Corporate Governance-Assessment of the Determinants of the Effectiveness of the Board

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Corporate Governance: Assessment of the Determinants of the Effectiveness of the Board.
By Mutui
1. INTRODUCTION
1.1 Background
There has been significant interest in corporate governance since mid-1980 both in the practice
and academic world. This has been brought about by the unearthing of major global business
scandals such as Lehman Brothers, WorldCom, and Enron Corporation had global impacts
(Ogbechie, 2012). As such, corporate governance issues have been brought into scrutiny as each
bout of scandal comes with a fresh round of discussion on the role and effectiveness of governance
systems. For instance, the WorldCom and Enron scandals brought issues on the independence of
the board and the role of auditors and audit committees while issues of insider trading were the
key focus of the 1990s Asian financial crisis. At the core of discussions in the failure of Lehman
Brothers were remunerations for the executive. In all these cases, the concern has been all about
the structure of corporate governance and particularly the role and effectiveness of the Board of
Directors.
Consequently, there have been a lot of theories and investigations into the role of the effectiveness
of the board concerning corporate governance. Similarly, there exist ambiguity as to whether the
effectiveness of the board is positively related to the performance of the firm. This is because it is
not easy to gauge the extent to which the board contributes to the performance of the business.
However, it is easier to measure whether the board acted effectively if, for instance, it was able to
avert a disaster such as a retreat to turn around a failing industry and reverse defective decisions
by the CEO. At times, such actions are rarely noticed in the outside world, thus making it a
daunting task in assessing the effectiveness of the board. This implies that the effectiveness of the
board is interpreted within the context of the working relationships of directors in discharging their
roles.
In many of these corporate failures in the last couple of decades, the question that lingers in the
minds of scholars, practitioners, and policymakers alike is where was the board (Nordberg &
Booth, 2018).) and how effective was the board? This leads to another question of what it takes to
measure the effectiveness of the board to the extent that such meaning of effectiveness has the
same understanding among the directors themselves, scholars, policymakers, and practitioners.
In regard, scholars have opined that it is not easy to identify conditions making up effectiveness
and as such this matter elicits a lot of debate from a policy and practical perspective (Nordberg &
Booth, 2018). This has called for some actions especially in developed countries such as the USA
to instate measures of enhancing board effectiveness such as periodical reviews of board
performance Cadbury (1999). Other regions such as the United Kingdom (UK) have followed the
suit (FRC,2018) with the enactment of policies demanding assessment of the board performance
be undertaken by external facilitators to enhance objectivity. This trend has gained traction and
has been adopted in many other counties in different environments for the public listed companies
(OECD, 2015).

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Given the worrying trends of erosion of corporate governance as witnessed by increasing entities
that were once described as too big to fail, several proposals have been put forth in an attempt to
restore corporate governance and rebuild public trust (Ogbechie, 2012). In some studies, the
emphasis on corporate governance is on the working and composition of the board (Van den
Berghe and Levrau, 2004). Within the African context, corporate governance is viewed from the
financial performance and board characteristics (Ujunwa, 2012). However, Baptista & de Melo
(2010) argues that besides structural factors influencing the effectiveness of the board, there are
non-structured factors that influence the effectiveness and strategic decisions of the board. These
are behavioral, cognitive, social, and environmental factors. In this regard it is yet clear which
factors act as the determinants of the effectiveness of the board, hence the need for the study.
1.2 Theoretical Framework of Evaluating Board Effectiveness
Both structural and non-structural factors are believed to influence the performance of the board.
To accommodate varying views on board evaluation and effectiveness, Forbes and Milliken (1999)
developed a model which integrates all the factors that are perceived to influence the performance
of the firm as influenced by the effectiveness of the board. This model is illustrated as here-below.
Figure 1: Theoretical Framework
1.3 Problem Statement
Studies have shown that identification and measurement of the effectiveness of the board is a
complex issue (Allen et al., 2004). It is also argued the performance of the firm may be influenced
by the effectiveness of the board. According to Forbes and Milliken (1999), the board’s
performance of its task may be used to assess its effectiveness. This effectiveness is depicted by
the execution of its tasks of control and service effectively.

