Board Dynamics Univ. - IRCG: Startseite · Board Dynamics Univ.-Prof. Dr. Marc ... Sources of Governance Power Individual directors ... would result in greater transparency of their

Advanced Corporate Governance

Board Dynamics

Univ.-Prof. Dr. Marc Eulerich ￭ Lehrstuhl Interne Revision ￭ WS 2017/18

Agenda

Univ.-Prof. Dr. Marc Eulerich Advanced Corporate Governance | WS 2017/18 2

Business Ethics

Board Diversity

Board Compensation

Board Dynamics

International Corporate-Governance-Systems

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2

3

4

5

6 Family Governance

4 Board Dynamics

Process Models

Input-Process-Output Approach:

Process mediates the relationship between structural dimensions and performance.

Behavior of corporate governance players is of crucial importance for the efficiency of

corporate governance systems.

Performance of the board as a social group can be measured as:

• Mastery of advisory and assurance tasks (task performance)

• Mastery of interaction problems

• Development of integrated long-term cooperation's.

Prerequisite:

• Cooperation (unhindered exchange of information between supervisory and executive

board

• Debate culture

• Group dynamics.


Process Models


Source: Welge and Eulerich (2002) modified from Lippert (2008)

Input-Process-Output Approach

Intermediary Variable

• Effectiveness of the

decision-making

• Board as a social

group

• Group dynamics

Structure Process Performance

• Size

• Composition

• Independence, etc.

• Corporate

performance

Input Output

Process Models

Intellectual Capital Model of the Board (Nicholson/Kiel 2004).

Starting point is the thesis that supervisory boards fulfill a variety of different roles:

• Monitoring and control of management (Berle/Means 1932)

• Counsel and advisory for executive board (Lorsch und MacIver 1989)

• Provision of resources and information (e.g. Pfeffer 1972, 1973).

Intellectual capital of the board needs to fulfill these roles:

• Human capital: skills, ability, knowledge of industry trends, industry structure and

dynamics, functional knowledge of marketing, finances, HR, etc., board-specific

knowledge

• Social capital: relationship between board members, relationship between supervisory

and executive board, relationship to external stakeholders

• Structural Capital: codified routines, processes, practices, procedures, etc. that enable

usage of human and social capital.

Addition of a „strategizing role“.


Process Models


Intellectual Capital Model of the Board:

Source: modified from Nicholson and Kiel (2004, p. 12)

Process Models

Board Effectiveness Model:

Traditionally, the ability to make good decisions was considered to be the result of the board

structure.

Lebland/Gillies 2005 extended this approach:

• Interpretation of corporate governance as a process of decisions made in small groups

• Taking into account skills and abilities of the individual board members.

Efficiency of board meetings depends on:

• board structure

• board process

• board membership.


Process Models

Board Effectiveness Model:


Source: Leblanc/Gillies (2005, p. 139)

Process Models

Behavioral patterns that influence the decision-making ability of boards:

• persuasive/ non-persuasive

• dissent/ consensus

• individual/ collective.


Process Models


Source: Leblanc and Gillies (2005, p. 166-167)

Process Models


Source: Leblanc and Gillies (2005, p. 166-167)

Sources of Governance Power

Individual directors‘ power over board matters derive from a variety of sources:

• Personality power (power of a dominant or charismatic individual)

• Knowledge power (derived from access to information, skills, experiences, etc.)

• Sanction power (exists if a director can apply sanctions to the company or other

directors)

• Political power (ability of directors to play boardroom games)

• Interpersonal power (because of relationship to or private knowledge about others)

• Organizational power (derived from position in organizational hierarchy, e.g. CEO)

• Networking power (derived from contacts and acquaintances of value to the company)

• Societal power (derived from a position of influence in society)

• Ownership power and ability to determine board membership

• Representative power (delegated from an external power source such as institutional

investors, joint venture partners, etc.).


Board Influences

Possible external influences on the board are:

• Dominant shareholders

• Threat of potential takeover

• Prospect of litigation

• Auditors

• Effects of legislation and regulation

• Media pressure and other external exhortation

• Risk of damage to personal reputation

• Changing business circumstances.


Boardroom games

Boardroom reality involves people, power, and politics as well as rigorous analysis and

rational debate.

In badly led boards personalities and political maneuvering can prevail and directors will play

games.

