UNIVERSITY OF GHENT FACULTY OF ECONOMICS COMMUNICATION BETWEEN MANAGEMENT AND THE BOARD OF DIRECTORS ACADEMIC YEAR OF

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1 UNIVERSITY OF GHENT FACULTY OF ECONOMICS ACADEMIC YEAR OF COMMUNICATION BETWEEN MANAGEMENT AND THE BOARD OF DIRECTORS MASTER THESES TO OBTAIN THE DEGREE OF MASTER OF SCIENCE IN APPLIED ECONOMICS Yana Vandekerkhove Under supervision of Pr. Dr. Gerrit Sarens

2 De ondergetekende verklaart dat de inhoud van deze masterproef mag geraadpleegd en/of gereproduceerd worden, mits bronvermelding. Yana Vandekerkhove II

3 VOORWOORD Het schrijven van mijn masterproef is een voorname manier om mijn opleiding Toegepaste Economische Wetenschappen aan de Universiteit Gent te volmaken. Het was een uiterst leerrijk proces waarbij ik de kans kreeg om zeer interessante mensen te ontmoeten die hun ervaringen met mij hebben gedeeld. Ik heb het voorrecht gekregen om een glimps op te vangen van het bedrijfsleven zoals het is. Ik wil daarbij mijn promotor Pr. Dr. Gerrit Sarens bedanken voor de goede begeleiding en de regelmatige feedback. Verder wil ik ook iedereen bedanken die bereid was om hun waardevolle tijd vrij te maken voor mijn onderzoek. I

4 TABLE OF CONTENT Abstract... III Voorwoord... I 1. Introduction Literary Study Board of Directors and the Executive Management Board of Directors Executive Management Relationship Collaboration Between Board and Management Agency Theory Stewardship Theory Communication Communication Variables Communication Facilitators Research Questions Methodology Within Case Analysis Company A Company B Company C Company D Company E Company F Company G Company H Company I Cross- Case Analysis Corporate Governance Structure The Role of the Board of Directors Communication Communication Variables Communication Facilitators Conclusion References... I 9. Appendices... IX A. Interview Questions... IX B. Conceptually Clustered Matrix... X C. Transcripts Interviews.XI II

5 COMMUNICATIE TUSSEN HET UITVOEREND MANAGEMENT EN DE RAAD VAN BESTUUR Deze paper bestudeert de communicatie tussen de raad van bestuur en het uitvoerend management in beursgenoteerde bedrijven. Om succesvol te zijn in hun rol moet enerzijds het management voldoende informatie en documentatie voorzien. Anderzijds moet de raad van bestuur deze informatie gebruiken om het bedrijf te evalueren en derhalve voldoende feedback geven. Het verloop van de communicatie tussen deze twee partijen is daarbij essentieel. Negen Belgische bedrijven waren bereid om mee te werken aan de studie. Hun bevindingen werden verzamelend met behulp van ongestructureerde interviews. De meerderheid van de behandelde bedrijven benadrukt de adviserende rol van de raad van bestuur. Dit is in lijn met wat de stewardship theorie suggereert. Ondanks de neiging naar advies en ondersteuning, houden de bedrijven alles graag formeel. Er wordt veel belang gehecht aan documentatie en registratie van de gebeurtenissen. De informatie die aangebracht wordt aan de raad van bestuur dient voldoende te zijn maar mag niet te gedetailleerd worden. Er moet steeds voldoende overzicht behouden worden. Enkel goed vertrouwen kan ervoor zorgen dat de raad van bestuur met beknopte informatie toch goede beslissingen kan nemen. Ten laatste kan geconcludeerd worden dat geen enkele raad van bestuur goed kan functioneren zonder de absolute integriteit van ieder lid. De voorzitter en de CEO spelen daarbij een sleutelrol. III

