Australian Boards and Performance: A Multi-Method Test of Three Theories of Governance

Nicholson, Gavin John (2007). Australian Boards and Performance: A Multi-Method Test of Three Theories of Governance PhD Thesis, School of Business, University of Queensland.

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Author Nicholson, Gavin John
Thesis Title Australian Boards and Performance: A Multi-Method Test of Three Theories of Governance
School, Centre or Institute School of Business
Institution University of Queensland
Publication date 2007
Thesis type PhD Thesis
Supervisor Professor Geoffrey Kiel
Abstract/Summary In this thesis I investigate how, if at all, boards of directors impact firm performance. To date, corporate governance research agendas have tended to concentrate on one particular role that a board performs. For example, agency theory concentrates on the monitoring role, resource dependence theory concentrates on the board providing access to resources and stewardship theory concentrates on the board’s advice-giving or strategic role. While these approaches can provide specific (but limited) insights into how boards impact firm performance, there has been limited work that seeks to understand the board of directors–firm performance relationship in its entirety. In order to pursue this broader agenda, I commence with a review of the corporate governance literature. The initial overview covers six theories of corporate governance and highlights how only three of these theories (resource dependence theory, agency theory and stewardship theory) directly relate to how the board impacts firm performance. I use these theories to develop a series of specific research questions about the relationships between various board demographic variables and firm performance. Following the literature review is a summary of the philosophical and methodological basis for the remainder of the research program. The first empirical study adopts the methodology used in international studies to investigate the link between boards and firm performance. I examine the relationships between board demographics and firm performance in 348 of Australia’s largest publicly-listed companies and describe the attributes of these firms and their boards. The need for this study is justified by the relatively modest sample sizes used in previous Australian studies and the differences in board composition between Australian boards and their international counterparts. For example, Australian companies more closely conform to ‘best practice’ governance structures than their international counterparts. I find that, after controlling for firm size, board size is positively correlated with firm value. I also find a positive relationship between the number of board interlocks and the market-based measure of firm performance, Tobin’s q. I discuss the implications of these findings in light of the prevailing international research and conclude they are not robust enough to draw meaningful conclusions. The second empirical study responds to calls in the literature for a more processfocused research methodology by using qualitative case study analysis to examine links between the board of directors and firm performance. By employing a pattern matching analysis of five cases, I am able to examine the hypothesised links between board demography and firm performance expected under the three predominant theories in corporate governance research, namely agency theory, stewardship theory and resource dependence theory. I find that while each theory can explain a particular case, no single theory explains the general pattern of results. I conclude by endorsing recent calls for a more holistic, process-orientated approach to both theory and empirical analysis to understand better how boards add value. Following this case study investigation I revisited the data and undertook a post-hoc analysis designed to identify areas of potential theory development. Using a qualitative sensemaking approach aligned with grounded theory I identified eleven themes for inclusion in future theory development. The final substantive chapter of the thesis provides a model of board effectiveness that uses the construct of board intellectual capital to integrate the three predominant theories of corporate governance and illustrate how the board can contribute to corporate performance. I contend that boards wishing to improve their performance need to review their intellectual capital and in so doing I provide a practitioner-based framework to assist a board in assessing its level of intellectual capital. In particular, I highlight that any theory or model of corporate governance must be contingency based. That is, the relative composition of roles for a particular board at a point in time will depend on several factors including the growth trajectory of the organisation, the strength of the management team, whether a crisis situation exists, the strategic issues facing the organisation and, of course, the size and primary function of the organisation. Further, the level to which a board can adequately execute the roles required of it is determined by its intellectual capital, a construct that comprises four important dimensions: human capital; social capital; structural capital; and cultural capital. I conclude the thesis by summarising the major empirical findings and detailing the contributions of this work to theory, practice and public policy. The major conclusion of the thesis is that there are several different, sometimes conflicting roles that boards can execute to add value to the corporations they govern and, further, that there are numerous ways for a board to organise itself to carry out these roles. As a result of this research, academics and practitioners have a new framework to assist them to understand how boards contribute to firm performance.

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Created: Fri, 21 Nov 2008, 15:35:22 EST