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According to Baptista & de Melo (2010), the functions of the board can be grouped into four tasks,
namely; strategy, service, resource provision, and monitoring. The framework of agency theory
supports the monitoring task that entails the protection of shareholder wealth and risk management
(Fama and Jensen, 1983). The stewardship theory supports the service task (Donaldson and Davis,
1991) which supports and advises the management. The activities of strategic direction and
management implementation of the strategic plan are with the board’s task of strategy (Phan,
1998). On resource provision tasks, the board is responsible for the provision of resources,
maintaining the relationship with stakeholders, and ensuring legitimacy and experience are
forestalled in the firm (Ong and Wan, 2008).
The extant literature presents the effectiveness of the board as either structural or non-structural
structural dimensions. Included in the structural dimensions are feature such as the size of the
board, the CEO duality, experience, and independence of the board to mention a few. Although
extensively researched, there still exists uncertainty as to the relationship between firm
performance and the structural characteristics of the board. This is partly because studies have
shown that non-structural factors restrain direct relations among directors. According to Forbes
and Milliken (1999), such non-structural factors could be behavioral, cognitive, power dimensions,
and work processes.
But more recent models of the effectiveness of the board, complementary approaches have been
employed incorporating both structural and non-structural views. In this regard, Ong and Wan
(2008) grouped the models into process and mediation categories of which the former explains the
effectiveness of the board from a structural standpoint. The mediation models are holistic to the
extent that they combine both structural and non-structural factors on assumption that there is an
interrelationship between the structure of the board, processes, and the performance of the firm.
Despite these varying dimensions and factors, the ensuring discourse fails to demonstrate the key
drivers of the board’s effectiveness. This study sought to establish the determinants of the
effectiveness of the board.
2. LITERATURE REVIEW
This section provides reviews of the extant literature on the determinants of the effectiveness of
the board from theoretical and empirical perspectives.
2.1 Theoretical Literature Review
Several theories have been put forth to explain the relationship between effectiveness and
performance. Three theories were explored in this paper, agency theory, stewardship theory, and
stakeholders’ theory.

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2.1.1 Agency Theory
This theory argues that the principals lose control of the agents as the firm grows in size. Hence
the agents effectively seize control over the principals leaving them at the advantage of pursuing
their vested interests at the expense of the principals (Mizruchi, 1983).
According to this theory, the effectiveness of the board is important for the continuity of the firm
and more so when there is a clear distinction between the roles of the executive and the board
(Fama and Jensen, 1983). This effectiveness will depend on how the board and executive discharge
their duties in the protection of the shareholders’ interests.
On the flip side, this theory fails to address the organizational life complexities, hence prompting
the need to assess other theories about the effectiveness of the board.
2.1.2 Stewardship Theory
This theory advocates that the managers should perceive themselves as stewards who work in the
best interest of the principals (Donaldson and Davis, 1991). In this theory, the motivation of the
steward should be aligned with the overall goals of the organization such the attainment of those
goals will benefit all the stakeholders and business.
In contrast with Agency theory, the theory advocates for the CEO’s duality such that there is no
loss of control as the CEO who is the steward is also the chair of the board (Ju and Zhao, 2009).
This theory has been criticized for its advocacy duality role which is frowned upon in the modern
governance world.
2.1.3 Stakeholder Theory
According to the Stakeholder Theory, the key focus is to balance the conflicting interests of the
various stakeholders. These stakeholders may include stockholders, managers, workers, and
suppliers. In this theory, the interest of the board is in performance to ensure it meets the
expectations of the stakeholders. To actualize such expectations, the board is required to have the
right mix of directors in terms of experience and background for its effective functioning. The
theory has been propagated by the proponents of the balancing of human and social capital in
corporate governance.
However, the theory falls short of certain expectations as observed by Freeman & McVea (2001).
who argued that the theory failed to offer guidance in ranking or reconciling competing interests.
Also, It does not stipulate how the effectiveness of the business will be judged.
2.2 Empirical Literature Review
Several approaches have been used to determine the effectiveness of the board (Van den Berghe
& Levrau, 2004). According to Nicholson & Newton (2010). effectiveness is measured by the
extent to which tasks and outcomes fulfill the set goals. However, the role of the board is not