6 COMMUNICATION BETWEEN MANAGEMENT AND THE BOARD OF DIRECTORS This paper is a study of the communication between the board of directors and the executive management of listed companies. In order to serve their purpose, executive management must be willing to share sufficient information and the board of directors must be willing to support and reinforce them by examining the company from a broader perspective. Therefore, communication between the two parties is essential. The impressions of the corporate secretaries of nine Belgian companies were gathered by means of unstructured interviews. The majority of the Belgian companies were found to emphasize on the advising role of the board of directors, supporting the vision of the stewardship theory. Despite this, most companies preferred to work in a formalized environment. Furthermore, the information provided by the executive management should be sufficient yet not overly detailed, which implies that the relationship must be based on trust. Finally, the successful interaction between the board of directors and the executive management depends largely on the integrity of its members with great importance of the chairman and the CEO. IV

7 1. INTRODUCTION In history, a variety of mechanisms were identified to ensure the managements integrity towards the company that is owned by its shareholders. One of these internal mechanisms is the institution of the board of directors. Corporate charters describe that the responsibility of the board of directors is management, or management delegation. Directors represent trustees for the shareholder. They determine the management structure and delegate to that management structure (Molz R., 1985). There is often questioned whether the board of directors really matters because of the difficulty to measure their day- to- day impact. The board only becomes center of the attention when developments occur with large impacts for the company and its environment. This does not mean that corporate boards are asleep in the mean time. With supervision and proper advisement, the board tries to prevent such things from happening. Without mutual respect and good collaboration, the board of directors and the executive management cannot serve their purpose, as they should. Well- established communication between the two is key to this success. The board of directors is a protector of good governance and therefore, serves as a safeguard of society. Despite the fact that the board is the highest authority of the company, they are still dependent on the information that is provided by the executive management. When communication between these two parties struggles to climb to the appropriate level, all intentions of good corporate governance will be for nothing. The goal of this study is to get an impression of how this communication is characterized within a European market environment and what aspects of the interaction between the board of directors and the executive management have an influence on the quality of that communication. It is important to mention that a limited number of companies were reviewed, which makes it difficult to generalize to the entire Belgian market. Nevertheless, it is possible to learn from these case studies and capture some general trends. First, a literary review will give an idea of what previous research already revealed about the relationship between the board of directors and the executive management. Important to mention is that most literature comes from Anglo- American countries, whose market environment is quite different from the European one. This study will be conducted exclusively in Belgium; therefore, one must be careful to generalize conclusions taken by American studies or generalize conclusions of this study towards Anglo- American environments. The empirical study was carried out by means of unstructured interviews with the corporate secretaries of large Belgian companies. Nine companies were willing to cooperate and share their experience. The within- case analysis will present a thorough overview of the conversations combined with a 1

8 short outline of the type of company and the sector it operates in. Based on the content of these interviews, a conceptually clustered matrix is drafted with the intent to surface common themes and directional processes. Finally, the cross- case analysis provides an overarching description and integrative expression of all cases. 2. LITERARY STUDY 2.1. BOARD OF DIRECTORS AND THE EXECUTIVE MANAGEMENT Before the investigation of the relationship and communication between the executive management and the board of directors, both parties and their responsibilities towards each other will be strictly defined. The definition of the board of directors will be based upon the dual role structure from the official Belgian corporate governance code (2009). Management is much more difficult to capture because it has such a broad interpretation range Board of Directors The overall objective of both board of directors and executive management is corporate governance. Corporate governance is a much- discussed concept with as much definitions as studies. Tricker (1984) provides a definition that is broad and clear. The governance role is not concerned with the running of the business of the company per se, but with giving overall direction to the enterprise, with overseeing and controlling the executive actions of management and with satisfying legitimate expectations of accountability and regulation by interests beyond corporate boundaries (Tricker, 1984) First, the overall direction can be established by setting strategy, corporate policies, overall direction, mission and vision (Corporate governance code, 2009) Second, the Belgian corporate governance code (2009) provides us with 2 main purposes: supporting entrepreneurship and ensuring effective monitoring and control. The board has to serve as a guardian of the corporation and its long- term success. In order to succeed, both dependent and independent directors as well as both executives and non- executive directors could be profitable as members of the board. Outside members of the board of directors are found crucial to maintain independent judgment and control sufficiently. (Belgian Corporate Governance Code, 2009) Finally, Weisbach (2110) suggests that each board of directors is likely to be a unique and dynamic entity. It operates as a function of many factors including personal characteristics of each separate 2

