Complex and diverse roles performed by non-executive directors in the context of the implementation of the non regulatory codes of corporate governance – Evidence from the small and medium firms in the UK
by Dr Halpege Walter Gunetilleke University of Sri Jayewardenepura/University of Greenwich and Dr Anil Chandrakumara Sydney Business School University of Wollongong
Author contact:
[email protected]
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Summary This study aims to address two interrelated issues. (1) What is the role of no-executive directors (NEDs) of public companies listed in the Alternative Investment Market (AIM) in the UK? (2) Whether AIM listed companies accept the principles and provisions of the Combined Code of Corporate Governance (CCCG)?1 and, if so, to what extent? Small and medium companies can use AIM to float their shares with more flexible regulatory system than is applicable to main market. There is dearth of studies on roles of NEDs of AIM listed companies in the UK, which is a growing segment of the UKs economy (AIM, 2007). This study intends to fill the knowledge gap that exists in the areas of understanding the role of NEDs in AIM listed companies and about the degree of acceptance of principles and provisions of CCCG by these companies. The study is also important in a sense that the role of NEDs is not getting serious attention among researchers on continuity basis as it has been given primacy when there are corporate collapses only. The role of NEDs is associated with corporate governance. AIM insists the usefulness of the CCCG for its listed companies despite the fact that AIM companies are not required to follow the CCCG. Practically, this study is important to enhance the understanding of tasks to be performed by NEDs in different organisational context and effective discharging their duties and responsibilities towards stakeholders. Another contribution of this study is the application of content analysis methodology in identifying the role of NEDs in AIM companies, which might be useful for future researchers as well. Numerous studies and regulatory bodies have also indicated the need to create accountability within the boards by NEDs in making effective dialogue at board meetings and in addressing CG issues (e.g. Halablian and Rajagopalan, 2006; Roberts et al., 2003; FRC, 2006). Method This study adopts content analysis method to collect and analyse data. It is a technique used for “objective, systematic and quantitative description of the manifest content of communication” (Kassarjian, 1977, P. 8). We selected this method because of its ability to address three important properties: stability, reliability, and validity. Stability is ensured by continuous and consistent use of same coding given to document. The properties of mutual exclusiveness and mutual exhaustiveness are addressed to ensure reliability. General theoretical frames works are used in the literature, application of methodology, and in the discussion of findings to ensure internal validity. 75 annual reports were used for identifying and coding of NEDs roles and corporate governance mechanisms. Contingency tables and frequency analysis are used for interpreting data. Chi Square statistical test was used to see whether the coded data is randomly distributed ensuring mutual exclusiveness and exhaustiveness of the categories (Cooper and Schindler, 2003). In the analysis and discussion, tasks of NEDs were identified as dimensions of roles. Results The findings indicate that the nature of task of NEDs of AMI listed firms is characterised by multiplicity of tasks and task variation by the type of chair. For example, the content analysis indicated 24 tasks of NEDs. Some of these tasks such as strategy, advice, monitoring are well
1
Since 2010, CCCG has been amended with more changes as a result of the consultation process and feedback from
the participants as The UK Corporate Governance Code.
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established findings in the literature. This study found number of cognitive tasks such as beliefs, considerations, and expectations. With regard to variation of task by the type of chair, it was found that some task categories are more relevant to particular type of chair, which was classified as Chair, executive chair, non executive chair. With regard to specific characteristics of tasks of NEDs of AIM companies, the study found three major roles and relationships. They are (1) identification of the needs of several share holders, (2) concerns about more corporate governance than strategic direction, and (3) Cognitive tasks and their relationships to key board tasks. The degree of voluntary acceptance of principles and provisions of CCCG of AIM listed companies was reflected by the types of chairs, number of NEDs, and acceptance of sub committees of the board. Implications This study contributes to fill the knowledge gap in the literature with regard to the role of NEDs of SMEs in general and AIM listed companies in the UK in particular. The identification of common and specific roles played by NEDs of AIM companies would be useful for enhancing tasks, responsibilities and performance of NEDs. This contribution might be useful for effective fulfilment of interest of stakeholders of SMEs and AIM companies in the UK. To best of our knowledge, this study is the first if its kind to explore the role of NEDs in AIM companies by using content analysis. As such this study has the strength of providing methodological and research design insights for future researchers. Key words Non-executive directors, AIM companies, corporate governance
Acknowledgements
Authors wish to thank the organising committee of the ICSB conference 2012 for giving this opportunity to present this paper. They thank the anonymous reviewers who have made very useful comments. First author thanks his home university Sri Jayewardenepura and University of Greenwich where he completed his doctoral research which has contributed to write this paper. Author acknowledges various insights received from his PhD Thesis supervisor Professor Zeljko Sevic which has had a phenomenal contribution to develop this paper for the conference.