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always very clear and, in some instances, the role of the board could be multiplicative while in
other cases it could be contradictory (Hung, 1998). According to Baptista & de Melo (2010), the
functions of the board can be grouped into four tasks, namely; strategy, service, resource provision,
and monitoring. However, in the case of Zahra & Pearce (1989), there are three roles of the board,
namely strategic, control, and service. In other studies, the role of control is the same as oversight
or monitoring while the service role is likened to the advisory role. These roles as discussed
hereunder.
2.2.1 Control Role
In the control role, the board put in place control mechanisms to ensure the actions of the
management are in line with the interests of the owners. This entails mechanisms for selecting
and recruitment as well as removal from the office of underperforming CEO and management,
establishing incentives for the management, and monitoring and evaluating the performance of the
organization (Zahra & Pearce, 1989). The emphasis of this role is to ensure the management work
in the best interests of the shareholders by having in place control mechanisms for the action of
the management (Hillman & Dalziel, 2003).
2.2.2 Service Role
This is probably one of the key functions of the board. In this role, the board provides the CEO
and management with expert counsel and accessibility to resources that are within the reach of the
directors. The role is derived from both resource dependence theory and stewardship theory. In the
case of the resource dependence theory, the board is responsible for linking the firm with external
organizations that are related to its functions (Pfeffer and Salancik, 1978).
From the stewardship theory, there is the affirmation of legitimacy for strategic engagement. As
such, there is mismanagement of corporate resources since there are other nonfinancial incentives
for managers such as the derivation of satisfaction from successful performance and recognition.
In the absence of management vested interests, the question is what drives the managers to high
performance (Muth and Donaldson, 1998).
2.2.3 Strategic Role
This role of the board entails the formulation and execution of strategies for the success of the firm
(Watson, 2002; Useem, 2003). There has been increased interest in this role as directors are going
from the traditional role of monitoring to strategic roles that adds value to the firm performance
(Leblanc and Gillies,2005)
2.3 Board Characteristics and Processes
The ongoing discussion on the role of the board to enhance the effectiveness of the board through
improved performance. The effectiveness of the board is a result of resources and activities of the
board, input, and processes all directed toward the role of the board. For the board to be effective,
certain structural and non-structural dimensions factors influence the performance of the board.

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As we look into the characteristics of the directors, board, and the process in the analysis that
follows:
Characteristics of the individual directors: These are the demographic characteristics of
knowledge and skills possessed by individual directors. They are easy to know by obtaining one’s
career details. Board interlocks studies have shown that it may be possible to assess the social
capital of an individual director from the outside world. However, it may not be possible to know
the social capital of individual directors on the board, thus leading to board cohesiveness and
cognitive conflict and rendering external assessment of interpersonal relations irrelevant within
the board context.
Similarly, Charas (2015) argues that the use of data sources may not say much about one’s
persuasiveness, thought processes, and sensitivity to cultural variations whether through either
peer-to-peer evaluations or the use of internal evaluators such as the chairman. Thus, a better way
to assess individual characteristics will be to use external evaluation and ethnographic approaches
as suggested by Nicholson et al. (2017).
Board characteristics: According to Forbes and Milliken (1999), these are demographics that the
board collectively possesses. They could be a mix of professional backgrounds, gender, and ages.
They show diversity on the board which is a solution to excessive cohesiveness. However, existing
empirical studies do not clearly show such diversity affects the tasks of the board and the
performance of the firm (Homberg & Bui, 2013). As with individual characteristics, it is possible
to assess the board characteristics since background information about directors, and structures of
the board are now becoming publicly available. There is an increasing need to improve board
diversity, thus the focus is on assessing how such collective characteristics affect the processes,
effectiveness, and evaluation processes of the board.
Board processes: The board processes are hard to observe especially where there are no clear
policy prescriptions. While processes such as attendance of board meetings may be easily
available, certain features such as how the board uses their skills and knowledge may not be visible.
Similarly, cognitive conflict is not possible and only manifests itself when there is the collapse of
board cohesiveness.
More often, there a several reasons for hiding information on board processes. While
confidentiality (Zhang, 2010) could be one of the reasons, other factors such as political forces
greatly affect director persuasiveness, emotional intelligence, cultural behavior, and social capital
all of which have an impact on board processes and effectiveness.
3. METHODOLOGY
According to Daily et. al., (2003) majority of studies on boards of directors and their effectiveness
have used quantitative data analysis techniques. In this many studies, archival data and
questionnaires are used for data collection. In some studies, mixed-method design encompassing
both quantitative and qualitative methods have been used (Teddlie and Tashakkori, 2003). In the

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case of Creswell et. al. (2003), a two-phased methodology entailed collecting qualitative data after
which quantitative techniques were used for data analysis.
In this study, a review of existing literature was relied upon to determine key determinants of the
effectiveness of the board. The study used Google Scholar to search for relevant articles and
journals containing keyword searches such as board effectiveness, board of directors, corporate
governance, and structural and non-structural dimensions of the board.
4. FINDINGS AND DISCUSSIONS
This section provides a discussion of the results of the key findings from the literate review on the
determinants of the effectiveness of the board. From the analysis of the existing literature, it is
clear that the effectiveness of the board affected the performance of the board. Board performance
refers to how well the board executes its roles of control, service, and strategic and working
mechanisms with the management for the larger good of better performance of the organization.
Analysis of the various studies reveals interesting results of determinants of the effectiveness of
the board as discussed here below.
There was a positive and significant relationship between the decision-making and the
effectiveness of the board. This means that the quality of the board’s decisions has a direct effect
on its roles of control, service, and strategic functions. According to Zona and Zattoni (2007), the
quality of the decisions made by the board is influenced by factors such as cognitive conflict and
open discussions which in turn affect its effectiveness.
Another factor that had a positive and significant influence on the effectiveness of the board was
board cohesiveness, implying that the higher the level of cohesiveness the more effective the board
was in executing its roles effectively. This cohesiveness is exhibited by the presence of strong
teamwork. According to Kemp (2010), teamwork enhances board effectiveness and processes as
90% of the respondents in the study mentioned. It was observed that the working of the boards
involved complex decisions and teamwork by way of collective decisions, information, and
resource sharing was critical for the effective functioning of the board (Hambrick, 2007). On the
contrary, less cohesive boards could work at the mercy of powerful CEO and were ineffective in
rendering strategic advice to the top management.
The operations of the board positively influenced the effectiveness of the board. This means that
processes of good operations enabled the board to perform its duties effectively. Good operations
were demonstrated by timely and quality board reports, well-defined responsibilities of follow-up
of pending matters, the proper understanding of the roles and responsibilities of the board, and the
conduct of the board meetings.
However, analysis of the various studies revealed that the size of the had no significant relationship
with the board’s operations, cohesiveness, and decision-making, hence the size of the board failed
to demonstrate any effect on the board’s effectiveness. Studies by Randoy and Jenssen (2004)
attest to this finding and that the size of the board had a significant influence on the performance

