A tweet from Raj Thamotheram alerted me to this Bloomberg headline: "Corporate Directors Say It’s Not Their Job to Monitor CEO: Study".
“Usually directors at least pretend to acknowledge their legal obligation to provide oversight of CEOs on behalf of shareholders,” said Nell Minow, who advises institutional investors on corporate governance issues at ValueEdge Advisors. “This acknowledgment that directors see themselves as corporate cheerleaders instead of skeptics whose job is to push back, question, and insist on better is further proof that shareholders will need to support more Engine No. 1-style challenges.”
The article helpfully provided a link to the study (so many don’t!) so I headed off to Strategic Management Journal to read more.
What a surprise – a paper by US academics using grounded theory! And a paper challenging the assumptions of agency theory! I was quite thrilled but as I read on through the thirty odd pages my disappointment grew.
I was interested in the research method. The predominant approach to corporate governance research in the US is quantitative so it is refreshing to see a qualitative perspective. But how was the research actually undertaken? 50 interviews were transcribed, coded and analysed. There are four authors. The coding process is described in the paper and the appendix provides a lengthy list of interview questions used (is this really grounded theory?) but it is not clear who conducted the interviews. Does this matter? I think so: interviewing is not a straightforward process and I think the paper should at least include some reflection on the variability of the experience.
I read the literature review with interest. Little attention seems to have been paid to the work of UK or European scholars. A 1999 paper by McNulty and Pettigrew is cited but I would have expected to see some reference to the work of Annie Pye, to the work of John Roberts and colleagues on NEDs
But apart from geographical silos, the literature review also reflects disciplinary silos. I would have expected to see reference to the work of US legal scholars in critiquing board roles, especially Kellie Alces’ paper “Beyond the Board of Directors”.
A central finding of the paper seems to be the evidence that the directors interviewed had little enthusiasm for the monitoring aspect of their roles. I don’t think this is a great surprise. Strategy is far more interesting work than compliance. But it is surprising to find directors not only admitting that they don’t monitor but arguing that they can’t and it’s not worth trying. My work on UK audit committees suggests that the monitoring role is challenging for NEDs but it is accepted as part of their role. Oddly, there is no mention of audit in the paper although the interview questions cover the work of the audit committee. Did any of the directors interviewed interact with external or internal auditors?
I have long believed that the agency theory model does not capture the dynamics of corporate governance behaviour and has inhibited the development of corporate governance research so I am always pleased to see it challenged. But it is worth remembering that the need for monitoring predates this theory: financial reporting and audit exist to support the monitoring process.
The paper cites Professor Boivie’s earlier paper which is an important critique of the ability of boards to monitor effectively and includes a very comprehensive review of relevant literature (but again seems to overlook the work of US legal scholars). On the basis of the copious evidence they marshal, Boivie et al remark that:
“… we believe that future research and theorizing needs to focus on boards as advice-giving bodies, or bodies that get involved in punctuated events, and look to other corporate governance mechanisms to secure monitoring."
The interpretation of the data in this subsequent paper certainly appears to support that belief. Now, I hesitate to suggest that eminent scholars might be subject to confirmation bias. I have just been reading a pair of papers by Professor Brendan McSweeney on confirmation bias in qualitative research, so such a suggestion might lead to accusations of my own confirmation bias… But I do think that researchers, especially those claiming to be using grounded theory, need to reflect on their interpretive choices in more detail than is shown in this paper. The appendix provided a little more detail but I really wanted to know how the interviewers responded to some of the comments with follow-up questions.
I am left with a strong sense of the wide differences in approaches to corporate governance roles between the US and the UK. Some of this is attributable to differing regulatory frameworks but this study suggests to me that there are also very significant cultural differences. I’d very much like to see such a study replicated in the UK.
However we react to the insights of this paper, it does raise a fundamental question about the relationship between corporate governance and management.
I think the boundary is more blurred than the conventional wisdom suggests (Sir Adrian certainly didn’t agree, we had some interesting chats about it!) and some time ago I started to explore this as reflected in the use of language around governance and management (I've yet to write them up but you can listen to my thoughts here and I'm happy to supply copies of the accompanying slides if you are a real glutton for punishment) Interviewing NEDs on NHS Trust boards provided some interesting insights into how they viewed their roles within the different accountability structure of the public sector: they were able to shift quite easily between providing hands-on support to managers in applying new government instructions and reverting to a monitoring role.
I’m looking forward to the imminent publication of ISO 37000 which apparently aims, among other things, at “clarifying the distinction between the governance realm and the management realm.”
(Some of the links will lead you to full papers, others are not open access but I'm happy to send you a copy.)