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1.
INTRODUCTION
Mandatory regulations such as the Company Law (Companies Act, 2006) and self regulations such as the the Combined Code on Corporate Governance (FRC, 2006) insist that listed companies, where there is a separation of management and ownership, should appoint NonExecutive Directors (NEDs) into the board of directors to align the interests of the management and other stakeholders (Donaldson and Preston, 1995). However, NEDs have failed to meet the expectations of the shareholders and the other stakeholders (Miwa and Ramseyer, 2005) despite the fact that there is some appreciation on their effectiveness to protect the interests of the shareholders (Rosentein and Wyatt, 1990). Role of NEDs is not getting serious attention of researchers on a continuity basis but only when there are corporate collapses (Šević, 2005).
This paper fills knowledge gap that exists in the area of understanding the role of NEDs in the public companies listed in the Alternative Investment Market (AIM) which is a growing segment in the UK economy (AIM, 2007). In our literature survey, we have found only two papers with the phrase ‘Alternative Investment Market’ within the title, while they too do not study the role of NEDs (Mallin and Ow-Yong, 1998; Parsa and Kouchy, 2008). The role of NEDs is associated with corporate governance. AIM companies are not required to follow the principles and the provisions of the CCCG (FRC, 2006), but it insists the usefulness of them for the AIM companies too. In small and medium scale companies in the UK, NEDs play a much intensive role with the task of getting ready to ‘go public’ (Berry and Perren, 2001). In this context, this aims to address two interrelated issues. (1).What is the role of NEDs in the public companies
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listed in the AIM in UK. (2) and whether AIM listed companies accept the principles and provisions of CCCG and if so to what extent? The paper is structured as follows. A brief literature review on the role of NEDs is followed by a justification of applicability of content analysis for the study. Specific methods and reliability and validity consideration are presented in the third section. Data analysis and discussion of findings are presented in the fourth section. Final section deals with conclusion and methodological directions for future research.
2.
LITERATURE REVIEW
Literature review consists of two sections. First section deals with exploration of the role of NEDs in general and theoretical approach. Second section deals with exploring the applicability of content analysis in identifying the role of NEDs. 2.1. Theoretical Approach In this study, we intend to use the Role theory (Sarbin and Allen, 1968) as the guiding framework to analyse the role of NEDs. Role theory points out that a person who holds certain power and authority to discharge a duty in an organisation has to meet the expectations of the stakeholders. He or she has to perform different roles when the number of stakeholders increases as their expectations vary from one person to the other person. Shareholders (Koehn and Ueng, 2005; Jong et al., 2006), employees (Clapham and Cooper, 2005), and debtors (Day and Taylor, 1998) usually represent major role senders or the stakeholders. Role of NEDs The role of the directors of public limited liability companies in the UK is explained in general terms (Companies Act (2006: sections 171 to 177), which includes serving the company within
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the powers, promoting the business, exercising judgment and exercising reasonable care. Similarly, CCCG (FRC, 2006) also identified vital tasks of the board and the need of the NEDs and the executive directors to work together in the unitary system of board (Conyon and Muldoon, 2006).
According to Stiles and Taylor (2001), NEDs are required to execute four roles, namely: advising, monitoring the managers, setting the strategic frame and the servicing role. However, they argue that ‘the strategic role is said to be the defining role of the board giving the term ‘director’ its meaning, and playing an important part in determining organization’s effectiveness’(2001:27). Many authors find that the NEDs perform an important function in securing vital resources for the small and medium firms such as the markets, technology, support from financial institutions and so on (Deakins, et al., 2000). Mintzberg (1983) lists seven roles for the NEDs: (1) selecting the CEO; (2) exercising direct control during periods of crisis; (3) reviewing managerial decisions and performance; (4) co-opting external influencers; (5) establishing contacts and raising funds; (6) enhancing the organisation’s reputation and (7) giving advice to the organisation. According to Useem (2003), design and development of criteria to evaluate the board, performance of the firm, recruitment of the directors are tasks of the NEDs.
Roberts, et al., (2005) emphasise the need to create accountability within the board by the NEDs in making an effective dialogue at the board meetings. Useem (2003) explains how a corporate failure happens as well as how a corporate failure could be avoided with probing and challenging the assumptions of the managers analysing number of corporate collapses and turnarounds in the
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US including Enron scandal. A synthesis of the arguments of many authors who write on the role of NEDs has been brought under a concept explained as corporate directing by Pye (2002). Three aspects come under corporate directing: governing, strategising and leading. Corporate directing includes, ‘more than just board behaviour and includes all aspects of directors’ communications, both explicit and implicit as well as inside and outside their organisation in the process of shaping their organisation’s future’ (Pye, 2002:155).
