The Role of the Board in Firm Strategy: integrating agency and organisational control perspectives

• Author: Kevin Hendry,Geoffrey C. Kiel
• Published date: 01 October 2004
• DOI: http://doi.org/10.1111/j.1467-8683.2004.00390.x
• Date: 01 October 2004

500 CORPORATE GOVERNANCE

Recent media attention highlights that,

more than ever, boards of directors are

being held accountable for the organisations

they govern. High prof‌ile corporate collapses,

accounting irregularities, corporate corrup-

tion, remuneration excesses and inadequate

disclosure practices have signif‌icantly affected

public conf‌idence in markets and focused the

media spotlight clearly onto corporate gover-

nance (Taylor, 2003). The response has been a

signif‌icant increase in attention to structural

governance solutions, manifest in legislative

interventions (e.g. Sarbannes-Oxley Act of

2002 in the US) and in a new round of best

practice governance guidelines (e.g. ASX Cor-

porate Governance Council, 2003). These

changes have been largely aimed at the con-

formance role of boards and pay limited atten-

tion to the performance role. While company

law, governance practitioners and many acad-

emics accept that a key aspect of this perfor-

mance role is board involvement in strategy,

there is little consensus on the nature of this

involvement, despite considerable debate in

the literature.

Early researchers, taking a managerial

hegemony perspective, argued that boards

made little contribution to strategy (Mace,

1971; Vance, 1983), while others around the

same time took the opposite perspective. For

example, Boulton (1978) argued that the stra-

tegic role of boards was evolving in impor-

tance, while Andrews (1980) recommended

that directors should work with management

in devising strategic plans because of their ex-

perience and the fact that an in depth under-

standing of a f‌irm’s strategy facilitated the

monitoring function. Lorsch and MacIver

argued that, in the words of one director, “the

thinking through of where the company is

going is underemphasised among directors’

roles” (1989, p. 67), while the compliance

aspects were overemphasised. More recent

research has conf‌irmed that directors con-

© Blackwell Publishing Ltd 2004. 9600 Garsington Road, Oxford,

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Volume 12 Number 4 October 2004

The Role of the Board in Firm

Strategy: integrating agency and

organisational control perspectives*

Kevin Hendry** and Geoffrey C. Kiel

The role of the board of directors in f‌irm strategy has long been the subject of debate. However,

research efforts have suffered from several def‌iciencies: the lack of an overarching theoretical

perspective, reliance on proxies for the strategy role rather than a direct measure of it and the

lack of quantitative data linking this role to f‌irm f‌inancial performance. We propose a new

theoretical perspective to explain the board’s role in strategy, integrating organisational

control and agency theories. We categorise a board’s approach to strategy according to two con-

structs: strategic control and f‌inancial control. The extent to which either construct is favoured

depends on contextual factors such as board power, environmental uncertainty and informa-

tion asymmetry.

Keywords: Strategy, boards of directors, agency theory, organisational control, strategic

control, f‌inancial control

*This paper was presented at

the 6th International Confer-

ence on Corporate Governance

and Board Leadership, 6–8

October 2003 at the Centre for

Board Effectiveness, Henley

Management College.

**Address for correspondence:

School of Business, University

of Queensland, PO Box 2140,

Milton, QLD 4064, Australia.

Tel: +61 7 3510 8111; Fax:

+61 7 3510 8181; E-mail: k.hendry

@competitivedynamics.com.

au

THE ROLE OF THE BOARD IN FIRM STRATEGY 501

sidered assisting management with making

strategic decisions one of their key roles

(Conger et al., 2001). However, in general,

research efforts into the board’s role in stra-

tegy have been limited (for a review, see

Johnson et al., 1996).

This paper addresses this gap in the litera-

ture by investigating the strategy role of

boards. It is based on three important and

inter-related research questions:

1. How do boards fulf‌il their strategy role?

2. How is this strategy role affected by con-

textual factors in the f‌irm’s internal and

external environments?

3. How does this strategy role relate to f‌irm

f‌inancial performance?

