The Research Theoretical Framework

The framework on which this thesis is based is derived from the two frameworks of Nicholson and Kiel (2004) and Levrau and Van den Berghe (2007) discussed above. It is based on an inputprocessoutput approach based on the premise that board characteristics of board size, leadership, independence, and diversity, and human capital have influence on board processes of board decision-making, cohesiveness and administrative operations, which have significant impact on the effectiveness of boards. Board effectiveness in this model is defined as the outcomes of the main tasks of the board of control, service, and strategy. The control role includes oversight of management activities and internal control;

while the service role includes advice to management and providing resources to the firm such as information/data and generating business. The strategy role includes participating in strategy development and monitoring implementation by management.

The inputs in this framework are board characteristics of board size, board leadership, board independence, board diversity and board human capital. Only board size, independence and diversity are in the Levrau and Van den Berghe model. Board leadership and human capital are the additions in this framework. Board size is the number of directors on the board and this will impact, positively or negatively, on the board processes of decision-making, cohesiveness and board operations. Board leadership in the framework is actually board duality and it is argued that separating the position of chairperson from that of the CEO will

Board Characteristics Board Processes Board Effectiveness

Board Size

Board Independence Board Diversity

Conflict Norms

Cohesive ness

Debate

Board Task Performance

Strategic Role Control

Role

Firm Performance

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have a different impact on the board processes mentioned above from that of combining the positions. Board independence is achieved to some extent when the number of non-executive directors is more than that of executive directors on a board. Board diversity is an indication of the diverse backgrounds, education, professions, age and gender of directors on the board.

Board human capital in this framework is the same as in the Nicholson and Kiel framework.

The thesis is an empirical test of the model and a step beyond Nicholson and Kiel (2004) and Levrau and Van den Berghe (2007).

Figure 4.3: Research Theoretical Framework on Board Effectiveness

A review of various literatures on corporate governance, top management team and group effectiveness, and board effectiveness, have revealed multiple intervening constructs that mediate the direct impact of board characteristics on board performance and effectiveness. This theoretical framework strongly relies on the inputprocessoutput approach used in the research frameworks for studying organizational teams (Gladstein,

Board

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1984; and Cohen and Baily, 1997). This approach has also inspired other board models (Forbes and Milliken, 1999; Huse, 2005; and Levrau and Van den Berghe, 2007).

Frameworks of how boards work are central to corporate governance research and practice; they dictate the type of data collected, the analysis process employed and the action plan that is developed. Zahra and Pearce (1989) developed an integrative model that could be used to study how the roles and attributes of the board influence firm performance; Hermalin and Welsbach‘s (1998) model is used to investigate the dynamics of the Board-CEO relationship, and in particular board independence from the CEO; and Boyd (1990) devised a model to determine whether boards respond to different types of environmental uncertainty.

There have also been some recent attempts to model board dynamics theoretically (Forbes and Milliken, 1999; Sundaramurthy and Lewis, 2003; Zona and Zattoni, 2007).

Forbes and Milliken argue that the effectiveness of boards depends on socio-psychological processes, related to group participation and interaction, the exchange of information and critical discussion. They define an effective board as one that can perform distinctive service and control activities successfully yielding task effectiveness, and yet continue working together, that is, cohesiveness. Sundaramurthy and Lewis (2003) propose a ‗simultaneous need for control and collaboration‘ in the working style and dynamic of boards. Zona and Zattoni relate group‘s social-psychological processes to different board tasks.

The aim of the thesis is to develop a holistic framework for examining how characteristics of boards of directors affect board performance, which in turn affects corporate outcomes and to empirically test it. Rather than relying on any single governance research agenda, such as agency theory, stewardship theory, resource dependence theory, etc, a general framework that conceptualises the board as part of a governance system is outlined.

This model is based on the assumption that board effectiveness is determined by the outcome of the main tasks of boards – control (oversight), service (advice and resource availability), and involvement in strategy development (strategic role). The main challenge is how to measure the outcomes. An analysis of the various components of the framework and their interrelationship will provide a better insight into the framework.

The framework includes four independent variables, namely firm size, age, ownership, and type as controls for potential influences on board effectiveness. These control variables have been introduced in order to investigate any specific effect of board

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characteristics and board processes on board effectiveness under various conditions. The control variables will be used to account for other important factors which might influence the results of the study.

The size of the company can have an effect on board performance and hence firm performance (Short and Keasey, 1999). The effect is believed to be two fold. In the first instance, large companies may be able to access funds more easily and can afford to put governance processes in place. Secondly, large companies may be able to create entry barriers arising from better strategic decisions (Mangena and Tauringana, 2006), and hence better performance. As the size of the firm increases its complexity also increases, board size may increase due to need for advice and environment monitoring (Pfeffer, 1972; Zahra and Pearce, 1989).

Board effectiveness may also be influenced by firm age; the older firms are likely to be more efficient than younger firms (Ang et al, 2000). Older firms may have proven processes that have been developed and tested over the years, while younger firms might still be experimenting with their processes.

Studies have shown that as firms grow over the years, their capital structure will likely change with age (Berger and Udell, 1998), which puts much demand on the board in terms raising capital. New firms are expected to have smaller earnings than old ones because they have less experience in the market, are still building their market position, and might have a higher costs structure. Such new firms might not have the clout to attractive good directors and could lack resources to put good governance processes in place.

Ownership in this case implies that the companies can either be locally owned or are subsidiaries of multinational organisations. Subsidiaries of multinational organisations are likely to have better governance structures and practices in place as a result of the influence of their parent companies that are inclined to adopt global best practices. The locally owned companies in Nigeria face the challenges of staying alive and remaining viable no matter what it takes and so could close their eyes to governance and ethical issues.

Companies in this framework are classified as either manufacturing or non-manufacturing (service). This constitutes the ‗type‘ control variable in the framework.

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