If the expectations of the stakeholders could be identified, it could be possible to list out the tasks to be performed by the NEDs although the contract could be incomplete due to many factors (Eisenhardt, 1989). Due to the interest of large number of stakeholders (Stenberg, 1997) and the wide variety of stakeholders, it creates difficulties in understanding the relative importance of the stakeholders and identifying specific job contract for the NEDs.
In order to address the
complex role of the board or the black box, many researchers emphasise the need to cultivate and maintain the right bag of cognitive tasks such as right perception, positive beliefs, assumptions and attributions to make the board the successful (Walsh and Seward, 1990; Haleblian and Rajagopalan, 2006).
Authors give various labels for the role of NEDs as shown in table I which make it difficult to categories the roles as explained in the traditional literature as strategy, advice, monitoring and resource acquisition (Stiles and Taylor, 2001).
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Table I Role identified by four authors ‘External director actions and ‘The role of board’ (Stiles, Contribution of NEDs Board role performance in small and (Berry and Perren, medium sized family firms (Heuvel, Gils and 2001:165) 2001:635) Voordeckers, 2006:479) roles’ (Deakins, O’Neil and Mileham, 2000:120) Action/Role Listed rank order Guidance and support Discuss problems
in
VC set 3.61 3.73
NON VC 3.96 3.61
Interview response
No
Results from 180
No
Role
Discuss alternative solutions to problems
3.61
3.48
Constructive criticism
3.52
3.52
Using the benefit of previous generalist experience Emotional support
3.48
3.56
3.17
Feedback Pointing out strengths and weaknesses Bringing discipline (to procedures) Clarifying responsibilities
Involvement in strategy Responsibility for monitoring health of the firm Hire appraise, and fire executives
32 20
Outside objectivity Strategic planning process
73 50
Select new managers Determine manager’s responsibility
7
Finance expertise
33
Converse with shareholders/stakeholders Ensure corporate renewal
6
Operational expertise
31
5
Network of contacts
28
3.56
Development vision
corporate
5
Structured procedures
board
28
3.04
3.22
4
2.91
2.48
3.13
Determine risk position
2.74
2.13
Lead strategic change
2.74
2.74
Review responsibilities
Helped with growth problems 3 Brought marketing support 3 Provided ally on the board 2 Reduced board conflict 2 Gave confidence to financiers
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3.30
Responsibility for ethical framework Ensure corporate survival
Specialist assistance
social
14 13 11 11
Control role 0.983 0.782
Service role -0.301 0.035
Determine salary/ Compensation for managers Direct succession problems Maximise shareholder values
0.708
0.075
Evaluate/control management performance Building organisational reputation Networking and maintain relations Advising management Formulate/ratify organisational strategy Taking care of access to extra resources
0.652
0.012
0.607
0.164
0.495
0.369
-0.204
0.871
-0.141
0.822
0.247
0.605
0.214
0.559
0.237
0.495
8
Using the previous experience Ethical role
benefit of specialist
Structuring tasks Relating concepts practice Visionary ideas
to
Succession planning Restructuring board composition
2.45
2.83
Act as ambassadors for the firm
2
Prestigious name on the board
9
-
-
-
2.30
2.30
1
-
-
-
1.96
4
-
-
-
2.30
1.74
-
-
7
-
-
-
2.09
1.83
-
-
Helped with turnaround Competitor information Customer information Company flotation advice
7
2.26
Understand current and forthcoming legislation Total
1
-
-
-
1.61 1.22
1.91 1.39
-
-
-
-
-
-
-
92
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2.2. Methodological Approach and its Justification
In this study, we adopt content analysis as the major data collection and analysis method. To our knowledge, we don’t find a published paper which uses the content analysis method to investigate the role of NEDs in AIM listed companies. Alsaeed (2006) analyses the relationship between the disclosure level and the appointment of the NEDs but not necessarily the tasks performed by the NEDs. Kassarjian (1977:8) explains content analysis as a research technique for the ‘Objective, systematic and quantitative description of the manifest content of communication’i. Three properties of a content analysis should be achieved by a content analyst namely stability, reliability and validity. If the coding of a document is done in the same way after a period of two weeks, and if the same codes are given for the document coded, the stability is achieved. Reliability is the degree of confidence a reader could develop in his or her mind about the results of the content analysis. In order to ensure reliability, there are many steps to follow in the content analysis. First of all, the unit of analysis has to be decided. Milne and Adler (1999) point out that the sentence is reliable than the word. With regard to unit of analysis, Stiles (2001) has selected the sentence as the unit of analysis.
