company towards engagement with purpose. I posit that an important step in this direction is to examine how directors view and engage with purpose, as through engagement they may contribute to the corporation’s reinvention, eventually placing purpose at its heart. It can be assumed that individual differences exist among directors (Hillman, Nicholson & Shropshire 2008). Thus, if purpose-driven boards are to make good, value-creating decisions, it is
essential to examine how directors engage with purpose. In the next section I review the roles assigned to directors in corporate governance and how they might relate to purpose.
directors and their companies can create value. Strategy, as the ‘overall business direction of the firm’ (Garg & Eisenhardt 2017, p. 2016), is no longer an area reserved for the CEO (Chief Executive Officer) and the senior management teams (Pugliese et al. 2009). The literature, however, tends to focus on ‘finding the level of board involvement that is
conducive to effective strategy formulation’ (Federo & Saz-Carranza 2018, p. 414), assuming that strategy remains most often delegated to management (Hillman & Daziel 2003; Pfeffer 1972; Pfeffer & Salancik 1978). Furthermore, most governance research has studied boards (and, more recently, directors) from a distance, based on archival data (Aguilera, Florackis &
Kim 2016; Boivie et al. 2016; Kumar & Zattoni 2019; McNulty, Zattoni & Douglas 2013;
Stiles & Taylor 2001), and for this reason research in the real world of governance is much needed. Studies indicate that boards and directors are responsible for setting and contributing to the top-level context and parameters of strategy (Jensen & Zajac 2004; McNulty &
Pettigrew 1999; Pugliese et al. 2009; Stiles 2001). In particular, Stiles’ study found that by establishing the business definition (which I argue should rest on corporate purpose),
monitoring it and building confidence in it, they can influence strategy. Over the last decades, governance systems have profoundly changed across the world. Globalisation, governance scandals, accountability and expectations of greater transparency have placed directorial roles and duties at the heart of the governance debate (Ingley & Van Der Walt 2001; Kiel &
Nicholson 2003; Pugliese et al. 2009). While control (and independence) are generally
theorized as important, shareholder value maximization seen as core directorial duty (Fama &
Jensen 1983a; Jensen & Meckling 1976; Jensen & Zajac 2004; Lorsch 2017; Mizrucki 1983), roles beyond monitoring, for instance in strategy, are widely debated (Daily, Dalton &
Cannella 2003; Golden & Zajac 2001; Zahra & Pearce 1989;). Scholars recognise that key fiduciary responsibilities go beyond monitoring and extend to other roles and strategy
(Brauer & Schmidt 2008; Fama & Jensen 1983a; Federo & Saz-Carranza 2018; Judge &
Talaulicar 2017; Kim, Burns & Presott 2009; Weitzner & Peridis 2011). Hence it is important to review directorial roles and how they are situated in the field of governance.
Boards, and their directors, are key corporate governance actors, next to shareholders and managers (Aguilera 2005). They represent a corporation’s highest legal authority (McNulty, Zattoni & Douglas, 2013; Starbuck 2014), are viewed as mediators between the corporation and society (Parsons 1960) and have been described as the conscience of the corporation (Mace 1971). The term corporate governance dates back to the 1970s and was coined in the wake of corporate scandals (Ocasio & Joseph 2005). Governance is a social construction and its definition evolved over time depending on viewpoints (Aguilera et al. 2015; Tihanyi, Graffin & George 2014). Fundamentally, governance is concerned with the structure of rights and responsibilities among those holding a stake in the company (Aguilera, Florackis & Kim 2016; Aoiki 2001), and with corporate power being properly channelled to the benefit of society (Judge & Talaulicar 2017), although other definitions exist (Daily, Dalton & Cannella 2003; Davis 2005; Donaldson 2012). Corporate Governance: An International Review (CGIR), a leading academic journal in the field, adopts a broader definition: ‘the exercise of power over corporate entities so as to increase the value provided to the organization’s various stakeholders as well as making those stakeholders accountable for acting responsibly with regard to the protection, generation and distribution of wealth invested in the firm’
(CGIR 2019). I adopted this definition as it focusses on the exercise of power (I will return to this point) and value creation for a broad group of stakeholders. This definition aids the development of a predictive, rather than descriptive, global theory of corporate governance (Judge 2009, p. iii), aiming to influence what governance ought to be, and how corporations
should be governed (Carver 2010; Donaldson 2012). For any governance proposition to prove useful upon its implementation, including the ones I present in this thesis, it must anticipate changes rather than merely describe what happens in practice, in the status quo (Donaldson 2012; Starbuck 2014). Since I aim to examine director engagement in light of insights that might emerge to guide corporations in the future, the adoption of this definition of corporate governance seems appropriate.
