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Activity 16-Project

Michael Bush

California Southern University

MGT 87545

June 26, 2017

Dr. Penny A. Wilkins

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Activity 16-Project

Global Issue: Board of Directors and Value Creation

Review of Subject

The board effectiveness is influenced by the interaction of behaviors, process, and

structures within the organization. Historically, the boards for commercial businesses

were established because of the steady departure of risk, control and ownership increased

environmental complexity and industrial revolution (Carter, D'Souza, Simkins, &

Simpson, 2010). Today, the modern business corporations are having a substantial

influence on overall society at the national and international level. Reports share the

latest facts that the world’s economy is being run by 50 companies and 500 large

corporations are controlling 25 percent of total global economic output ( Chambers,

Harvey, Mannion, Bond, & Marshall, 2013). These figures suggest there is a need to

understand the role played by different organizational actors in companies, as well as in

local and international economic development. The main purpose of establishing the

boards of directors (BOD) was to represent the shareholders’ interest in their absence

where organizational management acts as boards agents. However, Adam Smith criticized

this theory and said that it is highly risky to divert and separate the control from owners

to the agents. However, the agency theory still holds true and corporate boards represent

the interests of owners (Chambers et al., 2013).

This paper analyzes the role played by the board of directors in creating and

maximizing the value of the firm and its shareholders. Various scholarly articles and

books were reviewed to assess the opinions of previous research studies and identify the

important demographic and behavioral factors that affect the Board’s value creation
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ability. The focus of the research will be on exploration of important behavioral

characteristics that determine the board effectiveness . (because review of literature

revealed that behavioral dimensions have been less explored compared to the

demographic characteristics while determining the board effectiveness, that’s why this

study focuses on the behavioral characteristics to fill this gap). Moreover, the study will

explore how an effective BOD influences the corporate financial performance in a highly

turbulent scenario and which organizational actors hinder its ability to make an optimum

utilization of its strategic expertise. The study will also discuss the results of some

empirical studies to strengthen the argument. Results of previous studies will be

compared to provide important theoretical insights . (comparison of previous empirical

studies will generate important theoretical insights) The discussion section mainly

explains the role played by Board of Directors within the firm, the BOD’s ability to

create the economic value, the effect of demographic characteristics, and the BOD’s

value creation process within the organization. In addition, important behaviors

determining the success of BOD’s and the role played by organizational actors and

stakeholders’ alliances during the value creation process are discussed.

Discussion

In the contemporary era, the increased environmental complexity, globalized, intensified

competition and highly turbulent business scenario has imposed significant challenges for

modern business enterprises (Cameron, Thakor, Quinn, & Degraff, 2006). Today, they must

deal with the conflicting stakeholders’ interests besides creating value for business, as well as

society. This situation has intensified the need for good corporate governance. Firms are

increasingly interested in exploring the factors that affect the good corporate governance
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(Torchia, Calabrò & Huse, 2011). For this purpose, various research studies have been conducted

to assess the role played by the BODs in maximizing the value for shareholders. The studies

propose that the board’s ability to create the economic value relies on many factors (Carter et al.,

2010). However, previous studies have mainly focused on exploring the impact board’s

demographic characteristics on its ability to create the value and enhance corporate financial

performance (Argote & Greve, 2007). This paper will analyze the board’s behavioral

characteristics and assess how board creates the value and which demographic and behavioral

factors affect its value creation and value maximization ability. (explanation given above)

Role of BODs in the value creation process

Evolving societal, political and cultural viewpoints of corporate boards are escalating the

interests in the demographic and psychographic characteristics of the corporate BODs (Huse,

2007). Additionally, the desire to enhance the corporate governance at a global stage has further

increased the researchers’ interest to study how BODs create the value within the firm (Carter et

al., 2010). The Canadian Dey Report, the General Motor’s BOD guidelines in the United States

and the UK’s Cadbury Report demonstrate an escalated attention in enhanced corporate

governance across different nations (Monks & Minow, 2004). In the United States, the recent

corporate scandals, such as Enron, WorldCom, and Lehman Brothers, and governance failures

have increased the need to understand the significance of corporate governance after the

introduction of a massive legislation piece, which is the Sarbanes-Oxley Act 2002 (Carter et al.,

2010).