9 member (their background, skills, personality) and their connection with other board members (relationships with other members, incentives). Solomon (2010) explains that there are two main types of board structures; unitary and two- tier board structures. Unitary boards contain both executive and non- executive directors and tend to make decisions as a unified team. Two tier boards, however, work with two separate boards, a management board and a supervisory board. The management board consists exclusively of executives. This board focuses on operational issues of major importance and is headed by the chief executive (CEO). The supervisory board deals with other strategic decisions and monitors the management board. A. Key Members of the Board a. Executive vs. Non- executive Board Members Both insiders and outsiders can have significant importance within the board of directors. Byrd and Hickman (1992) provide us with a clear definition. The inside directors provide valuable information about the firm s activities, while outside directors may contribute both expertise and objectivity in evaluating the managers decisions. The corporate board, with its mix of expertise, independence and legal power, is a potential powerful governance mechanism. Computer- aided communication technologies can help to reach outsiders more easily and thereby solve the problem of experts being geographically unreachable (Huber & George, 1990). b. Chairman The essential role of the chairman is ensuring board effectiveness (Solomon, 2010). The corporate governance: a practical guide (2004) states that the chairman has a pivotal role to play in helping the board to achieve its potential, being responsible for leading the board, setting the board agenda and ensuring its effectiveness. c. Chief Executive Officer (CEO) Literature doesn t really provide us with a formal definition of what the Chief executive officer is. We can consider the CEO as the leader of the top management and the person who is in charge of every aspect of the company s actions. The CEO is often entitled to be a member of the board of directors. d. Independent vs. Depended As mentioned above, it is not wise for a board to consist solely of depended members. Their independent components could be of big importance. A non- executive director is considered independent when the board determines that the director is independent in character and judgment and that there are no relationships or circumstances which could affect, or appear to affect, the 3

10 director s judgment (Higgs Report, 2003). The main role of an independent board member is to provide a sounding board for the chairman and his evaluation and to serve as a trusted intermediary for the non- executive directors (Walker Review, 2009). They should also be accessible to shareholders in the event that communication with the chairman becomes difficult or inappropriate (Walker Review, 2009). B. Remuneration Committee The Remuneration committee is responsible for setting up remuneration proposals. The Remuneration Committee Forum is constituted as a forum of the Institute of Directors in Southern Africa (2013) and will be based upon for the determination of the committee s primary roles. According to the paper, the remuneration committee has 3 major roles: 1. The directors executives and prescribed officers are remunerated fairly and responsibly with the long- term interests of the company in mind 2. The remuneration report and disclosure of director and other executive and prescribed officer remuneration are simple to read and understand, accurate and complete. 3. An effective remuneration policy is in place, aligned with the company s strategy, and is applied consistently throughout the entity at all employee levels. Finally, it is important to note that the board of directors stays responsible for the end decision. They choose to approve or dismiss the proposal. C. Audit Committee The audit committee primary oversees the firm's financial reporting process. It meets regularly with the firm's outside auditors and internal financial managers to review the corporation's financial statements, audit process, and internal accounting controls. (Klein A., 2002) In addition to this definition The Belgian code on corporate governance (2009) proposed several guidelines that the board should consider while implementing and choosing the audit committee. First of all, the audit committee should be exclusively consisting of non- executive directors. Second, the audit committee should exist of at least a majority of independent members with relevant expertise, notably in accounting, auditing and finance Executive Management The role and purpose of the executive management can be interpreted very broadly. They are in charge of the coordination of all the activities of a company with the purpose of achieving objectives. They organize, control and direct the process of allocating recourses in the best interest of creating 4