Several steps are taken to ensure reliability: (1) preparation of the coding instrument and coding decision rules (2) theoretical framework to develop the coding instrument, (3) protection of two properties in content analysis that is mutual exclusiveness and mutual exhaustiveness. Mutual exclusiveness means that a sentence could fall only into a single category. Mutual exhaustiveness means that all the sentences in the selected ‘locations’ (Milne and Adler, 1999:241) in an annual report get the attention of the coder to see whether there is any relevant sentence. Denscombe
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(2003) points out that constant comparison going backward and upward in the document could ensure the above two properties.
Validity consists of two components namely internal validity and external validity. In order to ensure internal validity, conceptual framework is built on the general theoretical frameworks on the role of the NEDs. For example, category of strategy, advice and monitoring and so on are found as tasks of the NEDs (Stiles and Taylor, 2001).
External validity could be ensured when the content analysis design is replicated in the same research context or in another research context and if the results obtained are similar or close to the same results (Bacharach, 1989). Conceptual terms not familiar to the researcher are required to be considered as unique at the open coding stage (Glaser and Strauss, 1967). However, in order to ensure complete understanding of such conceptual terms or what Glaser and Strauss (1967) explain as theoretical saturation or theoretical sensitivity (Ahuvia, 2001), such conceptual terms found in the open coding stage is further studied to see whether there is any theory behind (Perry and Bodkin, 2000). The conceptual term of ‘negotiation’ is a task of the management and the board. D’Aveni and Kesner (1993) note that ‘numerous board connections of top managers (and other elite connections) may also be a means by which organizations negotiate their environments’(1993:126). Another theme found across many annual reports of AIM companies is ‘consensus’. Zahra and Pearce (1989) points out consensus is one of the five elements in a successful board process.
The number of AIM annual reports selected is not a priori decision. As Glasser and Strauss (1967) and Ahuvia (2001) explain, last annual report to be coded would be decided when only
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the coder gets an understanding of the emerging picture of the role of NEDs. Berg (2004) emphasises the need to look across the document to identify the themes needed for the analysis. Thus, the sections of the document or ‘location in report’ (Milne and Adler, 1999:241) are identified before the proper coding takes place. They are: Chair’s statement, CEOs review, corporate governance report, directors’ details and directors’ report.
Contingency tables (Rose and Sullivan, 1998) and frequency analysis are the popular method of data interpretation by content analysts (Beattie, McInnes and Fearnley 2004). As such, the preparation of cross tabulated data tables and frequency analysis are expected to perform in this study. This paper uses
x
2
test
ii
(Cooper and Schindler, 2003) to see how close the observed
frequencies are to the expected frequencies. Although literature is not found with regard to the use of this statistical test, authors find that it is appropriate to use the test because the coding of the annual reports constructs only the categorical data. Number of pre-requisites are required in order to calculate the
x
2
(Cooper and Schindler, 2003): (1) content analysis data should be from
a sample of a population which is assumed to be randomly distributed; (2) categorical data must be mutually exclusive and exhaustive; (3) data must be reported in frequencies not in percentages; (4) there should not be any cells with zero frequency and (5) expected frequencies below five should not compose more than twenty per cent of the cells. Muhr (1991) argues that the insignificant frequencies could be deleted, amalgamated or redefined. The removal of the less frequent categories ensures the application of the
x
2
but could damage the emergence of a real
picture.
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The tasks and role of NEDs could differ substantially according to the nature of the chair (executive or NED chair), number of NEDs and the number of sub committees of the board (nomination, remuneration and audit). In order to understand this aspect, data are obtained from the annual reports and corded then before preparing questions in the form of a content analysis schedule (e.g. Jauch et al., 1980:524-525). They are: (1) how many directors are in the company? (2) How many of them are NEDs? (3) What is the title of the Chair? (4) How many sub committees are in the board? Literature review suggest that corporate governance mechanisms such as the separation of the chair and the CEO, appointment of the audit committees and the NEDs could lead to more disclosures and more vigilant corporate governance as found by many authors (Chen and Jaggi, 2000; Bushman et al., 2004).
3.
METHODS
This study adopts content analysis as justified in the second section of the literature review. It is a technique used for “objective, systematic and quantitative description of the manifest content of communication” (Kassarjian, 1977, P. 8). We selected this method because of its ability to address three important properties: stability, reliability, and validity. Stability is ensured by continuous and consistent use of same coding given to document. The properties of mutual exclusiveness and mutual exhaustiveness are addressed to ensure reliability. General theoretical frames works are used in the literature, application of methodology, and in the discussion of findings to ensure internal validity.
75 annual reports were used for identifying and coding of NEDs roles and corporate governance mechanism. Although this may not be a representative sample of the total number of AIM companies (about 1076 as at December 2009), the information generated through content
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analysis is very important in terms of addressing basic research issues. In the analysis and discussion, tasks of NEDs were identified as dimensions of roles.