The current circumstances stress the need to open the black box of the Board behavior

during the value creation process (Gabrielsson & Huse, 2004). New directions to explore the

impact corporate governance on value creation must be set to address the needs of the
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contemporary era. The emerging board behavioral research avenue can derive its basis from the

behavioral theory of the firm, proposed by Cyert and March. Despite the relevance, the previous

researchers have not made an extensive use of this theory to understand the desirable BOD

behavioral dimensions for creating the value within the firm (Argote & Greve, 2007). The

previous studies have mainly focused on exploring the economic perspective while ignoring the

behavioral dimension (explained above that board’s behavior directly affects the performance,

however, this dimension has not been adequately explored) Mostly, the association among

corporate financial performance and ideal board constructs has been explored by applying the

untested and unquestioned behavioral assumptions (previous studies assumed that behavior

doesn’t vary or play any role in overall board performance) (Cameron, Thakor, Quinn, &

Degraff, 2006). However, it is important to understand how information sharing,

communication, and interaction between board members affect the overall performance and

ability to create the value for the firm and society (Gabrielsson & Huse, 2004). Huse (2005)

contends that exploring the behavioral influences is only a starting point that can be extended to

the development of behavioral concepts that can explain the BODs decision-making process and

how this decision-making affects the overall organizational performance.

Studies have also explored the impact of demographic characteristics on the board’s ability

to create value for shareholders. Various empirical studies have been conducted and it is

proposed that an efficiently diversified board fulfills expectations of all stakeholders more

efficiently than a non-diversified board (Torchia, Calabrò & Huse, 2011; Nielsen & Huse, 2010;

Carter et al., 2010; Argote & Greve, 2007). The next section will explain the moderating effect

of demographic variables on the Board’s ability to create value for the firm.
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Moderating effect of demographic characteristics

The global financial crisis has induced different countries to pass the clear guidelines and

legislations governing the BOD’s behavior. A few examples of latest legislations passed in

different countries to ensure the efficient corporate governance include the increased interest of

Scandinavian states in reserving more seats for women within corporate BODs. Also, Norway’s

legislation to reserve 40% BOD seats for women and Spanish legislation to increase the women

quota of female corporate board of directors (Adams & Ferreira, 2009). This research has chosen

the “gender” as a main demographic variable to assess the possible moderating impact on the

Board’s ability to create economic value for the firm and its shareholders.

Gender representation affecting the value creation process

Torchia, Calabrò & Huse (2011) conducted an empirical investigation to assess whether a

balanced BOD regarding gender results in enhanced value creation and innovation within the

organization. For this purpose, tests were conducted on the 317 Norwegian firms. The

researchers executed statistical tests and results confirmed that BODs having two female

directors created more economic value than the BODs with one female director did. Similarly,

the BODs with three female directors created more economic value than the BODs with two

female directors. Based on empirical research, the study confirmed that demographic

characteristics of BODs have a statistically significant effect on their ability to create the

economic value for the firm. The results further suggested that a diversified BOD fosters the

creativity and innovation at the workplace. Nielsen & Huse (2010) reported similar findings,

where researchers empirically assessed the appropriate gender representation within the

corporate BOD and its possible effect on the Board performance. Based on the empirical

research, the researchers concluded that greater women representativeness results into enhanced
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strategic control. Moreover, it also increases the board’s effectiveness through decreased

conflict, enhanced negotiation and pro-active board initiatives for creating value.

