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Power relations between boards and senior managers in the governance of public and non-profit organisations

Power relations between boards and senior managers in the governance of public and non-profit organisations
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  Open Research Online The Open University’s repository of research publicationsand other research outputs Power relations between boards and senior managers inthe governance of public and non-profit organisations Conference Item How to cite: Cornforth, Chris (1999). Power relations between boards and senior managers in the governance of public and non-profit organisations. In: 2nd International Conference on Corporate Governance and Direction,13-15 October 1999, Henley Management College, UK.For guidance on citations seeFAQs.c  [not recorded]Version:[not recorded]Copyright and Moral Rights for the articles on this site are retained by the individual authors and/or other copy-right owners. For more information on Open Research Online’s datapolicyon reuse of materials please consultthe policies page. oro.open.ac.uk  http://oro.open.ac.uk/15399/1/HENLEY_99.doc02/04/09 1 Power relations between boards and senior managers in thegovernance of public and non-profit organisations  A paper for the 2 nd  International Conference on Corporate Governance and  Direction, Henley, 13-15 October 1999. 1  Chris Cornforth, Open University Business School, Walton Hall, Milton Keynes, MK7 6AA, UK. Tel: 01908 655863; Fax: 01908 655898; E-mail: c.j.cornforth@open.ac.uk     Abstract This paper presents the findings of an in depth study of power relations betweenboards and senior managers in four organisations: a school and a FE college fromthe public sector and a national overseas development agency and a community-based organisation from the voluntary sector. Unlike many previous studies of boards this study draws on observations of what happened inside the boardroom aswell as interviews and the analysis of board documents. Pettigrew and McNulty’s(1995) tripartite model of power and influence is used to analyse and compare power relations in the four organisations. The paper argues that neither agency theory nor managerial hegemony theory adequately explains board power relations. In particular it highlights how differences in expertise and skill, and board processesand procedure helped shape different patterns of power. Introduction After many years of neglect there has been a recent upsurge of writing and researchon the governance of organisations. In the business literature this renewed interestcan in part be traced back to a raft of corporate scandals and collapses in the US andthe UK in the 1980’s, which were attributed to failures in corporate governance. Thislead to a renewed interest among policy makers and business leaders in ways of reforming and improving governance mechanisms. In the UK this lead to a series of enquiries and reports aimed largely at improving the powers of non-executivedirectors, the most famous of which was the Cadbury report (1992).Paralleling these developments there has also been a growing interest in thegovernance of public and non-profit organisations in the UK, although the reasons forthis interest have been somewhat different. The last Conservative governmentconcerned about effectiveness across the public sector introduced widespread reforms.These reforms of the 1980’s and 90’s, designed to introduce the market and businesspractices into the public sector, led to widespread changes in the governance of manypublic organisations. Although these changes varied considerably between differentareas of public service there were a number of trends. One trend was to removevarious bodies such as FE colleges from local authority control. Another was toreduce or remove local authority representation on the boards of public bodies and tomake many public organisations accountable to appointed unelected board members. 1 An earlier version of this paper was presented to the Public Sector Management Stream of the BritishAcademy of Management Conference, 1999.  http://oro.open.ac.uk/15399/1/HENLEY_99.doc02/04/09 2In areas like health these boards have been modelled explicitly on the boards of private companies. As with the private sector there have been concerns about theeffectiveness of these new boards (Ashburner, 1997). In addition new concerns havebeen raised about a possible loss of local democratic accountability (Plummer, 1994;Skelcher and Davis, 1995; Skelcher, 1998).A distinguishing feature of voluntary organisations is that voluntary boards governthem. Their governance has long been regarded as problematic. As Middleton (1987)and more recently Harris (1999) note voluntary sector staff seldom seem to besatisfied with the performance of their boards. Boards are either accused of meddlingin the affairs of management or conversely that they are not involved enough andserve a largely symbolic function. A survey of charity board members carried out in1992 rather alarmingly revealed that many were unaware that they were charitytrustees (NCVO, 1992).Across the different sectors a key issue concerns the power of boards. Do boardshave the power to effectively supervise management and set the strategy of theorganisation? The theoretical and empirical literature presents conflicting views andevidence on this point. The dominant theory of governance in the economic literaturehas been agency theory. Agency theory is in many ways a theory that attempts toexplain current patterns of corporate governance in the Anglo-Saxon economies. Itsees boards of external directors as one of the means necessary to ensure managers actin the shareholders best interests. It assumes that boards will have the power toeffectively supervise management. In contrast managerial hegemony theory chartsthe rise of managerial power in the West and suggests that it is managers who havethe expertise, time and resources to really control what happens in corporations.While various empirical studies have claimed to support managerial hegemony theory(Mace, 1971; Herman, 1981; Lorsch and MacIver 1989) other studies have presenteda more mixed picture of power relations between boards and managers (Murray,1992; Wood, 1992; Pettigrew and McNulty, 1999).As long ago as the late 1960’s Zald (1969) suggested a way around such seeminglycontradictory views about the powers of boards. He proposed what in essence is acontingency theory of board-management power relations. In particular that a board’spower will depend on its ability to control various internal and external resources ,various situational variables such important events or crises in the organisation andthe  personal characteristics of board members and executives. More recentlyPettigrew and McNulty (1995) suggest that board-management power relations needto be analysed in terms of the deeper structural and contextual features that bothconstrain and enable board power, but also in terms of board members will and skillin mobilising various power sources. The research reported in this paper follows inthis tradition to examine how power relations between boards and management infour organisations from the public and non-profit sectors are shaped and enabled bycontextual and situational factors, and the ability of