11 value in terms of the economic activity. The executive management strives towards objectives that were set up based on the corporate strategy. According to code Buysse (2009), senior management consists of all executive directors, the members of the executive committee and the top management Relationship There are numerous situations in which the board and the senior management have to interact and work together. As already mentioned, it is very common that members of top management have a seat in the board of directors. Responsibilities go both ways. First of all, the foundation of the relationship can be devoted to the fact that the senior management has to implement the strategy of the enterprise as decided by the board of directors. (Buysse, 2005). However, there is often claimed that the board of directors is excluded of decision- making in the early initiation phase. From this perspective, the board is rather silent with regard to strategy. Johandson (2008) assumes that strategy- issues are a domain of management. Management makes decisions and introduces them to the board of directors by means of a proposal. The board then takes in a passive role and expresses its opinion regarding the subject in the form of approval or rejection. Such manner of decision- making will have an impact on board control and communication. A second link between board and management is the fact that the board of directors decides about management appointment, evaluation and remuneration. There has been some controversy about management handpicking board members, which should have an impact on board control and independence. (Shivdasani, Yermack, 1999) Remuneration proposals are submitted by a specialized remuneration committee. Salaries have to be prepared in such a way that the best managers are attracted while market conditions are respected. Regulators limit the executive influence on CEO- pay by strengthening the role of non- executives in the remuneration committee (Greenbury Report, 1995;Higgs, 2003; Combined Code, 2009) Thirdly, the board of directors depends largely on the executive management of the company for information in order to accurately evaluate leadership and financial results (The economist, 2001). Renée B. Adams and Daniel F. (2007) describe a dual role of the board of directors being a monitor as well as an advisor of management. When monitoring, it is important to make clear agreements on establishing parameters to objectively evaluate management. (Code Buysse, 2005) This need of evaluation derives from the divergence of interests between shareholders and managers. According to the famous agency theory, monitoring 5

12 and controlling managers provides a security for the shareholders that their interests and visions are considered as well (Jensen and Meckling, 1976;Fama and Jensen, 1983). Subjects, on which boards are asked to give advice, are often important decisions concerning the future, with a huge impact on the organization. The board must review and approve fundamental operating and financial decisions, and other strategy- related material. When directors see better options for achieving the aim, they should be willing to withhold approval and insist on change (American Bar Association s Committee on Corporate Laws, 1994). Off course, the CEO will dislike these kinds of intrusions because they minimize the CEO s impact on the decision process and also his or her trustworthiness towards subordinates (Joseph L. B., 2002). Advice is particularly important in times of crisis or when a great deal of uncertainty arises. The board should open itself up towards the management when problems of crisis arise. Directors serve as a source of advice and counsel, serve as some sort of discipline, and act in crisis situations. (Mace and Myles, 1971) In times of great distress, the future of the current CEO- position can become uncertain. In extreme cases it can eventually result in the board taking over the steer of the business activities, at least temporarily, until a solution is found. Unfortunately, there is little organizational literature, which addresses firms in crisis. The focus has been on effectively managing successful organizations (e.g., Jensen, 1993; Summer et al., 1990; Whetten, 1980). Given the dual role of boards as advisor and monitor (Renée B.A. & Daniel F., 2007), the management and the CEO face a trade- off in providing clear and detailed information to the board. On the one hand, they get better advice and council, which results in better decisions. On the other hand, providing more information also induces the chance that the board will notice better options and intervene in the decision- making process of the CEO (Renée B. & Daniel F., 2007). Little literature has been looking at the duty of providing the board with adequate information about the firm s performances (Johandson D., 2008). This is surprising knowing that this is one of the key responsibilities of the executive management towards the board of directors. The Belgian corporate governance code (2009) suggests that the board of directors and its interaction with the executive committee should periodically (every two or three years) be evaluated. This process should have four general objectives; the assessment of how the board and its committees operate, checking whether important subjects are suitably prepared and discussed, the individual contribution of each director, his attendance at meetings and his involvement in discussions and decision- making and finally, the current composition of the board and the committees in comparison with the desired composition. 6