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of the firm. However, studies by Bozec (2005) and Guest (2008) assert that the size of the board
had a significant and positive influence on the firm’s performance.
On CEO duality and independence of the board, studies have failed to demonstrate how they affect
the processes of the board, thus they do not influence the effectiveness of the board. Based on the
accounting parameters, Randoy and Jenssen (2004) established that the independence of the board
had no impact on the performance of the board. Similar findings were reported by Bhagat and
Black (2002) as they did not establish how the independence of the board contributed to the better
performance of the firm. These findings as well as those of Wintoki et al. (2009) and Coles et. Al
(2008) observe that the size and independence of the board have no relationship to the performance
of the firm. According to these studies, the formation of the board is depended on the contract
environment and their information.
Owing to rising corporate scandals, there has been a clamor to separate the role of the CEO and
the Board chairman all over the world (Wilson, 2008) as there is more effective monitoring when
the chairman of the board is independent of the firms’ operations. Equally the same is for the CEO
who is not the chair of the board as he can focus on the daily operations of the firm while providing
support to the board. However, this argument of CEO duality is still inconclusive as there is no
sufficient evidence linking the relationship between board processes and CEO duality to the roles
of the board. But Hwang and Kim (2010) have countered this argument of independence noting
while the board may appear independent on paper, their dalliance and personal connection with
the CEO outside the office could render them less effective in monitoring the firm performance.
The was a significant and positive relationship between job-related diversity and the cohesiveness,
operations, and decision-making of the board, thus better decisions for a more diverse board.
Diversity, in this case, means different experiences that can be relied upon for the enrichment of
board operations. This positive relationship is attributable to the fact there is a tendency for
creativity and innovation and quality decisions emanating from a more diverse board (Bilimoria
and Wheeler, 2000) which leads to sound planning and decision making. It has been established
that there is a high likelihood of strong cohesiveness when the board is diverse contrary to the
belief that of possible discordances due to varying views and opinions. However, there are cases
where diversity has been reported to have a negative impact such as failure to reach a consensus
on strategic decisions (Knight et al., 1999).
The presence and use of board skills, knowledge, and experience otherwise known as professional
human capital were found to positively and significantly influence the decision-making and
cohesiveness of the board, thus indirectly but positively affecting the effectiveness of the board.
This human capital is important to support management as well as participation in key strategic
actions and decisions that are bound to benefit from such specialized knowledge and competencies
possessed by a diverse board. Hence, the greater the human capital of the board the better the
effectiveness of the board and firm performance (Stewart,1997).

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5. CONCLUSION
While the importance of corporate governance has been growing in an attempt to enhance board
effectiveness, there is no consensus on the key determinants of effectiveness and it will vary from
one situation to another. There have been assumptions in many studies that the effectiveness of the
board is determined by its independence and structure of the board. This is not the case as this
study has established that various factors influence performance and they could be processes and
demographic factors that contribute to the board’s effective performance. As such the study has
demonstrated that good performance of the board is a result of cooperation and quality decisions
arising from quality information.
Contrary to many expectations that structural dimensions such as board demography are key
determinants of board effectiveness, this study has established that the determinants of board
effectiveness are actually from non-structural dimensions. These are, for instance, board processes
and decisions, cognitive conflict and open discussions, cohesiveness, board operations, job-related
diversity, and presence and use of board skills, knowledge, and experience.
In conclusion, there is a need for further research to incorporate non-structural factors into the
performance and evaluation of the board’s effectiveness as they have shown to significantly and
positively determine the performance of the board.

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