Directors' Social Identifications and Board Tasks: Evidence from Finland

• Date: 01 January 2015
• Author: Violetta Khoreva,Eric Breit,Dmitri Melkumov
• DOI: http://doi.org/10.1111/corg.12088
• Published date: 01 January 2015

Directors’ Social Identif‌ications and Board

Tasks: Evidence from Finland

Dmitri Melkumov, Eric Breit, and Violetta Khoreva*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Scholars and practitioners have been interested in the tasks of boards of directors, yet we know

relativelylittle about the impact of directors’ social identif‌ication on their engagement in specif‌ic board tasks.Examining the

92 largest Finnish industrial organizations, we explore how the directors’ identif‌ication with the organization, its share-

holders, and customers affects the extent to which the board engages in externallegitimacy, networking, advice and counsel,

top management monitoring, f‌inancial monitoring, strategic participation, and strategic evaluation tasks.

Research Findings/Insights: Following the social identity perspective, we provide new insight to understand the relation-

ship between board tasks and the directors’ relevant identif‌ications. We f‌ind that organizational identif‌ication is positively

related to the level of board task involvement. We also discover that shareholder identif‌ication is negatively related to

strategic participation tasks and only weakly related to other board tasks.

Theoretical/Academic Implications: Wecontribute to the present literature on boards of directors by applying an empirical,

analytical lens to theories on how and why directors engage in board tasks. In particular, we show that different social

identif‌ications of the directors have different explanatory power towards the subsets of resource provision and monitoring

tasks.

Practitioner/Policy Implications: Our f‌indings suggest a re-evaluation of the shareholder supremacy view as the only

driver of valuecreation for the organization. Additionally, we advocatethat board, organization, and industry characteristics

are similarly weak in predicting the involvement of the directors in the board tasks examined.

Keywords: Corporate Governance, Board of Directors, Social Identif‌ication, Board Tasks

INTRODUCTION

For decades, scholars have been interested in f‌inding

meaningful relationships between organization perfor-

mance, board task involvement, and their possible determi-

nants (Daily,Dalton, & Cannella, 2003). A dominant theme in

governance literature is board behavior and the kinds of

processes that are going on inside the board (Forbes &

Milliken, 1999; Huse, 2005, 2007; McNulty, Roberts, & Stiles,

2005), along with how boards are inf‌luenced by level of

directors’ participation, exchange of information, and critical

discussions (Hambrick, Werder, & Zajac, 2008; Huse, 2005,

2007). The motivation in these studies has been to increase

knowledge on the factors that have an effect on the extent to

which boards undertake certain tasks in order to improve

board eff‌iciency and, hence, organization performance.

As part of an increased focus on the dynamic nature of

boards, the literature has expanded into organizational

behavior theories, including those concentrating on identity

(Burke, 1980; Stryker, 1968) and social identity (Hogg, 1992;

Tajfel, 1974). Scholars focus on identif‌ication with not only

the focal organization but also with other contingencies both

within and outside the organization (Burke, 1980; Foreman

& Whetten, 2002; Harris & Goel, 2010; Jing, 2009; Stryker,

1968). As a result, the multiple identities and identif‌ications

of directors have been posited as important predictors of

board behavior (Golden-Biddle & Rao, 1997). On the one

hand, identities and identif‌ications of a director can be

aligned or compatible with one another, in which case the

multiplicity of identities may be benef‌icial for the organiza-

tion. On the other hand, conf‌licting or competing identities

may be an important source of tensions, conf‌licts, and com-

peting demands in the director’s thinking and behavior

(McCall & Simmons, 1978). In this case, multiple identities

*Address for correspondence: Violetta Khoreva, Hanken School of Economics,

Management and Organization, Kauppapuistikko 2, 65101 Vaasa, Finland. Tel:

+358(0)403521551; E-mail: violetta.khoreva@hanken.f‌i

42

Corporate Governance: An International Review, 2015, 23(1): 42–59

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12088

and identif‌ications may negatively alter a director’s behavior

and, hence, his or her enactment of and involvement in

board tasks.

Hillman, Nicholson, and Shropshire (2008) develop a con-

ceptual model of directors’ identities and identif‌ications and

their impacts on board monitoring and resource provision

tasks. Thescholars propose that directors’ identif‌ication with

the organization, its shareholders, its customers, and direc-

tors’ occupation as a professional director and/or CEO

affects their monitoring and resource provision tasks.In fact,

the scholars argue that directors’ multiple identities and

identif‌ications may explain how and why directors become

engaged in their board tasks, which in turn inf‌luence their

behavior.

Following in the footsteps of Hillman et al. (2008) and

McNulty et al. (2005), the objective of our study is to build

and empirically test a model that explains how the directors’

organizational, shareholder, and customer identif‌ications

impact their contribution to board resource provision and

monitoring tasks. Our study contributes to the present lit-

erature on boards of directors by applying an empirical,

analytical lens to theories on how and why directors engage

in board tasks posited by scholars following the social iden-

tity perspective (e.g., Golden-Biddle & Rao, 1997; Harris &

Goel, 2010; Withers & Hillman, 2008). In particular, follow-

ing Huse (2005) and Minichilli, Zattoni, and Zona (2009), our

study provides a broader def‌inition of resource provision

and monitoring tasks than the one suggested by Hillman et

al. (2008), showing that different social identif‌ications of the

directors have different explanatory power toward the

subsets of both of these tasks.