Contingency tables and frequency analysis are used for interpreting data. Chi Square statistical test was used to see whether the coded data is randomly distributed ensuring mutual exclusiveness and exhaustiveness of the categories (Cooper and Schindler, 2003). The calculated Chi Square value is 16.85 with the degree of freedom of 26. The table value for degree of freedom of 26 with the 0.05 confidence level is 38.85. As the calculated value is less than the table value, null hypothesis cannot be rejectediii. There is independence between the variables. On the other hand, it means that each category has its’ own independent distribution with the protection of the properties in content analysis, that is mutual exclusiveness and exhaustiveness. Further, this signifies that the content analysis data is randomly distributed.
Presentation of data and information is done covering the following areas, which were based on initial research questions. 1. Degree of voluntary acceptance of the principles and provisions of Combined Code of corporate governance (FRC, 2006) by the AIM companies. 2. Nature of tasks of NEDs 3. Characteristics of major roles of NEDs.
4. DATA PRESENTATION AND DISCUSSION 4.1 Corporate Governance Variables: Type of chair, number of NEDs and sub committees Table II shows that the AIM companies use three different titles beneath the statement of the chairman in the annual reports coded: Executive chair (22.7 per cent) non-executive chair (52 per cent) and chairman (25.3 per cent). The annual reports which do not specify beneath the statement of chair whether the chair is an executive or non-executive chair, belong to the category listed above as chairman. However, a closer look at the bibliography page of the board
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members and in relation to the chair, it is found that the chair is classified either as executive chair or non-executive chairiv whereas in the statement of the chairman, it goes as chairman. Table II Type of Chair Type of Chairman
Number of firms
Per cent
19 17 39 75
25.3 22.7 52.0 100.0
Chairman Executive Chair Non-Executive Chair Total Source: Survey data
Table III shows that many companies appoint the NEDs. Only in six companies (8 per cent), there are no NEDs at present. There are eleven companies which have one NED in each company (14.7 per cent) and in 24 companies, there are two NEDs in each of them. There are 3 NEDs in each of 22 companies. In 11 companies, there are 4 NEDs in each of them while in one company, there are 5 NEDs. These figures show the remarkable acceptance of the significance of the NEDs. Table III Number of NEDs Number of NEDs 0 1 2 3 4 5 Total Source: Survey data
Number of firms 6 11 24 22 11 1 75
Per cent 8.0 14.7 32.0 29.3 14.7 1.3 100.0
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Table IV shows that the audit and remuneration committees are more established (74.7 and 73.3 per cent respectively) while the nomination committees (41.3) are still to develop. However, there is no clear term of reference for the sub committees of AIM companies as in the FTSE companies. Table III shows that in 34.7 per cent of companies have all three sub-committees. In 33.3 per cent of companies, there are two committees and at least there is one sub-committee in 6.6 per cent of companies. Only in 25.3 per cent of companies, there is no a single subcommittee in the board. The degree of significance given for the sub-committees varies among the firms. This could be due to the firm specific factors (Schmidt and Spindler, 2002) such as the phase of growth of the company, appraisal of cost and benefit of sub-committees of the board, growth of the market and so on.
Table IV Sub Committees of the Board Committee Audit Remuneration Nomination All three of above committees Two committees Only one committee No sub committees Source: Survey data
Number of firms
Per cent (out of 75)
56 55 31 26 25 5 19
74.7 73.3 41.3 34.7 33.3 6.6 25.3
The spread of the number of sentences coded among the three types of chairs give us some insights about the board culture. Of the 1,020 sentences coded, 592 sentences (58.0 per cent of total sentences) are in the coded annual reports where there are NED chairs. In the annual reports
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where there are executive chairs, there are 205 sentences coded (20.1 per cent). In the unclassified chairman category of annual reports, there are 223 sentences coded (21.9 per cent). Thus, the number of sentences in the annual reports coded in which there are NED chairs could be used as a proxy for more vigilance corporate governance. This picture is further supported by Table IV. It shows that when the number of NEDs in a board varies from two to three, 35.4 per cent and 30.5 per cent of the coded sentences are found respectively. A remarkable feature is that when there are more than 4 NEDs in a board, the number of coded sentences remains low.
Table V Relationship Between Number of NEDs and the Number of Coded Sentences Category 0 Approvals Inputs Meetings Organisation Responsibilities Revisions Monitoring Total 20 Percent of total 2.0 Source: Survey data
4.2
1 2.2 170 16.7
Number of NEDs 2 3 4 2.3 2.5 2.5 3.6 3.4 3.1 3.7 4.2 2.7 3.1 3.2 2.4 361 311 142 35.4 30.5 13.9
Total 5 16 1.6
7.3 5.5 9.8 11.0 9.9 9.2 5.8 1,020 100
Nature of Tasks of NEDs
Content analysis data shows the following characteristics of the tasks of the NEDs. Characteristic 1
Multiplicity of tasks
Multiplicity of the tasks is the major feature found in relation to the tasks of the NEDs. Multiplicity is explained here as the existence of a large number of tasks. Content analysis finds 24 tasks of the NEDs (Table VI). Some of these tasks such as strategy, advice, advice and 17
monitoring are well established findings in literature. Cognitive tasks are explained in theory but without adequate evidence in relation to the board research (Forbes and Milliken, 1999). This survey finds number of cognitive tasks of the NEDs such as beliefs (4.3 per cent), considerations (4.8 per cent) and expectations (3.5 percent).