An awareness of these games can help to create a board culture in which they become

apparent and are stopped.


Boardroom games

Alliances: Two or more members of the board conspire together to influence a board

decision.

For example, two executive directors, each responsible for an operating division in a group,

work together in prevent the introduction of a proposed management control system that

would result in greater transparency of their divisional activities: however, they both agree to

argue their case on the grounds that the system would prove expensive and that cost would

outweigh any benefit.


Boardroom games

Coalitions and Cabals: Groups of directors work together, inside and outside the

boardroom, to bring about a specific outcome to a board decision. Coalition building involves

the canvassing of support for an issue informally outside the boardroom so that there is a

sufficient consensus when the matter is discussed formally in the boardroom.

For example, a group of directors in a not-for-profit company incorporated to run a sports

facility opposed plans to build a new swimming pool. The members of this clique were all non-

swimmers, and refused to sanction other expenditure unless the swimming pool plan was

dropped.


Boardroom games

Cronyism: Relationships between directors an influence decisions on the basis of personal

relationships not the rational merits of the case. Cronyism can produce decisions that are not

in the best interest of the company.

For example, three directors on the board of a listed company were all members of the same

country club. They tended to support each other in board discussions, all favoring the same

outcome and opposing the same alternatives.

Cronyism can affect an entire board.

For example, a director declared a personal interest in a tender for a project being discussed

by the board. He was asked to leave the room during the discussion of that contract. But the

board decided to support this bid because of their personal relationships with the director,

even though the bid was not the most worthy.


Boardroom games

Deal Making: Agreements made outside the boardroom between two or more directors to

achieve a specific outcome on a board issue. Deal making is a classic game, usually

involving compromise.

The medical members of a hospital board agreed, during a private dinner, to put pressure on

the board to acquire some new sophisticated medical equipment they wanted. They were

successful, even though there were more pressing needs for the available funds, including

cleaning equipment for the wards.


Boardroom games

Divide and Rule: When a contentious issue is being discussed, the outcome wanted by one

faction is more likely to be achieved if the other directors can be divided into a number of

disagreeing factions. This is a ploy adopted from the chair in some boards.

Divide and rule can be a dirty game, in which the player sees the chance to set one director

against another, or groups of directors against each other.

An issue in the financial accounts might be used, for example, to divide the executive

directors, the non-executive directors, and the auditors from each other, in order to achieve

an entirely different personal aim.

For example, a senior INED serving on the board of a Canadian cooperative advanced

arguments that divided the board into three groups reflecting the views of the various

representative groups – suppliers, customers, and the administration – thus he could push

through the strategy be wanted.


Boardroom games

Empire Building: Usually adopted by executive directors, empire building involves the

misuse of privileged access to information, people, or other resources to acquire power over

organizational territory. The process can involve intrigue, battles and conquests.

Take the example of a company in the IT consulting business, which acquired a marketing

company to promote its business. The operations director of the IT company moved his staff

to the more palatial offices of the marketing company, took over its fleet of cars, and argued

in the board meeting that his deputy should also become a board member, because of his

enlarged portfolio of responsibilities.


Boardroom games

Half Truths: By presenting only part of the information on an issue before the board, an

unscrupulous director can bias the discussion in favor of his or her own preferred result.

Whilst the director does not actually lie, the half truth obscures the full story.

For example, an executive director argued strongly in favor of his own project, presenting

impressive cost/benefit information in support, but failing totally to mention that the risk of

stoppage to the firm‘s entire operation would be significantly increased.


Boardroom games

Hidden Agendas: An individual director offers a convincing argument in support of a

particular line in a board discussion without adding that additional outcomes to his or her

advantage would then arise – the hidden agenda. Hidden agendas usually involve the pursuit

of secret goals that benefit a director‘s own interests or further his or her own career against

the interest of the organization as a whole. In other words, the ploy is another example of the

agency dilemma.

For example, in advocating a contract to acquire services for a joint venture, a director on the

joint venture company board failed to mention that this contract would bring significant sales

discounts on products bought by one of the joint venture partners – his employer.


Boardroom games

Lobbying: involves attempts to influence directors, or those in a position to influence

directors, usually outside the boardroom.

Consider the implications when a director of a consulting practice sought out the wife of the

CEO of a client company during a cocktail party and encouraged her to persuade her

husband to accept a quotation.


