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Board chairs are the key to your company’s future

Datum:07 november 2022
Auteur:Fabian Ahrens
Board chairs are the key to your company’s future
Board chairs are the key to your company’s future

Supervisory boards (hereafter: boards) around the globe play an important role in corporate governance vis-à-vis top management teams (TMT). They are important because, while TMT develop and propose the actions and strategic plans to achieve the firms’ goals, it is the board and the directors on it who represent different stakeholder groups and thus strongly influence the goals of the firm.

The leaders of both these teams, the board chair and the chief executive officer (CEO), have significant influence on how their teams operate, what actions they take and what goals they follow. Decades of research have focused on the CEO as the main decision maker of the firm and the ‘CEO-effect’ on firm performance, but recent research highlights the ‘board chair-effect’ which plays an even more important role in countries like the Netherlands.

For US firms, the CEO-effect has been demonstrated in multiple studies and, estimated as the percentage of variance in firm performance, e.g. ROA - return on assets, explained by the differences between CEOs, this effect varies between roughly 10% to almost 30% across these studies and sampled years [1].

However, when trying to understand these effects in countries with different governance settings and norms of good governance, the US data are not particularly helpful. This is because the US is characterized by high managerial discretion (i.e. high influence of managers on firm actions), a single board of directors with executives and non-executives, including a decreasing but still prevalent combination of CEO and board chair positions, and a strong shareholder orientation [2].

Countries like the Netherlands and Germany often counter this US governance model with lower managerial discretion ratings, a widely-used separation of CEO and board chair positions by having two completely separate teams and stronger stakeholder orientation through board representation of stakeholders, such as unions or employee representatives on boards.

In such European countries, board chairs have been shown to play a more important role and even have larger impact on firm performance (measured here as ROA) than CEOs. For the period between 1999 and 2016, Ryan Krause and colleagues estimate that the board chair-effect in Germany, which is the closest comparison to the Netherlands with currently available data, accounts for 29% of variance in firm performance while the CEO-effect only accounts for 7%. In their study they also found that both leaders in their US sample account for about 10% each [1].

This raises the question why board chairs, even in the Netherlands, are not seen as having such an important role, given their strong influence. Especially in countries such as the Netherlands and Germany where firms have greater responsibility to benefit not only shareholders but also involve other stakeholders, board chairs are the key to firm success.

Taking these insights together, it is not surprising that more and more firms in European countries are exploring different governance solutions that take into account a better balance between financial success and firm responsibility for environmental and social goals. An example for this is the increasing share of firms establishing purpose-driven corporate governance which is represented by different types of ownership and results in different kinds of representatives on the board. Steward-ownership [3], for example, can be implemented by creating a foundation as holding company that ensure that firm profits are not only distributed to shareholders but invested in all kinds of purposes from employees, society, sustainability, or R&D, just to name a few. The Business Roundtable in 2019 mirrored this development in their departure from sole shareholder commitment to acknowledging all stakeholders [3].

What does this mean for you as a professional? Although there is no one-to-one relationship between board chairs and firm success given the many factors involved, it is likely (statistically). If you think that your company should think about its purpose at large or re-evaluate its goals in the 21st century, your best bet is to initiate change by talking to the supervisory board and especially the board chair, because they are relevant for the success for the company in the future.

Fabian Ahrens (f.k.ahrens rug.nl) is a final-year PhD candidate at the Department of Human Resource Management and Organizational Behavior. He works with Prof. Floor Rink, Dr. Dennis Veltrop, and Dr. Laetitia Mulder in the field of behavioral corporate governance with a focus on boards of directors, top management teams, decision making and behavioral processes.

References

[1] Krause, R., Li, W., Ma, X., & Bruton, G. D. (2019). The board chair effect across countries: An institutional view. Strategic Management Journal, 40(10), 1570–1592.

[2] Crossland, C., & Hambrick, D. C. (2011). Differences in managerial discretion across countries: how nation-level institutions affect the degree to which CEOs matter. Strategic Management Journal, 32(8), 797–819.

[3] “What’s steward-ownership?” From medium.com: https://medium.com/@purpose_network/whats-steward-ownership-14efc6caf9e7

[4] “Want purpose-driven businesses? Rethink ownership.” From medium.com: https://medium.com/@purpose_network/want-purpose-driven-businesses-rethink-ownership-3684b9bc3ae4