13 2.2. COLLABORATION BETWEEN BOARD AND MANAGEMENT When corporate control is being defined, the board of directors and the executive management are considered as two opposite groups. This finding is based on the agency theory. However, there are other theories claiming different or complementary ideas. Interesting in this case is the stewardship theory (e.g. Davis, Schoorman & Donaldson, 1997). Stewardship theorists describe management and board as frequently having the same interests, also as those of shareholders (Davis et al., 1997). They are both inclined to operate in a manner that maximizes financial performance (e.g., Baysinger & Hoskisson, 1990). Therefore, the board of directors and the executive management can be considered a team, thriving for good results. Another model designed by Adams & Ferreira (2007) talks about the ideal of management- friendly boards. In which they explain that a friendly and cooperative board tends to get more detailed information of the executive management, which helps both sides in performing better. Again, in this model, working together as a joined team tends to be the best way to make solid decisions. The theory of management- friendly boards therefore enriches the stewardship vision. A crucial question within this study will be whether the agency or the stewardship theory has the most relevance in reality and how it affects the upper echelon communication and corporate control Agency Theory Managerial actions are argued to be departed from those required in order to maximize shareholder returns (Berle &Means, 1932). The model of man underlying the agency theory is that of the self- interested actor, rationally maximizing their own personal gain (McGregor, 1960). Because of this consideration, the board of directors should see to the maintenance of the appropriate governance structures in order to push managers towards the aim of return maximization (Tricker, 1984). Two structural mechanisms have been widely discussed by literature are alternative executive compensation schemes and governance structures (e.g., Demsetz & Lehn, 1985; Jensen & Meckling, 1976). The financial incentive schemes are constituted of rewards and punishments that are aimed at converging principal- agent interests (Schoorman & Donaldson, 1997). The agency theory emphasizes on the monitoring role of the board of directors (Williamson, 1985) and therefore suggests more board domination. The board can monitor the behavior of possible self- serving managers by installing a specific governance structure. They can perform audits and performance evaluations (Schoorman & Donaldson, 1997). This vision should definitely have an impact on the way the board and the management communicate. 7

14 Stewardship Theory As mentioned above, the stewardship theory strives for active CEO participation in order to facilitate effective action by the executive. The executive essentially just wants to do a good job. Stewards argue that there is no sign of an inner motivational problem and CEO s should be given the freedom to maximize their ability to achieve the firm s goals (Donaldson, 1990a, 1990b; Barney, 1990). There should be no room for doubt about the responsibility over a particular matter and leadership will be clearer with respect to subordinate managers (Donaldson & Davis, 1991). One of the indications of a manager being a steward is identification. Identification occurs when executives speak of themselves in terms of their function in the organization (Kelman, 1958). Managers, who identify themselves with the organization, interpret comments about the firm personally. The board of directors should be used as an advisory organ working in collaboration with the CEO. The structural situation in which the executive manager is located should facilitate effective action (Schoorman & Donaldson, 1996). Within the stewardship theory, neither the board nor the CEO should get a dominating position. Stewards do not ignore the danger that CEO s could become too powerful with the consequence of failing to keep the bigger picture in mind. The less domination, the better board and management can cooperate and make decisions jointly (Daily, Dalton & Cannella, 2003). From this point of view, both board power and management power can be seen as a disturbance of good communication. Literature suggests that firms who follow a stewardship vision should be the most successful (Donaldson & Davis, 1991; Dicke, 2002; Heinrick, 2007; Van Slyke, 2007; Donaldson & Schoorman, 1997) Striving for control and monitoring would only diminish collaboration and therefore communication between the board of directors and the executive management. For our case study, we will base ourselves on these findings. The question remains; Why isn t there always a steward relationship in real life? We can find the answer in the risk- adversity of people. Giving the CEO such freedom is risky and dangerous and everything depends on the amount of risk agents want to assume (Schoorman & Donaldson, 1996). 2.3 COMMUNICATION Nowadays, knowledge is being considered as the most important strategic resource in organizations. Organizations are capitalized on the knowledge circulating within the firm walls. To make this capitalization possible, managers have to understand how knowledge exists and is shared (Ipe M., 2003). Knowledge sharing covers all levels of an organization. In this paper, the very top of the echelon is being considered. We ask ourselves two questions; what defines the communication line between the executive management and the board of directors? In what way does this sort of communicating impact the quality of the decision- making? 8