Boardroom games

Log Rolling: Two or more directors colluding, to their mutual benefit, is a classic board level

game.

For example, two executive directors in a manufacturing company came to an agreement

before the board meeting. The first would enthusiastically support an investment proposal

benefiting the second, whilst the second would offer mitigating arguments during the review of

the poor budgetary performance of the first.


Boardroom games

Propaganda: is the dissemination of information to support a cause, without attempting to

show the complete picture.

The chief executive of a finance institution made a PowerPoint presentation to his board,

advocating the introduction of a new derivative-based product, without once mentioning the

work ‚risk‘. Unfortunately, none of non-executive directors raised the question, the board

approved the proposal, and a year later the company had to issue a profit warning following

losses on the new product.


Boardroom games

Rival Camps: is an extreme case of coalitions and cabals, where there are opposing factions

on a board. Hostilities, spies and double agents can be involved.

The board of a Fortune 500 company were totally split on a proposal led by the

chairman/CEO‘s proposal to bid for a rival company. Leaders of each faction emerged and

the two groups began to hold separate meetings, to brief the press independently, and to talk

with institutional investors about their own perspectives on the bid.


Boardroom games

Scaremongering: is used by some directors to emphasize the downside risks in a board

decision, casting doubts on the situation without presenting a balanced perspective, thus

attempting to have the proposal turned down.

As a director in a multinational manufacturing group argued convincingly, when the board

were considering building a new manufacturing facility in another country, „we shall have

nothing but labour troubles, high taxes, if we locate there, and possibly government

interference….and who knows what might happen if the present government falls? We could

find all our assets nationalized without recompense.“

A risk assessment would have shown the probability of these future uncertain events to be

low.


Boardroom games

Snowing: involves deluging any director who asks for more information on a topic with

masses of data, thus confusing the situation and hiding any cracks.

This game is usually played by executive directors on unsuspecting outside directors.


Boardroom games

Spinning: a form of gaming developed at governmental level, intentionally presents a

distorted view of a person or a situation, in a way that favors the spinner‘s interests.

In corporate governance, spinning can be carried out at the level of board committees, the

board as a whole, the shareholders, or the media.


Boardroom games

Sponsorship: is support by a powerful director for another director, often a newly elected

director, usually for their joint benefit.

For example, the long-serving director of the Australian subsidiary of an American global

group commented during a board meeting „Mr. Chairman, I‘ll have a word with Robert (a new

director) after the meeting to explain how we handle these things. As you know I‘ve a lot of

experience of this type of situation and what we‘ve done in the past.“ In the ensuing

discussion the experienced director relayed a lot of gossip about the ways of the board and

its chairman to his own future benefit.


Boardroom games

Sub-optimization: occurs when a director supports a part of the organization to the

detriment of the company as a whole. We have explored this situation already, both when

considering the agency dilemma and in group management control systems.

Some executive directors suffer from tunnel vision, because they are too closely involved with

a functional department, division, or subsidiary company. Others may have a myopic view of

the situation because they would be personally affected by the outcome. An independent

evaluation of the overall strategic situation and top management performance by outside

directors can help to overcome such problems.


Boardroom games

Window-Dressing: dressing includes making a fine external show of sound corporate

governance principles and practice, whist minimizing failures.

Some companies‘ mission statements, social responsibility and sustainable reports, and core

principles suffer from window dressing. Window dressing can also involve showing financial

results in the best possible light, whilst hiding weaknesses, although this runs of an adverse

audit report or worse.


Meeting Manipulation

Devices that directors have been known to use to achieve the results they want in

meetings include:

• Management of the agenda: determines what is and what is not discussed

• Challenging the minutes of the last meeting: re-opens discussion of a previously resolved

item

• Hijacking the chair: taking over the running of the meeting

• Refocusing the debate: when the tenor of the meeting is running against the

manipulator‘s interests

• Calling for a postponement of discussion until the next meeting, on the grounds of lack of

information, the need for more reflection, etc.


Board Styles

Different board styles:


High

Low

Country club

board Professional

board

Rubber stamp

board Representative

board

Low High

Concern for board performance

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Board Dynamics Univ. - IRCG: Startseite · Board Dynamics Univ.-Prof. Dr. Marc ... Sources of Governance Power Individual directors ... would result in greater transparency of their