Board monitoring and effectiveness: Antecedents and implications

• Date: 01 March 2017
• Author: Alessandro Zattoni,Praveen Kumar
• DOI: http://doi.org/10.1111/corg.12198
• Published date: 01 March 2017

EDITORIAL

Board monitoring and effectiveness: Antecedents and

implications

While the board of directors should perform both monitoring and

service tasks (e.g. Forbes & Milliken, 1999), from an agency

perspective, monitoring the top management team (TMT) to safeguard

shareholders' interests is the primary responsibility of board members

(see, e.g., Fama & Jensen, 1983). Consistent with this agency perspec-

tive, directors have fiduciary duties of loyalty and care, and their

behavior is subject to the class action of shareholders in case of breach

of these duties (Cyert, Kang, & Kumar, 2002). In sum, based on agency

theory and corporate law, boards of directors may have a positive

impact on the firm by performing their primary monitoring task (e.g.,

Kumar & Zattoni, 2013; Shleifer & Vishny, 1997).

Several characteristics of the board of directors contribute to

increasing its effectiveness in monitoring (e.g., Kumar & Zattoni,

2014). First, board composition and structure are assumed to be good

predictors of board monitoring. For example, previous studies empha-

size that board size (e.g., Kiel & Nicholson, 2003), board independence

(e.g., Zattoni & Cuomo, 2010), and board incentives (e.g., Zahra,

Neubaum, & Huse, 2000) may have positive effects on board monitor-

ing. In addition, the literature on team decisions, as applied to boards

of directors, suggests that some process variables—i.e. effort norms,

cognitive conflicts and use of knowledge and skills—may positively

affect board monitoring (e.g. Forbes & Milliken, 1999). Empirical

evidence only partially supports these assumptions, however, as

meta‐analyses on demographic variables cast some doubt on their

importance (e.g., Dalton, Daily, Ellstrand, & Johnson, 1998), while some

recent studies support the positive influence of board processes on

board effectiveness (e.g., Minichilli, Zattoni, & Zona, 2009; Zona &

Zattoni, 2007).

Notwithstanding the existence of many studies that have explored

the antecedents and consequences of board monitoring, and of board

effectiveness more generally, there remain several empirical inconsis-

tencies and open issues to explore (e.g., Adams, Hermalin, & Weisbach,

2010; Huse, Hoskisson, Zattoni, & Viganò, 2011). For example, while

boards with a more balanced gender representation seem to allocate

more time to board monitoring (e.g., Adams & Ferreira, 2009), more

research is needed to understand how female directors contribute to

board debate and monitoring (Kumar & Zattoni, 2016a). In addition,

while board independence (e.g., Kumar & Sivaramakrishnan, 2008)

and boards' information acquisition and monitoring competence play

an important role in the design of executive compensation (Lo & Wu,

2016), the role of the board of directors in the executive compensation

process deserves further investigation (Kumar & Zattoni, 2016b).

Finally, while board independence is assumed to be a key driver of

board monitoring (Zattoni & Cuomo, 2010), some studies have

underlined that (i) executive directors play an important complemen-

tary role (Chancharat, Krishnamurti, & Tian, 2012); (ii) additional board

monitoring is not always beneficial (Chen & Nowland, 2010); and (iii)

the improvement in board monitoring can imply lower board strategic

advice (Faleye, Hoitash, & Hoitash, 2011).

The four papers in this issue make significant contributions to the

current debate on board monitoring, its antecedents and

consequences. The first paper by D'Amato and Gallo explores

whether boards of cooperative banks are more effective than boards

of joint stock banks. To test this hypothesis, they collected data about

Italian banks in the period 2006–12. The authors measured the ability

of the board to perform its duties by considering the sanctions

imposed by the supervisory authority. Results show that boards of

cooperative banks are less effective than boards of joint stock banks

as they have a higher probability of being sanctioned, incurring

violations and receiving severe penalties. The study highlights also

that the relationship is mediated by board turnover and that cooper-

ative board members are more inclined to become too powerful and

entrenched. As such, the study contributes to both the academic

debate on board monitoring and effectiveness in different types of

firms, and to the political debate on the merits and limits of coopera-

tive banks.

In the second paper, Beuselinck and Du investigate the determi-

nants of cash holdings in Chinese subsidiaries of US multinational com-

panies. The study argues that multinational companies face a tension

about the level of cash holdings in subsidiaries. On the one hand, cash

holdings facilitate the transfer of resources across national borders,

and so contribute to global competitive advantage. On the other hand,

it may exacerbate agency conflicts as corporate headquarters face

problems in monitoring subsidiaries' operations. The empirical setting

is China as this country is characterized by both high growth opportu-

nities and high risk of expropriation. The results, based on a database

of 160 US multinational companies and 371 subsidiaries with data

over the period 2001–10, show that subsidiaries owning more locally

registered patents or operating in the same industry as the headquar-

ters have larger cash holdings. At the same time, they underline that

the presence of a subsidiary board and of an expatriate CEO help to

reduce the agency issue, and so increase the level of cash holdings.

As such, the study highlights the important role of subsidiary boards

and expatriate CEOs in monitoring foreign subsidiaries.

DOI 10.1111/corg.12198

76 © 2017 John Wiley & Sons Ltd Corporate Governance: An International Review 2017;25:76–77.wileyonlinelibrary.com/journal/corg