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Table V Tasks of NEDs within the Unitary Board in the UK
1.3
4.5
1.3
3.1
.9
.4
.9
1.3
3.6
3.6
N
6
1
13
1
8
9
9
1
4
1
2
7
9
A
16.7
9.1
B
50 17.6
5 18.2
29 18.4
10 30.8
2.9
.5
6.6
.5
3.9
4.5
4.4
.5
2.0
.5
1.0
3.4
4.4
N
19
1
43
16
26
19
33
7
8
8
5
21
39
A
52.8
NED Chair B
3.2
.2
N
36 3.5
EC Chair
Total % of total
50 58.1
17
10
8
Total
8.1
23
Scheduling
0
24
Strategy
4.9
10
Monitoring
20
6
Revisions
9.7 14.3
21
Responsibilities
9.1
15 22.7
5
Recommendations
30 22.2 14.3
0 24.3
22
Proposals
1
Organisation
8
Objectives
8
Meetings
7.7 18.2
3
Leadership
2
Study information
1
Expectations
2
Evaluation
7
Delegation
3
Decisions
10
Criteria
B
3
Considerations
30.6
18
Communication
A
0
Beliefs
11
Authority
N
Approval
Announcements
Advice Sentences
Type of Chair Chair
Category
223
22 41.7 18.8 35.3 17.5 23.8 24.5 28.8 30.3
25 21.9
.4
9.9
2.2
9.4
2.7
3.6 21.9
2
26
2
23
5
20 19.4 16.1 18.2
7.6
4.5
10
12
8
22
17
7
205
26 16.7 20.5 29.4 17.5 21.8 18.1 20.3 24.2 21.9 20.1
1.0 13.1 8
4.5 10.8 10.3
52
1.0 11.6 5
68
2.5 6
4.9 10.7
8.3
5.9
3.9
3.5 20.1
37
54
30
15
17
592
55
80 59.1 61.3 67.3
70 61.5 72.7
50 58.3 69.6 72.7
52 41.7 60.7 35.3 64.9 54.5 57.4 50.8 45.5 53.1
100
7.3
2.7
4.4
3.2
5.6
1.2
1.4
1.4
.8
3.5
6.6
1.4
8.8
.8 11.5
1
100
2
74
20
44
31
49
10
13
11
10
36
56
11 100
12 112
.2
7.3
2
4.3
3.1
4.8
1.0
1.3
1.1
1.0
3.5
5.5
1.1
1.2 11.0
9.8
6.3
9.3
9.1
5.1
2.5
2.9
17
57 101
94
59
33
32 1,020
1.7
5.6
9.2
5.8
3.2
3.2
9.9
100
N = Number of sentences, A = per cent of sentences within category, B = per cent of sentences within chair Source: Survey data
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Sentences which convey some message whether there is evaluation of the performance of both the NEDs and the executive directors in the annual reports coded take only 1 per cent of sentences coded. Higgs (2003) found that the evaluation is one of the least considered board tasks in the UK PLCs. Useem (2003) evidently pointed out that criteria development for the managerial decisions and for the board tasks is one of the most needed but forgotten task in the board. Content analysis data also shows that there is less significance for the category of criteria (1.0 per cent). Characteristic 2
Task variation by the type of chair
In order to understand the relative significance of each category according to the type of chair, this paper decides an arbitrary value to judge the most significant categories for a chair (as 5 per cent of coded sentences). Accordingly, table V shows that some task categories are more significant for some type of chairs. For example, the NED chair considers the following categories as significant relatively to others: organisation (11.5 per cent), responsibilities (9.3 per cent), revisions (9.1 per cent), meetings (8.8 per cent), approvals (7.3 per cent), studying information (6.6 per cent), recommendations (6.3 per cent) and considerations (5.6 per cent). When we apply the same rule for the executive chair, we could identify the following categories that are meetings (12.7 per cent), organisation (11.2 per cent), responsibilities (10.7 per cent), revisions (8.3 per cent) and approvals (6.3 per cent) rank high among the categories. Within the unclassified chair, responsibilities (10.8 per cent), revisions (10.3 per cent), meetings (9.9 per cent), organisation (9.4 per cent), approvals (8.1 per cent) and monitoring (7.6 per cent) takes higher values above 5 per cent. Across all the chairs, several categories are more important than others (organising the tasks of the board, meetings, responsibilities, revisions and approvals).
