Influence of governance regime on controller roles – supervisory board members’ perspectives on business unit controller roles and role conflict

• Published date: 16 July 2020
• DOI: https://doi.org/10.1108/CG-10-2019-0309
• Pages: 1029-1051
• Date: 16 July 2020
• Author: Bert Steens,Anouk de Bont,Frans Roozen
• Subject Matter: Strategy,Corporate governance

Influence of governance regime on

controller roles –supervisory board

members’perspectives on business

unit controller roles and role conflict

Bert Steens, Anouk de Bont and Frans Roozen

Abstract

Purpose –The plethora of changes in the corporate governance landscape over the past two

decades has the potential to tighten governance regimes and influence the preference of

supervisory board members vis-a

`-vis the involved decision-making role of business unit (BU)

controllers and their independent fiduciary role. Stricter financial reporting and compliance

requirements may lead organizations to prioritize the latter role. However, recent studies support the

need to balance these roles, inducing the potential for role conflict. The purpose of this study is to

shed light on the influence of a tight and loose governance regime on this balance as preferred by

supervisory board members.

Design/methodology/approach –This study uses a unique data set from an experiment among 73

supervisory board members.The authors take their perspective because compliance withgovernance

codes andcorporate policies are relevant topicsfor their function.

Findings –The authors find evidence for the preference of supervisory board members for ‘‘all-round’’

BU controllers who, irrespective of the governance regime, demonstrate substantial levels of fiduciary

and decision-makingqualities and deal withthe resulting role conflict.

Originality/value –The outcomes of the experiment among supervisory board members provide

evidence for their preferences concerning the balance of the two primary controller roles and for the

potentialof role conflict. The authors have not foundstudies that provide such empirical evidence.

Keywords Experiment, Controller independence, Controller involvement, Controller role conflict,

Governance regime, Supervisory board members

Paper type Research paper

1. Introduction

In his pioneering research, Sathe (1982,1983)[1] substantiates the relevance and the

merits of independence andinvolvement as the two major responsibilities of controllers.The

involved controller is actively involved in business decision-making, recommends courses

of action and challenges the plans and actionsof executives using prospective information.

The independent controller is responsible for the accuracy and reliability of financial

reporting and internal control activities, and has to be objective and independent in dealing

with management (Sathe, 1983, p. 36).The value of each of these roles is also supported in

more recent literature (Indjejikian and Mat

ejka, 2009;Friedman,2012, 2014;Merchant and

Van der Stede, 2017). However, Sathe’sinitial research and more recent studies (Maas and

Mat

ejka, 2009;Indjejikian and Mat

ejka, 2009;Van der Stede and Malone, 2010) point out

that the two roles could be conflicting: involvement could lead controllers to defend

managers’ stakes and jeopardizeindependence, and vice versa.

Bert Steens, Anouk de Bont

and Frans Roozen are all

based at the School of

Business and Economics,

Vrije Universiteit

Amsterdam, Amsterdam,

The Netherlands.

Received 8 October 2019

Revised 31 January 2020

5 May 2020

Accepted 11 June 2020

©Bert Steens, Anouk de Bont

and Frans Roozen. Published

by Emerald Publishing Limited.

This article is published under

the Creative Commons

Attribution (CC BY 4.0) license.

Anyone may reproduce,

distribute, translate and create

derivative works of this article

(for both commercial and non-

commercial purposes), subject

to full attribution to the original

publication and authors. The

full terms of this license may be

seen at http://creativecom-

mons.org/licences/by/4.0/

legalcode

The authors thanks Henri

Dekker, Tom Groot, Luc

Quadackers, Frank Verbeeten

and ARCA seminar participants

at Vrije Universiteit Amsterdam

for their helpful comments and

contributions.

DOI 10.1108/CG-10-2019-0309 VOL. 20 NO. 6 2020, pp. 1029-1051, Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1029

The relevance of these roles and their balance is emphas ized when they are affected by

regulatory corporate governance frameworks (enacted corporate governa nce codes, such as

the Sarbanes Oxley Act of 2002 [SOX]) and corporate internal control policies t hat together

define a company’s governance regime. A tight governance regime defined by a rule-based

corporate governance act that enforces strict control procedures, such as SO X, could affect

the activities of controllers (De Loo et al.,2011) and could result in a different preferred

balance than a loose governance regime. The latter is based on a principle-based code that

sets standards for the intended outcome and leaves room for less strict cont rols, such as the

Dutch Corporate Governance Code (DGC) (Wieland, 2005). Indjejikian and Mat

ejka (2009,

p. 1087) find survey evidence for the assertion that “SOX has made firms much more

concerned about the integrity of their financial reports” and, as a conseque nce, firms motivate

their chief financial officers (CFOs) “to focus more on their fiduci ary responsibilities.”

Via an experimental survey, our study aims to shed light on the influence of the governance

regime on the balance of the two main roles of a controller as preferred by supervisory board

members. We investigate, in particular, the impact of a tight and loose governance regime on a

business unit (BU) controller’s degree of independence and involvement and on the potential of

role conflict in the view of supervisory board members [2]. We take their perspective because

compliance with the relevant governance codes and corporate policies and the effectiveness of

controllers performing their fiduciary and decision-making roles are relevant topics for

supervisory board members [3]. We define supervisory board members as the non-executive

and independent members of a one-tier board of directors, and the members of the supervisory

board in a two-tier board structure. The generally accepted function of a supervisory board

member is to challenge and support the development of strategy, evaluate the performance of

management, safeguard the accuracy of financial information and the robustness and

defensibility of financial controls and risk management systems and remunerate, appoint and

replace senior management [4]. An organization’s governance regime comprises both

externally enforced corporate governance regulations and self-imposed internal controls,

following Merchant and Van der Stede (2017, p. 573) who assert that “Corporate governance

systems and management control systems (MCSs) are inextricably linked.” A tight governance

regime, as defined by a rule-based governance orientation, has a “comply-or-die” mechanism in

place, and has strict internal control practices and formal procedures to comply with the

imposed corporate governance rules and regulations. A loose governance regime, on the other

hand, is determined by a principle-based governance orientation and uses a “comply-or-

explain” mechanism. This regime leaves room for loosely structured and informal control

activities that permit and even encourage autonomy, entrepreneurship and innovation (Merchant

and Van der Stede, 2017, p. 230).

We respond to the call for further research in this area voiced by Byrne (2009, p. 378). In

discussing the outcomes of his study on the antecedents, characteristics and

consequences associated with the roles of management accountants (MAs) [5]. Byrne

argues that there is a need for more research into the consequences of SOX (i.e. a

determinant of a rule-based and tightgovernance regime) on the roles of MAs.

Using a unique data set from an experiment among 73 supervisory board members, our

study contributes to the existing literature as it provides empirical findings regarding the

preferences of supervisory board members for the involvement and independence of BU

controllers as a consequence of the tightness of the governance regime, and the potential

for role conflict. We have not found studies that providesuch empirical evidence.

2. Development of hypotheses

2.1 Controller’s roles

The traditionalrole of controllers (as defined in 1963 by the Financial Executives’ Institute) [6]

has often been characterized as that of bookkeeper, scorekeeper, corporate policeman,

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