15 The analysis of interactions among groups has been established by social psychology. The two key predictors of this interaction are social integration and communication (Cartwright & Zander, 1968; McGrath, 1984). There are several overlapping variables that can also have an importance when investigating the top echelon of an organization, including conformity (Berkowitz & Daniels, 1963), consensus (Hare, 1952), conflict (Brehmer, 1976) and facilitation (Triplett, 1897). These different variables have been linked to team demography and organizational performance (e.g. Murray, 1989; Eisenhardt & Schoonhoven, 1990; Keck, 1991; Michel & Hambrick, 1992). Communication has been described as the heart of group behavior (Shaw, 1981). As a variable, multiple dimensions can be distinguished. The variation in frequency can be investigated (Daft & Lengel, 1984). Communication can be established in a formal of an informal way (Katz and Kahn, 1978). Furthermore, Communication technology cannot be forgotten and will have a great meaning in the development of communication towards the future (Huber & George, 1990). Finally, one can look at the kind of information that is transmitted. In business environment, argumentativeness (vs. aggressiveness) (e.g., Infante & Rancer, 1982; Infante & Wigley, 1986) and preciseness (Berger, 1997; Greene, 1997; Wilson & Sabee, 2003) will be two important features to keep in mind Communication Variables A. Frequency Apart from the different communication channels that can be used (face- to- face, written notes, electronic mail, et cetera), communication frequency covers the amount of interaction among team members (Katz & Kahn, 1978; Shaw, 1981). How often are people of a specific group (in this study, interaction between management and board members) in contact with each other? Much research has hypothesized (Shaw, 1981; Smith et al., 1994) that communication frequency has a positive impact on the quality of communication and the decisions that are derived from it. However, the contrary has been argued as well. Ancoda and Caldwell (1992a) found a negative relationship between performance and frequency. They argue that communication frequency can also indicate conflict and disagreement, resulting in sloppy gatherings with no good decisions. Furthermore, in the social psychology research, there is a conception that communication frequency could be dependent of other variables like communication informality (Lott & Lott, 1961; Shaw, 1981) and social integration. Smith et al., 1994 found that the correlations between frequency and both social integration and informality were negative and significant. This indicates that socially integrated and informal teams do not have the need to communicate that much without loosing quality in the decision- making process. 9

16 B. Informality Spontaneous conversations and unstructured meetings are examples of informal communication channels. Shaw (1981) states that, If a group wants to function effectively, its members must be able to communicate easily and efficiently. In contrast with highly structured or written communication, informal communication should facilitate the frequent flow of communication among team members (Smith et al., 1994). There is no need for complicated rapports and documents as prove of the conversations because the understandings developed during the communication were based on trust. According to Ancoda and Caldwell (1992b), team demography will have an impact on the use of informal communication methods. Heterogenic groups were expected to use more structured ways of communicating using formal channels. On the other hand, the Belgian corporate governance code (2009) suggests that transparency and good documentation is required for large listed companies. The corporate governance charter should provide insights regarding the corporate governance structure and values of the company. On top of that, the corporate secretary should keep track of all the decisions and conversations during the board of directors by continuously making notes. Despite of the recommendations of the corporate governance code of Belgium (2009), from what we learned about the different perspectives of the agency followers on the one hand and the stewards on the other hand, there could be assumed that stewards would be likely to communicate in a more informal way. Agency followers would, however, consider formally induced communication structures to be the better approach. C. Argumentativeness vs. Aggressiveness Argumentativeness focuses on argument and respect in discussions instead of attacking the other (Rancer, 1998). It has several benefits; the stimulation of curiosity, the reduction of egocentric thinking or the increase of persuasiveness (De Vries et al., 2009). Argumentativeness, in contrast with aggressiveness, supposes to have a positive impact in organizational settings (Rancer, 1998). Argumentativeness occurs when groups aim to work together in order to achieve mutual goals (Stewardship theory), other than rival and dominate one another (Agency theory), which could result in aggressiveness. Aggressiveness uses messages that attack the partner s self- concept, such as competence by using, for example, treats (Wigley, 1998). D. Preciseness Top management and board members are ought to be competent communicators. They should have developed a knowledge system to understand, monitor and adjust multiple aims (Wilson & Sabee, 10