20
4.3. Major characteristics of NEDs roles. This section discusses several characteristics of the tasks of the NEDs inferred from the survey namely, (1) identification of the needs of several stakeholders; (2) concerns about compliance to corporate governance and strategic directions (3) cognitive tasks and their relationship with key board tasks.
Identification of Expectations of Several Stakeholders Within the multiple number of tasks, it is possible to identify that the NEDs to meet the expectations of several role senders such as the shareholders, CEO and regulatory authorities. Some of these tasks could meet the expectations of many role senders simultaneously. For example, the tasks of meetings (9.8 per cent), communication (3.1 per cent), beliefs (4.3 per cent) and expectations (3.5 per cent) could meet the needs of shareholders, CEO and regulatory authorities such as Financial Services Authority and Financial Reporting Council.
More Emphasis for Vigilant Corporate Governance than the Strategic Direction The significance of the appearance of the NED chair and the sub committees of the board could be considered as more attentive compliance for corporate governance. Non-regulatory codes on corporate governance make a big pressure for the NEDs towards monitoring of managers and compliance rather than the strategy of the firm (Taylor, 2004). Pettigrew and McNulty (1995) found that boards which give equal chance for the directors to discuss or make their points heard by the others, have more independent directors. Therefore, the survey could build a ‘Rough hypothesis’ (Berg, 2004:283) that the more NED directors lead to increased corporate governance.
21
On the other hand, more attention for corporate governance could lead to poor attention for the entrepreneurial activities of the companies. Strategic contribution and entrepreneurship are pointed out as key aspects in the role of NEDs (FRC, 2006). Chambers (2005) argues that ‘Many directors will concur with the sentiment that a greater proportion of their available time is now taken up with accountability, audit, risk management and control matters than was historically the case’ (Chambers, 2005:28). Some themes in the content analysis that is organisation, meetings, responsibilities and so on take a higher value among the total number of sentences examined than the sentences covered by the theme strategy. However, it is required to find out whether these tasks were directed to deliberations on various aspects of the strategy such as planning, revision, monitoring, and implementation and so on. Stiles (2001) finds a task variety within the strategy as mentioned above.
Cognitive tasks and their relationship with key board tasks We could develop a rough hypothesis for future research (Berg, 2004) that there is a relationship between the cognitive aspects of the NEDs and the extent of involvement in strategy, advice, monitoring, development of criteria, evaluation, leadership, and so on. In figure i, propositions are built to show the interdependence of the tasks. Cognitive tasks could influence several tasks such as the development of criteria for management evaluation, liaison with the shareholders, setting objectives for the firm and so on to name a few. The straight lines in figure i show the direct relationship and the dashed lines show how the outcome, that is the strategy, advice and monitoring and in turn they enrich the cognitive tasks. Since the cognitive aspects are vital in the
22
overall process of the role of the NEDs, further research is required to understand how the cognitive tasks are developed in the minds of the NEDs and what they are.
Many authors (Walliman, 2005; Reynolds, 1971; Rieke and Janik, 1979) that it is possible to point out a logical relationship between concepts rather than a mere statistical relationship. Using the theory of mental mapping (Farrand, Hussain and Hennessy, 2002), we develop two kinds of logical relationships between the concepts found in the content analysis. Accordingly, we could develop rough hypotheses for future research (Berg, 2004) that there is a relationship between the cognitive aspects of the NEDs and the extent of involvement in strategy, advice, monitoring, development of criteria, evaluation, leadership, and so on. In figure i propositions are built to show the relationship of the cognitive tasks, with several other tasks. Cognitive tasks could influence the other tasks such as the development of criteria for management evaluation, liaison with the shareholders, setting objectives for the firm and so on to name a few. The straight lines in figure i show the direct relationship and the dashed lines show how the outcome, that is the strategy, advice and monitoring themselves reinforce the cognitive tasks. Since the cognitive aspects are vital in the overall process of the role of the NEDs, further research is required to understand how the cognitive tasks are developed in the minds of the NEDs and what they are.
23
Figure i Testable Relationships in Content Analysis
Beliefs
Strategy
Expectations
Advice
Considerations
Monitoring
Key: relationship Indirect
direct
Source: Survey data
5. CONCLUSIONS AND DIRECTIONS FOR FURTHER RESEARCH This research finds that NEDs perform a multiple number of tasks and meet the expectation of several stakeholders simultaneously, such as the CEO, regulatory authorities, and shareholders. Therefore, it could be possible to imagine that the NEDs are a special kind of bees in the bee hive of board. In the above context, we could see that the NEDs take part not only on decision approval as professional referees (Fama and Jensen (1983) but also on decision taking too.
