison of cultural traits among Scandinavian and Latin countries. In his studies of cultural relativity and its impact on managerial practices and behaviors, Hofstede (1983, 1984, 2001) shows how Latin countries are more individualistic societies, dominated by larger “power distance” and stronger hierarchies in workplaces than Scandinavian countries (Hofstede, 1984). Power distance is related to the “degree of centralization of authority and the degree of autocratic leadership” (Hofstede, 1984: 81), and together with individualism defines the leadership style which is idiosyncratic to a specific national context. In countries characterized by high levels of individualism and power distance (i.e., Latin countries), individual subordinates usually refrain from participating in decision-making. As such, it is expected that leaders will lead “autocratically” (Hofstede, 1984).
In this study, we show how culture may moderate the relationships between board processes and board task performance. In particular, we argue that board processes will be stronger predictors of board effectiveness in individualistic rather than in collectivistic societies. Individualism, for instance, may induce overconfidence in executives' ability to lead the firm, and, as a result, reinforces the importance of individual decision-making over group consensus (Geletkanycz, 1997). Individualism may also parallel opportunism in that it allows room for opportunistic behaviours, since individualistic societies are likely to be characterized by lesser social control than collectivistic ones. In individualistic contexts, the presence of competent and skilful professionals in corporate boardrooms does not ensure the effective use of knowledge. In such contexts, the board leader (CEO and/or Chair) may prefer to assign individual responsibility to him- or herself, rather than eliciting collective use of knowledge and skills. Provided the importance of collective use of such knowledge in highly interdependent groups (Wageman, 1995), the actual active use of knowledge and skills will have a stronger impact on board task performance in individualistic rather than in collectivistic societies.
The opportunistic risks associated with individualism provide further arguments for the higher relevance of effort norms in leading board members' behaviours and force them to fulfil their responsibilities as board members. Hence, boardroom cultures characterized by emphasis on board members' preparation and actual contribution to board discussions (Forbes & Milliken, 1999; Wageman, 1995) will be stronger predictors of board effectiveness in individualistic than in collectivistic societies, since effort norms enforce the commitment that otherwise would be difficult to reach.
Consistent with previous research, hierarchy prevails over active participation in decision-making in high power distant cultures (Geletkanycz, 1997); cognitive conflicts are more likely to be suppressed than encouraged in such cultures. Hence, when conflicts arise, they lower hierarchical and cognitive barriers among board members (e.g., among outsiders and insiders) and create conditions for boards being participative in firm's critical decisions. Under such circumstances, conflicts have a stronger potential to engage board members in valuable discussions, which otherwise might be missing. This is perhaps one of the reasons why boards in Latin countries have a tradition for being passive; especially concerning control tasks (e.g., Brunello, Graziano, & Parigi, 2003).
Furthermore, different leadership styles in dissimilar national contexts will shape group dynamics in that they may stimulate or inhibit effective board processes. Hence, in high collectivist-low power distance cultures (like the ones characterizing Scandinavia), leadership style will encourage board participation, and processes will tend to be naturally more effective. As a consequence, however, it may lead to a “ceiling effect” in Scandinavian boards, since relatively less variance is achievable in a good process context. In sum, previous arguments point at the importance of developing effective board processes especially in those settings where autocratic leadership and low participative business styles prevail. In such settings, the greater variance in processes across boards will determine a higher predictive potential of the board processes themselves on board task performance. Thus, we hypothesize the following:
Hypothesis. Hypothesis 6: Effort norms, cognitive conflicts and the use of knowledge and skills will have a stronger positive impact on both control and advisory task performance in Latin countries vis-à-vis Scandinavian countries.