Toward a Behavioral Theory of Boards and Corporate Governance

Abstract

Manuscript Type: Review Research Question/Issue: A coherent alternative to an economic approach of corporate governance is missing. In this paper we take steps towards developing a behavioral theory of boards and corporate governance. Research Findings/Results: Building upon concepts such as political bargaining, routinization of decision making, satisficing, and problemistic search, a behavioral theory of boards and corporate governance will focus more on (1) interactions and processes inside and outside the boardroom; (2) the fact that decision making is made by coalitions of actors and objectives are results of political bargaining; and (3) the notion that not only conflicting, but also cooperating, interests are parts of the boards' decision making and control over firm resources. Theoretical Implications: The consequences are a new research agenda for boards and corporate governance. The agenda will focus on actual instead of stylized descriptions of board behavior. In a behavioral perspective the emphasis on problems of coordination, exploration, and knowledge creation may dominate over problems of conflict of interest, exploitation, and the distribution of value. A future research agenda based on a behavioral framework calls for novel and adventurous research designs. Practical Implications: A behavioral theory of boards and corporate governance will be closer to actual board behavior than the traditional economic approach and research about boards and corporate governance may thus become more actionable for practitioners.

Improving corporate performance by enhancing team dynamics at the board level

“…Van Ees et al (2009) further suggest that studying boards from a behavioral perspective adds more value than using the traditional economic frameworks, as using behavioral theory brings us closer to what is actually happening in the boardroom, and this is more actionable for practitioners. In fact, beyond the simple exchange of information, 'the focus on how boards add value has increased the relative importance of practices that facilitate boards working together well as a group' (Payne et al, 2009).…”

“…Another stream of research -the newest in the portfolio of approaches -is the use of behavioral theories to explain board actions and outcomes (Hambrick et al, 2008;Van Ees et al, 2009;Huse et al, 2011). These theories include some new and some old behavioral theories including identity theory (Ashforth and Mael, 1989), theory of planned behavior and reasoned action (Madden et al, 1992;Ajzen, 2002), and social networking theory (Granovetter, 1973), as well as various theories of the firm that have recently been applied to board behavior (Cyert and March, 1963;Grant, 1996;Rumelt, 1997;Slater, 1997) in framing and interpreting director actions and their impact on firm outcomes.…”

“…Poor board governance is one of the causes of shareholder activism (Smith, 1996;Gillan and Starks, 2007;Bebchuk and Weisbach, 2010). Much of the recent academic literature on boards has proffered the recommendation that directors should work as a team to be able to produce better board outcomes (Cohen and Bailey, 1997;Forbes and Milliken (F&M), 1999;Sonnenfeld, 2002;Finkelstein and Mooney, 2003;Leblanc and Gillies, 2003;Letendre, 2004;Pye and Pettigrew, 2005;Zona and Zattoni, 2007;Conger and Lawler, 2009;Payne et al, 2009;Van Ees et al, 2009;Huse et al, 2011;Lorsch, 2012), but these studies are based on theoretical assumptions.…”

The soft underbelly of corporate governance (Part 2): The software of board dynamics

“…As discussed above, one of the unique features of a board as a team is that one becomes a board member through politically-based election (or even nomination), where board members are expected, whether explicitly expressed or not, to promote and serve the parochial interests of the stakeholders whom they represent (Van Ees, Gabrielsson and Huse, 2009). If a biased preference exists for board members with a certain profile, e.g.…”

“…At issue is how and to what end the power and politics present in a board are applied: towards the common good of the board and the organisation concerned with its stakeholders or towards personal and/or parochial interests? The question is whether the board's use of its power with the associated politics is leveraged from an ethical, corporate citizen basis or a purely expedient, opportunistic, and self-serving basis (Davis, Schoorman and Donaldson, 1997;Garratt, 2003;Van Ees, Gabrielsson and Huse, 2009). The presence of a dominant coalition or not also can play a significant role in his power is deployed, and politics unfold in a board.…”