board members and managers tomobilise various power sources.Empirical studies of board behaviour have been criticised for their over reliance uponone source of data, usually the perceptions of board members gathered throughinterviews or questionnaires, because of the lack of any independent confirmation of actors' accounts (Peck, 1995). In particular there have been few studies that have  http://oro.open.ac.uk/15399/1/HENLEY_99.doc02/04/09 3managed to ‘get inside the boardroom’ and actually observe what happens there. Inorder to overcome these weaknesses, this study adopted a case study methodologydrawing on three different sources - observation of meetings, actors' accounts andboard documents.Four cases are examined: a school and a Further Education (FE) college from thepublic sector, and a small national voluntary organisation (NVO) providing overseasaid, and a local community-based voluntary organisation (LVO) from the voluntarysector. The paper contrasts the college and the NVO where the boards were ableexercise considerable influence, with the school and the LVO, where the boards weremuch less influential. Based on these comparisons the paper identifies some of thefactors that affect a board’s influence and its ability to carry out its role effectively. Research on the power of boards and their relations with senior management Existing theory and research on the role and power of boards is somewhatcontradictory. At a theoretical level the main theories of organisational governancepresent very different views of the role and power of the board. Agency theoryprovides the dominant model of governance in the economic literature and concernsthe governance of companies. Agency theory is based on the premise that managersand shareholders will have different interests. Hence, according to agency theory theowners of any enterprise face a problem, because managers (their agents) are likely toact in their own self-interests, rather than the owners’ interests. From this perspectivethe main function of the board is to monitor and control the behaviour of managers.This suggests that directors of companies should be independent of management, andtheir primary role is one of  stewardship - to make sure the resources of theorganisation are safeguarded and to monitor and, if necessary, control the behaviourof managers. Agency theory assumes then that non-executive directors have thepower to control the behaviour of senior managers.In contrast to agency theory is what is sometimes called managerial hegemony theory(Hung, 1998). This relates back to the thesis of Berle and Means (1932) that althoughshareholders may legally own and control large corporations they no longereffectively control them. Control having being effectively ceded to a newprofessional managerial class. A variety of empirical studies have leant support tothis thesis. Mace (1971) in his study of directors concluded that boards did not getinvolved in strategy except in crises, and that control rested with the president (chief executive) rather than the board. Herman (1981) came to similar conclusions butargued that managerial power was always in the context of various constraints and thelatent power of stakeholders such as external board members. In a more recent studyLorsch and MacIver (1989) conclude that although the functioning of boards hasimproved since Mace’s study, their performance still leaves much room forimprovement. Like Mace they distinguish between boards in normal times and duringcrises, and conclude that during normal times power usually remains with the chief executive:‘ Though they are legally empowered to govern, in reality, the CEO controls most of the power levers in the boardroom. …When directors lack a forum inside and outsidethe boardroom, to discuss tough issues together, to challenge management   http://oro.open.ac.uk/15399/1/HENLEY_99.doc02/04/09 4 collectively, and to act quickly in crises, their numerical advantage over the CEOcannot easily translate into real power.’ Pettigrew and McNulty (1995) summarising the findings from this literature identify anumber of factors that limit the power of boards: management’s control over theselection of outside directors, the limited time outside directors have to perform theirduties, the superior expertise, information and advice available to management, andnorms of board behaviour that limit outside board members acting together as criticsof management.However, not all empirical studies have supported managerial hegemony theory.Interestingly in their own study of directors in the UK Pettigrew and McNulty foundthat outside directors do play an important role in influencing organisational strategy(McNulty and Pettigrew, 1999). While they found it rare for outside directors toinitiate new strategic directions they were influential in both shaping and takingstrategic decisions.Peck (1995) argues for care in interpreting many empirical studies, like thosediscussed above, that rely exclusively on the accounts of board members. He arguesthat board members may have an interest in portraying themselves as playing anactive and important role. He argues for more studies that use the direct observationof board meetings to corroborate actors’ accounts. In his own study of an NHS TrustBoard, which involved the study of actors accounts, examination of minutes and theobservation of board meetings, Peck found through observation that board membersplayed a much less active role than portrayed by their own verbal accounts.A number of studies of the boards of non-profit organisations do involve direct boardobservation. Again, though, this literature presents a mixed picture of board power.Based on case study research Murray et al (1992) identified five different patterns of power relations among non-profit boards in Canada. The CEO-dominated  board,where chief executive and sometimes other senior managers exercise the main powerand the board play a largely symbolic role. The chair-dominated  board where thechair plays the main role and if there is a paid chief executive they play second fiddle.The  power sharing board, which usually share a strong commitment to democracyand participation, and rejects any kind of dominant leadership by an individual. The  fragmented  board where there are strong competing factions on the board andmeetings are characterised by conflict. The  powerless board where the board isunclear about its role and responsibilities and there is a lack of commitment.In an attempt to assess the wider relevance of the five models Murray et al carried outa survey of chief executives of non-profit organisations in Canada asking them abouttheir boards. The two most common patterns identified were the CEO-dominatedboard in just under half the boards, followed quite closely by the power-sharingboard. Small percentages were also found for the other types of board.Wood (1992), based on a study of 21 non-profit organisations in the USA, presents alife cycle model of governing bodies where the power of boards changes over time.Although based entirely on interview data the study did involve interviews with chief executives as well as board members. She suggests that after an initial ‘collective’phase boards tend to oscillate between a ‘CEO dominant’ pattern and, precipitated by
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