17 2003). Preciseness can be seen as an important variable of communication in organizations (De vries et al., 2009). A precise communicator can induce higher perceived source credibility, which can be important in this study. Advice coming from board members could be perceived as more useful or information sent to the board of directors about the organization provided by the management could be seen as more trustworthy. Boulton (1978) studied the changing need for information in an environment of more active boards and growing companies. He suggests that the information requirements need to evolve on three different levels. Firstly, the emphasis of reporting needs to be adjusted. Auditing and financial reports remain important, but they cannot absorb all the reporting space. Directors have more need to receive detailed reviews of key business areas with their most important challenges. The second one is change in time horizons. Boards must not only consider historical or current results, but need to orientate towards the future as well. Directors therefore need regular documentation around the achievement of long- range goals and multiple- year budgets. (Boulton W., 2014) The last change concerns more supported performance criteria to evaluate the executive management Communication Facilitators According to Smith et. al. (1994), communication is, among other variables, one of the key success factors of a well performing organization. The presence of these other variables can enable a better ability to communicate. The demography of a team can ensure heterogeneity or homogeneity within a team. Heterogeneous teams are known to perform lower and make more use of formal communication (Murray, 1989). Group- maintenance behavior is considered a precondition for well task- oriented behaviors (Stogdill, 1959). When team tenure tends to be higher, internal problems get the time to be resolved and team members can spend their time optimally in solving business problems. As Stogdill (1959) states, group tenure facilitates smoothness of teams. Finally, members of socially integrated groups exhibit greater efficiency in the coordination of tasks (Shaw, 1981; McGrath, 1984: O Reilly, Caldwell & Barnett, 1989). Smith et. al. (1994) discuss a framework where process, which exists of social integration and communication, is a mediator of the relationship between demography and performance. 11

18 A. Information Technology Traditional information technology can help to enhance data storage capacity, transmission capacity and processing capacity (Culnan & Markus, 1987; Rice & Bair, 1984). These properties facilitate the ability to communicate more easily and less expensively across time and space (Rice & Bair, 1984) and makes sure the information is communicated more rapidly and with greater precision towards the intended groups (Culnan & Markus, 1987; Sproull & Kiesler, 1986). On top of that, information technology can be used to record more reliably the content of certain communication events and makes controlled access and participation in a communication event easier (Culnan & Markus, 1987; Rice, 1984). Apart from traditional information technology, there exists an upcoming use of advanced information technology using innovative systems of communication to enhance the decision- making process (Huber, 1990). First of all, it is important to remark that these advanced technologies do not eliminate the use of traditional technologies; they have both different and overlapping purposes (Huber, 1990). The use of computer- assisted decision- aiding technologies (e.g., Expert systems, decision- support systems, on- line management information systems, etc) is in the late stages of development or early stages of implementation (Huber, 1990). These systems can greatly reduce the effort required for those, for example, advisory board members who are physically separated from the organization, which impedes the exchange of information (Hiltz & Turoff, 1978; Culnan & Markus, 1987). The use of well- installed and sophisticated information technology can enhance smoothness and effectiveness of the communication process between the board of directors and the executive management and even optimize the decision process. B. Social Integration Social Integration has multiple dimensions; it reflects the attraction to the group, satisfaction with other group members and social interaction among members of the group. (O Reilly, Caldwell & Barnet, 1989) A socially integrated group is better at efficiently coordinating tasks. Smith et al. (1994) argues that social integration and communication are key success factors that go hand in hand to make the right decisions and work as a team. C. Group Tenure The length of team tenure should be in direct relation with the level of team cohesion, which should induce an enhanced performance level (Michel & Hambrick, 1992). Much research has covered group tenure as a driver of success. Performance would be higher when the group was established long enough to initially learn the ropes and local practices (Pfeffer, 1983). Katz (1982) defends this point of view by arguing that group tenure induces stability and reduces conflict. When conflict would disappear, the communication process should enhance and the groups will work better and 12

