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Supervising the supervisors: why and when external regulation matters

Datum:19 januari 2019
Auteur:Julia Prömpeler
Supervising the supervisors: why and when external regulation matters
Supervising the supervisors: why and when external regulation matters

Elon Musk, known as the CEO of Tesla & SpaceX and founder of PayPal, is one of the most prominent entrepreneurs in Silicon Valley. Developments and visions regarding the future of electric cars and possible life on Mars frequently bring him to the news. However recently, this was different: Musk was featured on the news by getting into trouble with the external regulator for American organizations, the SEC [1] , over a series of tweets.

In summer 2018, Musk published several tweets about taking Tesla into private ownership. The news caused shareholders to react and lead to changes in stock value, yet Tesla never followed up. The SEC therefore sued Musk personally for securities fraud and claimed misguidance and deception of the public. Finally, despite Musk’s public aversion against the SEC overall and their decision, he had to resign as chairman of the board of Tesla and a 20-million-dollar fine was set - for Musk privately as well as for Tesla because they did not clarify the matter earlier. On top of that, the board is now responsible for controlling Musk’s communication.

Why does this story matter? It clearly demonstrates the influence of external supervisors in situations in which their boards failed to react to management mistakes. Generally, to ensure that top management teams act in the best interest of their organizational stakeholders and society overall, (supervisory) boards are in place. They are supposed to support and critically monitor management actions and firm decisions. However, it is questionable whether boards are sufficiently successful in doing so - both from a research perspective and from a public perspective - as the list of corporate failures is long. It seems that even though boards are structured ‘ideally’ to overview company actions, boards have shown to be unable to prevent decisions that harm organizations, its employees, shareholders and society (2).

That is where external regulators come into the picture. External supervisors oversee actions of whole market sectors or industries. In the Netherlands, external supervision is taking place in various sectors, ranging from healthcare, housing, FMCG, the financial sector (i.c. Autoriteit Financiële Markten - AFM), and all the way to fast-moving-consumer goods and also have the power to sanction and influence corporate actions.

Researchers increasingly argue that as long as external forces are neglected in board effectiveness research, the corporate governance puzzle will never be completed (3). I argue that the problem of board effectiveness in supporting and monitoring management action can only be understood and consequently tackled if the regulatory context of boards is considered and board behavior is evaluated from both an economic and a psychological perspective. Therefore, as part of my research with Prof. Dr. Floor Rink, Prof. Dr. Janka Stoker and Dr. Dennis Veltrop, I assess the role of external regulation in board decision-processes.

Two topics seem to be critical:

  1. The extent to which external regulators influence psychological processes in the board, board involvement, and eventually board effectiveness (board control and service tasks)
  2. The circumstances (i.e. social context factors) upon which the influence of external regulation on psychological board processes is contingent

Members of (supervisory) boards interested in this research are invited to contact me for potential collaborations.

Julia Prömpeler (j.b.j.prompeler@rug.nl) is a PhD candidate at the Department of Human Resource Management & Organizational Behavior, Faculty of Economics and Business, University of Groningen

  • The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. https://www.sec.gov/about.shtml
  • Boivie, S., Bednar, M. K., Aguilera, R. V., & Andrus, J. L. (2016). Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring. Academy of Management Annals, 10(1), 319–407. https://doi.org/10.1080/19416520.2016.1120957
  • Aguilera, R. V., Desender, K., Bednar, M. K., & Lee, J. H. (2015). Connecting the Dots: Bringing External Corporate Governance into the Corporate Governance Puzzle. Academy of Management Annals, 9(1), 483–573. https://doi.org/10.1080/19416520.2015.1024503