JAME Book Review. Author: Morten Huse. Cambridge University Press, pages, $45.00 Soft cover

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1 JAME Book Review Boards, Governance and Value Creation: The Human Side of Corporate Governance Author: Morten Huse Cambridge University Press, pages, $45.00 Soft cover Reviewed by: Jonas Gabrielsson, CIRCLE, Lund University; and Taina Tukiainen, Helsinki University of Applied Science Industrial Management Few research areas have gained more interest during the past two decades than corporate governance and boards and directors (Daily, Dalton and Cannella, 2003). The bulk of this stream of studies has used concepts and theories originating from a financial economics perspective with simplified assumptions of human behavior, and where corporate governance have often been defined as ways investors are safeguarding their interests. Against and instead in the book Prof. Morten Huse presents and reintroduces boards and governance from a strategic and entrepreneurial management perspective. The subtitle The human side of governance refers to that the main focus lies on interactions and processes between board members and other actors inside and outside the boardroom something which is often characterized as the black box of board behavior. The empirical descriptions used in the book are based on Prof. Huse s experience from over 20 years of studying corporate governance and boards and directors in a variety of different countries and contexts, from small and medium-sized enterprises to large corporations. Among the most important studies for his insights into the black box of board behavior are the One of the lads (Huse, 1998) and Fly on the wall (Huse, Minichilli and Schøning, 2005) studies where he has conducted longitudinal studies of boards in action. His studies of how executive managers can circumvent stakeholder control (Huse and Eide, 1996) and the life stories of women directors (Huse and Solberg, 2006) also provide important insights into behaviours and processes inside and outside the boardroom that otherwise often are overlooked. The most recent empirical studies in the book are based on his large-scale research program on the Value creating boards that he has been leading from the Norwegian School of Management BI the past years in cooperation with researchers across Europe and in the US. This research program has conducted several questionnaire surveys to explore and test relationships. The book is consequently built on an impressive and rigorous empirical base to back up the various statements and conclusions made in the various chapters. Content: The book consist of eleven chapters: 1. Understanding boards and governance; 2. Internal and external actors: defining corporate governance, 3. Board task expectations: contributions from theory; 4. The board members; 5. Context and resources; 6. Interactions: trust, power and

2 strategizing; 7. Structures and codes, norms and leadership; 8. Decision-making: the boardroom culture; 9. Actual board task performance; 10. The value creating board; and 11. An ABC of boards. Chapter 1 makes a nice introduction to the topic and presents how the whole book is structured around a holistic and systematic framework that aims to understand the role of boards in corporate governance and how boards should be structured in order to maximize value creation. The framework is itself embedded in three intellectual traditions. The first is a contingency perspective (Lawrence and Lorsch, 1967), which states that there is no best way of organizing a corporate governance system or a board of directors but also that any ways of organizing are not equally effective. Instead it is emphasized throughout the book that contextual factors call for different perspectives and that theories should be chosen depending on the context. The second intellectual tradition is the behavioural theory of the firm, which emphasize that decision making in organizations to a large extent is an experiential problem-solving process made by actors who have limited rationality (Cyert and March, 1963). Boards are thus understood as decision making teams or groups that seek to reduce complexity, create accountability and facilitate cooperation between different coalitions of actors through strategizing and political bargaining. The third intellectual tradition that is evident throughout the book is an evolutionary perspective. Here it is emphasized that relationships and interactions between actors provide different kinds of informational feedback that sustain or redirect their behavior and objectives over time. Corporate governance is in chapter 2 defined as being about interactions between internal actors, external actors and board members in directing a company for value creation. Definitions of corporate governance are moreover seen as a struggle between ideologies as they are embedded in positions of who and what really counts. In the chapter there is a presentation of how the corporate governance debate has developed and shifted from a focus from management definitions to definitions focusing on various groups of shareholders. The most important message in the chapter is that conceptualizing corporate governance is not about identifying the principal or main actors in a company. Rather, it is important to acknowledge that there are various groups of actors external or internal to the company, and the relations among them may empower the board members for special roles or tasks. Mace (1971) argued in his classical book Directors: Myths and realities that there often is a disparity between what boards are expected to do and what boards do in reality. These board task expectations (myths) and actual board task performance (realities) are address in chapter 3 and 9 respectively. In chapter 3 there is an impressive review of theories about boards and governance. Based on this review a typology is developed of six main board tasks with various focuses depending on if they have a firm-external control or firm-internal service perspective. The various board tasks are also sorted under different categories depending on if they emphasize formal tasks (aunt theories), external perspectives and incentives (barbarian theories), institutional perspectives and norms (clan theories) or strategies and resources (value creation theories). Chapter 4 is introduced by the statement from Vance (1983) that only an odd number can lead a corporation and that three is too many. From this start the chapter takes a fresh look on the topic of board members. Most studies of boards and governance have examined what is usually referred to as the usual suspects (Finkelstein and Mooney, 2004), which is the number of directors, the ratio of outside directors, CEO duality, and the percentage of shares owned by the board. Instead, the chapter focus on the competence, compensation and motivations of board members. First the market for board members is discussed where the issue of how board members are recruited are discussed. Thereafter follows an exploration of board members from a demand side perspective (firms having need for board members) followed by an exploration of board members from a supply side perspective (individuals who are able to serve as board members).