19 more efficiently together. However, according to Katz (1982), one must be careful that long- tenured groups can become less adaptive and innovative because they simply relate to the groups experience instead of feeling the need to improve. D. Heterogeneity vs. Homogeneity Both heterogeneity and homogeneity can be successful structures as long as they are implemented into the right situation. Pfeffer (1983) relates this type of team demography to formality of communication. Socialization, or in other words, informal communication will have the most impact when members are homogeneous (similarity of background, joint experience, shared perspective, mutual understanding). In contrast, demographic diversity would have a need for a formal, bureaucratic approach. Again, as with informality, the contrast between the agency theory and the stewardship theory arises. Bureaucratic control will make the organization less responsive to competitive changes (Burns & Stalker, 1961). We can expect that heterogeneous teams will be more complicated to control and will probably be more costly (Ancona & Caldwell, 1992). E. Corporate Control In order to investigate how managers and board members communicate, the attitude they constitute towards each other must be understood. The question to be asked is whether, more- often, management is dominated by the board of directors or vice- versa. In business literature, it is referred to as corporate control. This can be investigated by giving a detailed explanation of all the factors that play a role in the contest of control. In most conventional analyses, the term management refers to the top full- time officers of the organization (Herman, 1981, p.28). They are the executives who manage day- to- day business within the firm. Top management enjoys the same officer label but is also in close contact with the board of directors. In addition to this generally accepted definition, other assumptions about management have been circulating. Interesting for this analysis is the definition given by Berle and Means (1932) stating that management consists of a board of directors and the senior officers of the corporation. As they explain, stockholders are becoming more and more scattered and the board is loosing his responsibility to act in their name. They only have to answer to themselves. As argued by Burnham (1941), in that time, the modern industrial societies were undergoing a managerial revolution. Within that revolution, power and control were transferred from capital towards knowledge. From this point of view, management and board of directors work together in establishing control as they have the skills and the knowledge to lead and direct the company. 13

20 However today it is becoming a general believe that management in fact dominates the board (Allen, 1974; Galbraith, 1967; Herman, 1981; Mace, 1971; Pfeffer, 1972; Vance, 1968). a. What is Meant by Control? When talking about control, it is important to know exactly what control means and what variations exist within the business environment. Control has been defined and researched about a thousand times before, which makes it very hard to get a clear and structured answer to what control is. In the context of the corporate top, two different sorts of control can be distinguished. The distinction has been found in management literatures defining operating control and policy control (Bunting & Mizruchi, 1982; Juran & Louden, 1966). Juran & Louden explained that operating control contains the ability to set a direction within a company, and thereby exploited by the board of directors, while policy control focuses on how the management taked actions to walk down the path crafted for them. Another interesting difference is the one separating institutional or organizational power and personal power (Gibson, Ivancevich & Donnelly, 1991). These types of power are also used to differentiate principal- agent relationships from principal- steward relationships. The power granted to a specific function in the organization refers to institutional power (Schoorman & Donaldson, 1997). In their study, Schoorman and Donaldson (1997) make use of reward power and legitimate power as recognition of authority. Expert and referent power can be seen as personal power, which is developed over time. Personal power is seen as the basis of influence in a principal- steward relationship by Schoorman and Donaldson (1997). The type of power that dominates the organizational environment is a function of organizational culture and different individual characteristics. Hofstede (1980,1991) provides two aspects of culture that may influence the tendency towards agency or stewardship relationships. First of all, the dimension of Individualism- collectivism was described (Hofstede, 1980,1991). Individualism emphasizes on personal goals over group goals while collectivists strive for collective performance (Triandis, 1995; Dunnette & Hough, 1993). Collectivists have a tendency to work things out and communicate more directly, which relates to the sterwardship theory. The second aspect that is described is power distance. Hofstede (1991) defines it as The extent to which less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally. High power distance cultures would lead to agency relationships because they support and legitimize the inequality between management and board members. The opposite accounts for the development of stewardship relations because they value the essential equality of the entire group (hofstede, 1991). 14