Carter et al. (2010) assessed the ethnic and gender diversity within the corporate BODs in

the United States and financial performance of selected organizations. The findings suggested

that no statistically significant relationship exists between the ethnic and gender diversity and

financial performance. The findings negated the claims made by previous studies and proposed

gender, and ethnic diversity has no effect on the financial performance and the Board’s economic

value creation ability. Based on empirical evidence, the researchers suggested that ethnic and

gender BOD diversity and financial performance of an organization are endogenous. This

disagreement suggests that there is need to conduct further research and explore more variables

that affect the value creation process. The impact of demographic variables has been extensively

explored in this regard. However, the literature lacks the sufficient empirical evidence to explore

the effect of behavioral variables on BOD’s value creation ability (Argote & Greve, 2007).

Board behavior and value creation within the firm

To understand the value creation process within the firm, it is important to

understand the demographic, as well as behavioral characteristics of board members.

Variables like shared beliefs, previous experience, and past behavior play a significant

role during the decision-making process in and across the boards (Cameron, Thakor,

Quinn, & Degraff, 2006). Exploring the board behavior in value creation for firm and

shareholders is comparatively a new research venue (Zahra & Filatotchev, 2004). The

notion suggests that only demographic characteristics of the BOD do not predict the

board performance, but it requires understanding the inner processes within the board to

know how BODs perform their duties and make a substantial contribution to the
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innovative posture of governing organization (Blomqvist, 2009).  The focus on the history

and context in board’s behavioral perspective contrasts the economics ‘axiomatic

approach. Contending on the same note, Jensen and Meckling (1976) commented “focus

on a complex process in which the conflicting objectives of individuals are brought into

equilibrium within a framework of contractual relations” (Jensen & Meckling, 1976, p. 311).

The business corporations are the nexus of stakeholders’ coalitions without presupposing

about the strategic goals and objectives. This radical notion diverges from the famous

organizational perspective that prime goal of the business entities is to create the economic value

for the shareholders (Cameron, Thakor, Quinn, & Degraff, 2006). The BOD behavioral

exploration proposes that goal-setting process is affected by the politics and power plays among

alliances. Hence, the behavioral perspective accepts that the power and relations between

different alliances of external and internal actors control the BOD’s decision-making process and

consequently, the ability to create the value. Additionally, the relationship and power of such

alliances may depend on various firm development stages (Zahra & Filatotchev, 2004).

The influence and power of these alliances changes from crisis to normal time.

Researchers contend that different organizational crises reform the activities, power, and stakes

of different actors (Brickley, Coles, & Jarrell, 1997). Resultantly, the organizational objectives

transform with changes in the alliances. Therefore, the industry circumstances and organization’s

life cycle may influence the relationships and interactions between the stakeholders’ alliances

across the organization in such a manner that influences the roles, authority, and position of

BOD (Zahra & Filatotchev, 2004). The behavioral theory also suggests that board members’

behavior towards addressing the complexity, exploring new knowledge and searching solutions

for organizational problems determine their ability to create economic value for the firm as
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organizational actors possess the restricted capability to plan, control and analyze the

complexities and evade decision-making errors.

When board members ensure an early participation in the organization’s decision-making

process, they are better able to safeguard the interests of shareholders through timely

identification and definition of problems. It proposes that the BOD contributes to the problem-

solving process due to its diversified and extensive experience of handling complex tasks and

making decisions in difficult situations (Zahra & Filatotchev, 2004). Hence, their judgment

quality enhances the overall task performance, resulting in greater economic value for the firm

and its shareholders. BODs utilize their strategic proficiency and offer their valuable input into

intellectual tasks that serve as the basis for carrying out the strategic decision-making process

within the organization (Mnookin, Tulumello & Peppet, 2004). Hence, the behavioral

perspective of BOD suggests to focus on the knowledge creation, exploration and coordination

among the Board members (gave justification for adding behavioral perspective) while assessing

their ability to create the economic value as these variables successfully overcome the issues

arising from the exploitation, value distribution and conflict of interest (Cameron, Thakor,

Quinn, & Degraff, 2006).