The current study contributes to the board of directors

literature in two ways. First, by explaining how the strength

of identif‌ication affects a director’s resource provision and

monitoring functions, we provide a better understanding of

how individual directors engage in boardroom activities.

Our effort responds to calls for in-depth research of both

directors as individuals and the antecedents of board effec-

tiveness (Hillman et al., 2008). Second, by examining how

different types of directors’ identif‌ications inf‌luence each

director’s monitoring or provision of resources, we enrich

our understanding of such a phenomenon as board effec-

tiveness. Therefore, rather than analyzing either type of

directors’ identif‌ication in isolation from the other, we take

into account multiple directors’ identif‌ications with an

attempt to better understand the holistic effects of identif‌i-

cation on board effectiveness.

THEORETICAL FRAMEWORK

Board Tasks

Research on board tasks has traditionally been concerned

with directors’ engagement in efforts around control and

resource provision to the focal organization (Boyd, 1990;

Hillman & Dalziel, 2003; Pearce & Zahra, 1992; Zahra &

Pearce, 1989). The monitoring tasks primarily involve bal-

ancing the discretionary power of managers with account-

ability to the shareholders (Stiles & Taylor, 2001). The

resource provision tasks, in turn, embrace the provision

of any kind of feature, skill, or advantage that could be

considered useful for the organization’s operations (Pfeffer,

1972; Pfeffer & Salancik, 1978). The resource provision tasks

may involveproviding advice and counsel (Mintzberg, 1983;

Pfeffer, 1972, 1973; Pfeffer & Salancik, 1978; Zahra & Pearce,

1989), communication channels with external stakeholders

(Pfeffer & Salancik, 1978), granting access to commitments,

garnering support from important elements outside the

organization (Hillman, Cannella, & Paetzold, 2000; Lynall,

Golden, & Hillman, 2003; Zahra & Pearce, 1989), and pro-

viding legitimacy in society (Johnson, Daily, & Ellstrand,

1996; Zahra & Pearce, 1989).

The conceptual work of Hillman et al. (2008), on which

our study is based, concurs with the classical, dyadic classi-

f‌ication of board tasks into monitoring and resource provi-

sion. Developing the board tasks classif‌ication further, Huse

(2005, 2007) and Minichilli et al. (2009) provide a broader

def‌inition of the classic service and control, allowing for a

more thorough understanding of the different tasks the

board can perform and how the board is involved in value

creation for the organization. According to the scholars,

board tasks can be sorted depending on the board’s orienta-

tion or focus. For instance, the board’sconcerns with internal

factors of cost control and organizational structure can be

contrasted with external factors of relations with the share-

holders, governments, and communities (Huse, 2007). Board

tasks can thus have an internal, external, or strategic focus,

depending on the actors whom directors are addressing by

engaging in a specif‌ic task. We now turn our attention to

describing these tasks more thoroughly.

In the literature, the theoretical approach to the study of

determinants of board tasks varies. Resource dependence

scholars focus on the board’s ability to provide resources to

the organization, whereas agency theorists often examine

the board’s independence and incentives effect on board

monitoring (Hillman & Dalziel, 2003). Similarly to Huse

(2005, 2007) and Minichilli et al. (2009), we examine a range

of board tasks grounded in both the monitoring task and

resource provision domains. The monitoring task domain

includes the internally focused top-management monitor-

ing, externally focused corporate f‌inancial performance

monitoring, and strategically focused strategic evaluation.

This classif‌ication is conceptually benef‌icial, as it combines

complementary theoretical perspectives with the often-used

agency and resource dependence theories (Minichilli et al.,

2009). First, the top management monitoring tasks are

grounded in agency theory. They consist of monitoring the

CEO and top management’s behavior, including remunera-

tion schemes and successor choice (Boyd, 1995). Theprimary

objective of the board in this case is to ensure that the CEO

and top management are acting in full accordance with the

shareholders’ wishes (Shleifer & Vishny, 1997). Second, the

f‌inancial monitoring of the organization is also based on

agency theory and is concerned mostly with reviewing and

scrutinizing the f‌inancial indicators of the organization’s

operations. Due to the inherent diff‌iculty of objectively

observing and judging the CEO or top management’s per-

formance, directors monitor the corporate f‌inancial perfor-

mance of the organization to ensure that the shareholders’

interests are being properly represented (Fama & Jensen,

1983; Minichilli et al., 2009). Finally, strategic evaluation is

concerned with scrutinizing strategic directions and choices.

DIRECTORS’ SOCIAL IDENTIFICATIONS AND BOARD TASKS 43

Volume 23 Number 1 January 2015© 2014 John Wiley & Sons Ltd