In addressing these questions we begin by

brief‌ly discussing the “active” and “passive”

schools of thought that dominate much of the

literature on the board’s strategy role. We

then discuss the theoretical perspectives that

underpin these schools before going on to

review the normative and academic literature.

We take a chronological approach in review-

ing these bodies of work, demonstrating how

the conceptualisation of the board’s strategy

role has developed over time and how this

conceptualisation is converging in both areas.

In synthesising this literature, we outline the

limitations of research efforts to date, particu-

larly (1) the lack of an overarching theoretical

perspective on the board’s strategy role, (2) the

reliance on proxies for this role rather than a

direct measure of it, and (3) the lack of quan-

titative data linking this role to f‌irm f‌inancial

performance. Next we present a new theo-

retical perspective to explain the board’s role

in strategy, one that integrates organisational

control and agency theories. This integrative

perspective draws on the corporate–SBU

strategic management literature and argues

that boards emphasise a system of strategic

(behavioural) controls and f‌inancial (outcome)

controls over top management and that the

extent to which one of these mechanisms is

favoured provides an indication of the nature

and the degree of board involvement in stra-

tegy. We discuss the likely dimensions of

these constructs and argue that the f‌irm’s con-

text determines the extent to which strategic

or f‌inancial control is favoured and that the

choice of control mechanisms by the board

will impact on f‌irm f‌inancial performance. We

also propose four typologies for the board’s

strategy role according to the extent to which

it emphasises strategic and f‌inancial control.

We conclude by discussing the contribu-

tions to knowledge of this new theoretical

perspective.

Two schools of thought

Any discussion of the role of boards of direc-

tors relative to strategy needs to begin with a

discussion of the concept of strategy itself.

However, strategy has become a “catchall

term” in the literature with multiple, subjective

and often fragmented def‌initions (Hambrick

and Fredrickson, 2001, p. 48). Whittington

(1993) outlined four basic conceptions of stra-

tegy – classical, evolutionary, systemic and

processual – each of which has very different

implications for how to actually “do strategy”.

Mintzberg et al. (1998) detailed ten different

schools of thought on strategy, while Kiel and

Kawamoto (1997) demonstrated 32 different

def‌initions of the term strategy in the litera-

ture. Whittington (1993) also made the point

that, in 1993, there were 37 books in print with

the title “Strategic Management”. Today that

number is signif‌icantly advanced. Given this

diversity of opinion and sheer volume of liter-

ature, a detailed discussion of “what is stra-

tegy” is well beyond the scope of this paper.

However, we have adopted the view of stra-

tegy, advocated by Burgelman (1983, 1991) and

Noda and Bower (1996), as a shared frame

of reference within an organisation, pro-

viding the basis for an iterative process of

objective setting and resource allocation. This

view focuses on the “process” of strategy

(Mintzberg, 1973, 1978; Mintzberg and Waters,

1985), involves multiple levels within the f‌irm,

differentiates between planned or deliberate

strategy and emergent strategy, and recog-

nises that deliberate and emergent strategies

“. . . form the poles of a continuum along

which we would expect real-world strategies

to fall” (Mintzberg and Waters, 1985, p. 3).

Having def‌ined strategy, what then is the

strategy role of the board? From a legal

perspective, the board’s f‌iduciary duty is

generally considered to include the review

and monitoring of strategy (Stiles and Taylor,

2001). The management literature takes a

broader perspective and considers the board’s

role in strategy to include such aspects as

def‌ining the business, developing a mission

and vision, scanning the environment and

selecting and implementing a choice of stra-

tegies (Tricker, 1984; Pearce and Zahra, 1991;

Hilmer, 1993). More specif‌ically, Goodstein et

al. have def‌ined the strategic role of the board

as “taking important decisions on strategic

change that help the organization adapt to

important environmental changes” (1994, p.

242), while Judge and Zeithaml have def‌ined

it as “making nonroutine, organization-wide

resource allocation decisions that affect the

long-term performance of an organization”

(1992, p. 771).

© Blackwell Publishing Ltd 2004 Volume 12 Number 4 October 2004