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In previous research, not only the tasks are identified as roles but also they are identified as straight forward roles. In this research, tasks are identified as dimensions of a role. According to the findings, the role of NEDs is conditioned by two forces namely their own cognitive tasks such as beliefs, assumptions and expectations, and by the expectations of the stakeholders.
This research reflects the difficulty of developing a general theory on the role of NEDs to meet the expectations of even the easily identifiable stakeholders such as the CEO, shareholders, and regulatory authorities. In this study, researcher has largely focused on the role of NEDs in AIM companies. Therefore, the results could be more of relevance to the AIM companies. Second, selection of a set of annual reports for the content analysis was done on a random basis from the annual reports received from the Annual Report Service in the UK. They too are unable to collect annual reports from all the AIM companies according to our inquiry. Third, declarations of annual reports are assumed as true but there are many arguments of their accuracy (Atkinson and Coffey, 2004). If we do not assume that the declarations in the annual reports are correct, there will never be able to do a content analysis using the published documents. However, χ2 test analysis proved the randomness of the categories in the content analysis. Therefore, it is an assurance of the reliability of the content analysis. Fourth, personal attributes decide the selection of a theoretical perspective and in turn the selection of the methodology and research methods which could reflect some kind of abilities as well as cognitive limitations (Lohrke, Bedeian and Palmer (2004). These authors argue that ‘It is generally recognised that complex individuals process information differently from their cognitively less complex counterparts’ (2004:73). As a result, the development of coding instrument and designing of the postal questionnaire, data
25
analysis and discussion and so on could be different among the researchers if they are put into the same task.
Methodological Insights for Future Research and Agenda This survey has the strength to give methodological insights for the development of research instruments. Many argue the difficulty of getting methodological insights for research (Pettigrew and McNulty, 1995). To design the questionnaires for interviews or observations of the board in action, the tasks identified in this paper are vital to peep through. Further research is required to understand the distinctive processes involved in each tasks identified. Recommendation, decision, approval and so on have their own processes although they seem to be near equal in meaning. Such process studies are yet to come in relation to the board work (Pettigrew, 1997). There is a need to understand the relationship between the cognitive aspects of the NEDs and the extent of involvement in strategy, advice, monitoring, development of criteria, evaluation, leadership, and so on. Logical concepts could be related to each other in the context of discussion (Reynolds, 1971).
Semantic differences (Atkinson and Coffey, 2004) need the attention of board room research. Many authors explain either the tasks or the roles with phrases which give similar meanings (Deakins, O’Neil and Mileham, 2000; Stiles, 2001; Berry and Perren, 2001; Heuvel, Gils and Voordeckers, 2006) (See Table VI).
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i
Ahuvia (2001) argues that latent variables or the derivable variables from the manifest variables also should be analysed. This research analyses predominantly the manifest variables.
ii
The formula for Chi Square:
x
2
O E E ij
= i
j
2 ij
(Cooper and Schindler, 2003)
ij
Oij is the observed frequency and Eij is the expected frequency for the cell corresponding to the ith condition and the jth group. The expected value for each cell is calculated by multiplying the two marginal totals common to a particular cell and dividing this value by the size of the sample. Following steps are taken to analyse the Chi Square calculated values.
1.
Null hypothesis and the alternative hypothesis are:
Ho: O = E, that is the observed value (O) is equal to the expected value (E). If O=E, it could be inferred that the categories developed in the content analysis are independent. Further, it reflects the random distribution of the data and thus the protection of the two properties in the content analysis that is mutual exclusiveness and mutual exhaustiveness.
H1: O ≠ E means the observed values do not equal to the expected value. Accordingly, the categories developed in the content analysis could be considered as dependent on other categories.
2.
Confidence level is set at 95 per cent (see Rose and Sullivan, 1998):
3.
Calculate the value of the appropriate statistic. Also, indicate the degrees of freedom for the statistical test if necessary.
4.
Write the decision rule for rejecting the null hypothesis. Reject H0 if
The null hypothesis of independence is rejected if the calculated
x
2
= .05
x
2
table value
is greater than table value (statistical table of Chi Square
values), because this means that observed frequencies and expected frequencies are far apart. We reject H0 if the test statistic calculated from the sample lies under the rejection region of the Chi-Square curve with (r-1)(c-1) degrees of freedom. iii
See end note ii. Chi tables are included in any major statistics text book. Differences of the title (page number of the annual report within parenthesis) Name of the company annual report Title in statement of chairman Bibliography details LPA Group plc 2006 Chairman (5) Non-executive chairman (3) iv
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Glen Group plc 2006 DCD Media plc 2006
Chairman (1) Chairman (5)
Non-executive chairman (11) Non-executive chairman (10)
33
