The EU’s Internal and External Regulatory Actions after the Outbreak of the 2008 Financial Crisis

How Internal and External Supervision Impact the Dynamics between Boards and Top Management Teams and TMT Reflexivity

“…However, governance theorists argue that both internal and external supervision are important to ensure reflexivity, such that TMTs make strategic decisions that protect stakeholder interests and safeguard long term organizational viability (Aguilera et al, 2015). Internal supervisory bodies provide direct supervision over these decisions (Jensen & Meckling, 1976;Walsh & Seward, 1990), and external supervisory bodies supervise and enforce compliance of these decisions with regulation (e.g., Aguilera et al, 2015;Wouters & Van Kerckhoven, 2011). We therefore also examined how external supervision affects the relationship between Board-TMT relationship conflict and TMT reflexivity.…”

“…Our proposition is supported by conflict literature, stipulating that generally speaking, the negative effects of intergroup conflict can be mitigated when a nonpartisan third-party intervenes and acts as a mediator between the two conflicting parties (Dixon, 1996;Jehn & Bendersky, 2003). External supervisory bodies can fulfil this role because they have the legitimate intervention authority (Karambayya et al, 1992;Keashley & Newberry, 1995), and the legal instruments to step in when TMT functioning endangers organizational sustainability and/or risks the stability of a larger industry (Ury et al, 1989;Wouters & Van Kerckhoven, 2011).…”

“…system these organizations are part of (e.g., Aguilera et al, 2015). Although the roles of both internal and external supervisory bodies have gained importance in response to the financial crisis of 2007 (Wouters & Van Kerckhoven, 2011), there is an ongoing theoretical debate about their effectiveness in influencing TMT functioning.…”

The Balancing Act of Effective Supervision: Understanding the Relationship between Internal and External Supervision

“…External supervisory bodies are officially commissioned by important governmental stakeholders (Lerner & Tetlock, 1999;Tetlock, 1992), and include government inspectorates (e.g., the tax authority), and independent market institutions (e.g., supervisory authorities for the financial sector). These external supervisory bodies, monitor whether decisions of organizations are compliant with the law and safeguard public interests (Wouters & Van Kerckhoven, 2011). Cases like the diesel-emission scandal raise the question of: what makes each supervisory body and the combination of supervisory bodies effective in influencing decision making of TMTs and other groups in organizations?…”

“…In order to prevent organization members from making such self-serving decisions, many organizations appoint internal supervisory bodies, such as internal supervisory boards or audit committees, to lay down rules for proper practices (i.e., codes of conduct ;Treviño, Den Nieuwenboer, Kreiner, & Bishop, 2014), and to control whether work actions are in the interest of the organization. After the financial crisis (2007)(2008)(2009) the main public response was to further strengthen the position of external supervisory bodies, such as tax authorities, accountants and formal governmental or independent supervisory agencies, which are responsible for safeguarding the stability of the industry, and as such, also supervise the risks that organizations pose to their customers and the public interest (Wouters & Van Kerckhoven, 2011). Advocates of this public response assume that organization members will be sufficiently aware that their organization has to justify its decisions to external supervisory bodies, and will make more sound decisions accordingly.…”