Directors have legal responsibilities, and their roles have evolved over time (Boivie et al.
2016; Judge & Talaulicar 2017; Klarner, Yoshikawa & Hitt 2018), resting either on the foundation of governance or on the evolution of its conceptualisations. At the heart of governance is agency theory, and its key concepts of agency problem and shareholder interests (Aguilera, Florackis & Kim, 2016; Daily, Dalton & Cannella 2003; Filatochev &
Boyd 2009). Shareholder value maximisation, incentives and board independence feature as
‘mantras of corporate governance’ (McNulty, Zattoni & Douglas 2013, p. 194). Traditionally, directors perform two broad roles: monitoring (much investigated) and resource provision (less studied) (Hillman & Dalziel 2003; Hillman Nicholson & Shropshire 2008), although this task classification has been disputed (Machold & Farquhar 2013). These roles may be complemented with service and strategy roles (Stiles & Taylor 2001; Zahra & Pierce 1989) or substituted with monitoring and service roles (Judge & Talaulicar 2017). Beyond role taxonomies, I take the view that to get closer to what directors do, we need to examine how they think, and how they engage with purpose. For this reason, I will consider the activities directors are tasked with and might carry out, including monitoring and service, in the broadest sense.
Rooted in agency theory, monitoring is viewed as primary directorial role (Berle & Means 1932; Eisenhardt 1989a; Hambrick, Misangyi & Park 2015; Jensen & Meckling 1976), directors being first and foremost agents tasked with safeguarding shareholders’ interests through monitoring the company’s affairs, nominating and compensating executives, and auditing and reporting on the finances (Baysinger & Butler 1985; Daily, Dalton & Cannella 2003; Fama & Jensen 1983b; Hillman & Daziel 2003; Hillman et al. 2008; Kosnik 1987;
McNulty, Florackis & Ormrod 2012). In an agency relationship, one or more people (the principals) engage another person (the agent) to carry out activities with delegated authority for decision-making. Shareholders are viewed as principals (Jensen & Meckling 1976), directors as first-order and managers as second-order agents (Eisenhardt 1989a). Directors monitor managers to protect the interests of their principals (Hillman & Daziel 2003), assuming managerial self-interested behaviour. In this role, directors act as ‘the company watchdog’ (Guerrero et al. 2017, p. 136), focussing on corporate performance in carrying out their key fiduciary responsibilities (Aguilera, Florackis & Kim 2016; Brauer & Schmidt 2008; Fama & Jensen 1983a, 1983b; Kim, Burns & Presott 2009; Weitzner & Peridis 2011).
Therefore, in a strict view of agency, this role rests on a view of governance as a mechanism for signalling robust risk-control to investors (Schneider & Scherer 2015), although in reality this robustness is often absent, prompting the question as to whether directors make any difference (Boivie et al. 2016). A recent example of the lack of robust risk-control by directors was seen in Australia. As reported in The Guardian, after intense pressure, the government established a Royal Commission on the banking industry to investigate if any of Australia’s financial entities had engaged in misconduct (Hutchens 2018) and found evidence of a lack of robust risk control at managerial and governance level, among others. The
challenges of our time fuel interest in how governance can contribute solutions, yet decades
of studies on directorial monitoring, attempting to link structure to financial performance, have yielded mixed results (Boivie et al. 2016; Bhagat & Black 2002; Dalton et al. 1998, Dalton et al. 1999). Questions emerge about whether a group of people who meet
sporadically, and without involvement in the business, can plausibly understand what is really happening, let alone control it (Boivie et al. 2016; Starbuck 2014; Zeitoun, Osterloh &
Frey 2014). Scholars concede that we need to look beyond monitoring if we are to understand how directors can make a difference, inviting research to examine the contexts in which directors can add value (Aguilera, Florackis & Kim 2016; Starbuck 2014).