Blomqvist (2009) conducted research to assess the value creation by the BODs

through their entrepreneurial and innovative behavior. Based on the quantitative research,

the study concluded that active involvement of the Board in the financial control resulted

in enhanced innovative posture and greater value creation within the firm (it is a previous

empirical study only discussed here to share the important insights) The results further

proposed that when BODs are actively indulged into service and strategy formulation was

not significantly associated with the innovation management (Blomqvist, 2009). It is

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important to understand the Board behavior for understanding their role in the innovation posture

and value creation within the firm (Cameron, Thakor, Quinn, & Degraff, 2006). The research

further suggests that the Board behavior and contribution to the value creation varies with the

firm size. The Board’s contribution towards the value creation increases with the increased

involvement in the financial control mechanisms. Moreover, positive behaviors within the

BODs, such as adequate preparedness to deal the organizational matters, active engagement,

generous knowledge and experience sharing, constructive and open interaction, a creative and

critical working style and an overall good atmosphere (Blomqvist, 2009).

Conclusions

Based on the review of existing scholarly sources, this paper has identified the behavioral

factors affecting the Board’s ability to create value for the firm and shareholders. The study

confirms that the board of directors is playing a highly important role in creating the economic

value for the shareholders in their absence. However, the findings suggest that most of the

previous researchers have analyzed the impact of demographic factors on the ability of the board

to create the economic value, ignoring the highly important dimension, that is, behavioral

characteristics. To understand how the board creates value, it is important to understand how the

previous experience, the shared beliefs, and past behavior play the role during their decision-

making process. However, such historical and contextual focus on board’s behavioral

perspective contrasts the economics ‘axiomatic approach.

The research further suggests the Board’s value creation ability is influenced by the

stakeholders’ interests and coalitions. The impact and control of these coalitions differ in

crisis and normal time. Hence, it is also important to consider the organization’s lifecycle and

industry circumstances while understanding the associations and interaction among different

stakeholders and how they influence the role, authority and position of BODs within the
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organization. Review further suggests that the Board’s value creation ability enhances with the

increased ability to resolve the problems based on their extensive and diversified problem-

solving experience. Their judgment ability improves the overall task performance, resulting in

greater economic value for the firm and its shareholders. The research proposes that BODs

utilize their strategic proficiency by offering the valuable input into strategic tasks, which

provide the foundation for facilitating the strategic decision-making process within the

corporation. Review of recent empirical studies concludes that BODs create the economic value

through their positive innovative and entrepreneurial conduct. The researcher provides empirical

evidence to support the fact that Board’s greater involvement and greater financial control results

into improved innovative posture and greater value creation within the firm.

Overall, the study confirms that Board of Directors plays a highly important role in

the economic value creation for the firm. However, it is important to understand the

behavioral characteristics to determine their effectiveness in the contemporary highly

turbulent business environment.

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References

Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on

governance and performance. Journal of Financial Economics, 94(2), 291-309.

Retrieved from https://core.ac.uk/download/pdf/6234590.pdf?repositoryId=153

Argote, L., & Greve, H. R. (2007). A behavioral theory of the firm—40 years and

counting: Introduction and impact. Organization Science, 18(3), 337-349.

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doi=10.1.1.955.6105&rep=rep1&type=pdf

Blomqvist, A. E. (2009). Board Contribution to Value Creation through Innovation and

Entrepreneurial Behavior Influencing the Innovative Posture of Small and

Medium-Sized Firms in Finland (Available on Internet) (Master's thesis, Svenska

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Brickley, J. A., Coles, J. L., & Jarrell, G. (1997). Leadership structure: Separating the

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Cameron, K. S., Thakor, A. V., Quinn, R. E., & Degraff, J. (2006). Competing

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Elgar Publishing, Incorporated.    

Carter, D. A., D'Souza, F., Simkins, B. J., & Simpson, W. G. (2010). The gender and

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