The directorial service role is the second set of activities relevant to this thesis, yet it remains less studied (Hillman & Dalziel 2003; Johnson, Daily & Ellstrand 1996; Judge & Talaulicar 2017; Zahra & Pearce 1989). Directors are an ‘instrument for dealing with the organization’s environment’ (Pfeffer 1972, p. 218), and an important resource to the corporation (Mintzberg 1983; Parsons 1960; Pfeffer & Salancik 1978; Selznick 1948; Zald 1969), where a resource is
‘anything that could be thought of as a strength or a weakness of a given firm’ (Wernerfelt 1984, p. 172). The board, and its directors, can step in to make strategic decisions in times of crisis or CEO succession (Mace 1971). Directors can provide a wealth of services, including more favourable lines of credit (Stearns & Mizruchi 1993); training, succession and expertise (Dalton et al. 1999); advice to the CEO (Westphal 1999); timely information via professional and personal networks (Boyd 1990; Hillmann, Cannellla & Paetzold 2000); linking the corporation to important stakeholders and constituencies (Hillman, Keim & Luce 2001;
Hillman, Cannella & Paezold 2000; Hillman & Dalziel 2003); support, advice and
information (Adams & Ferreira 2007; Guerrero et al. 2017; Minichilli & Hansen 2007). In
addition, individual directors’ resources can significantly impact market value (Di Pietra et al. 2008).
Despite decades of studies, we still know very little about how boards and directors
contribute to strategy and value creation in general (Huse & Gabrielsson 2012). Huse et al.
(2011) argue that this might be due to the dominance of agency theory and invite scholars to adopt alternative or complementary approaches, while Pugliese et al. (2009) point to the importance of understanding the context and impact of both formal constraints (laws, regulations and constitution), and informal ones (values, cognitions, beliefs, traditions and norms of behaviour) on how directors serve their companies. Briscoe and Gupta (2016) emphasise the importance of studying how activism, including shareholder activism, affects corporations and their governance, while Aguilera et al. (2015) call for research investigating how external governance practices, such as investor activism or the legal environment, might affect how directors think and operate. Scholars concede that, although theoretically distinct, in practice directors may carry out their roles simultaneously (Hillman, Cannella & Paetzold 2000; Johnson, Daily & Ellstrand 1996). Monitoring is about control and can constrain
management, while service is about support and can strengthen (or weaken) strategic decision making (Judge & Talaulicar 2017). The fundamental point is that directors need to strike an ongoing, delicate balance among their activities (Adams & Ferreira 2007; Anand 2018;
Anderson, Melanson & Maly 2007), and what they do is contextual and subject to
interpretation (Guerrero et al. 2017). Directors’ actions are affected by the views of those individuals, including those on the purpose of the company (Crilly & Sloan 2012) and the purpose of the corporation in relation to a broad group of stakeholders (Kacperczyk 2009). I argue that to better understand how directors can make a difference, so that their companies can create value, the key question is how they view and engage with purpose, as this can
affect their activities, including, but not limited to, strategic decision making. I also argue that making a difference requires directors to possess and exercise a power of ‘efficacy and capacity’ (Kanter 1979, p. 65). Power is a key directorial attribute and ‘is a complex matter’
(Orssatto & Clegg 1999, p. 276), and has assumed different dimensions in the literature.
There is no universally accepted concept of power (Pettigrew & McNulty 1998). Agency tradition has conceptualised it as the power of authority and control, the relative power of directors over managers being the subject of many studies (Fama & Jensen 1983a; Herman 1981; Mizruchi 1983; Westphal & Zajac 1995). I argue that for directors to engage with purpose, they need the power of authority and control, and of efficacy and capacity, a point supported by Orssatto and Clegg (1999) when noting that power eventually boils down to
‘the capacity of agencies to make a difference’ (p. 276). Ultimately, understanding engagement with purpose might help us to better comprehend how it can drive directorial (and potentially board) activities towards value creation.
The key insight of the much debated topic of directorial roles, lies in the recognition that what directors do is still understudied. How directors can make a difference is affected by a variety of factors, both external, including investor activism, and internal, such as directorial cognition, or how directors perceive and engage with corporate purpose. In the next section I review the literature on engagement, and the little we know about director engagement with purpose.