3 Chapter 5 discuss contextual factors that influence actual board behaviour. Context and resources are important to consider in any discussion of boards and governance. This is also evident in the framework developed by Prof. Huse in the book where context and resources have a direct effect for understanding who the actors are and their relative power. The chapter reviews the most commonly used contextual variables in studies of boards and governance and their impact on the choice of board members in companies. The main point emphasized in the chapter is that there has to be a fit between the context in which the company operates and specific governance designs. Recommendations should thus not be applied across contexts without due consideration. In chapter 6 there is a focus on how interactions between actors determine decisions and behavioral outcomes in relation to boards and governance. It is in this chapter that the human side of governance advocated in the book is developed with concepts such as trust and emotions, political dynamics, and micro strategizing. It is emphasized that interactions take place both inside and outside the boardroom. Moreover, board decision making is influenced by activities in various arenas and not all actors have the same access to various arenas. What is important in this chapter is the recognition that boards are embedded in social institutions, and that social and psychological processes taking place between various actors may neutralize effects that are described in theories and recommendations about corporate governance. In all, the chapter is a sharp contrast against the dominating and simplified black-box approach that is common in contemporary studies on boards and governance. Chapter 7 takes on the challenging task of discussing how good corporate governance may be developed. To do this the chapter is structured around the concepts norms, rules, structures and leadership. There is a review of the rapid development of various codes of corporate governance which present best-practice recommendations regarding board structure and behavior. Although the review is insightful there is more emphasis on structure than behavior, and thus some of the highlights regarding board dynamics from the last chapter seem to disappear in the discussion. However, the main highlight in the chapter comes later in the section about board leadership. Often discussions about board leadership are reduced to a question whether the CEO also should be the board chairperson or not. Instead Prof. Huse makes an interesting and challenging review of relevant literature and research that have addressed the leadership role of the board chairperson and how to mould a group of individual board members into a good working team. In chapter 8 Prof. Huse again come back to the human side of governance by addressing the decision making culture in the boardroom. The board is presented as a team and aspects of team dynamics, including cognitive perspectives, are emphasized. To structure the discussion the chapter introduces concepts connected to board processes such as criticality, creativity, cohesiveness, openness and generosity, preparations and involvement, and cognitive conflicts. These concepts are then related to how they may mediate relationships between board demographics (the usual suspects ), board structure and board-level outcomes. The recognition of paradoxical pairings (i.e., critical but creative ) may not be new (see for example Demb and Neubauer, 1992; Roberts, McNulty and Stiles 2005) but the chapter gives an intellectually stimulating discussion of how managing such paradoxes may involve an approach that must accept tension and seek proper balance. In chapter 9 the book returns to the issue of actual board task performance with empirical examples from the value creating board surveys. The discussion also involves examples of how to operationalise and measure board task concepts. One thing that is emphasized in the chapter is that board members approach boards from various perspectives depending on their experiences and backgrounds. Thus, perceptions of board task involvement will be influenced by the role of the

4 actor, and consequently who you ask to evaluate the performance of the board may influence the result you get. This is something that is well known but it is seldom discussed in contemporary studies of boards and governance. Value creation is a core concept in the book and this is focused in chapter 10. A basic assumption is that the duty of boards is not only to protect and distribute value but also to create value. The first part of the chapter links value creation to financial performance, CSR, innovation, market venturing and entrepreneurial activities. The second part of the chapter discusses how boards may contribute with value throughout the whole value chain and not only the final value distribution part of the chain. Here concepts from earlier chapters are linked to firm activities that can be associated with value creation. In chapter 11 the ten first chapters are reviewed and the main contributions from the author s point of view are presented together with some summarizing observations about board ethics and board behavior. The reprise of the ten first chapters is a short version of the chapter summary that appears in the end of each chapter. This repetition is unnecessary to go through again for readers who have studied the book chapter by chapter from the start. However, it could be of some value for people who want to get a quick overview of the content and key message of the book. The section where the main contributions are presented may also feel a bit repetitive but it serves its purpose of giving a coherent summary of the main conclusions that has been emphasized in the various chapters. The last part of the chapter is perhaps the most interesting as it adds some final comments and implications in relation to board ethics, value creating boards and the human side of governance. Conclusion: In all, we believe that Prof. Morten Huse has made a top-class scholarly work in the field of corporate governance and boards of directors and we enjoyed very much reading it. The book provides a powerful, rigorous and insightful lens to observe and understand the role of boards in corporate governance and how they can be structured in order to maximize value creation. The key message in the book is that good governance can be found in human and social factors. Structures may be necessary but is far from sufficient. What characterize good boards are that they are robust, social systems and an understanding of effective boards that contribute to value creation requires an understanding of the human side of governance. We see three main target groups for the book. First, it is a research-based monography that can be used as a benchmark and reference for scholars working in the field of boards and governance. Second, it can be used as a textbook on boards of directors in courses at the graduate level on corporate governance, strategy, or CSR. Third, it is a book that can give input to debate and reflection for practitioners working in or close to boards. Although it is a challenging task trying to meet the demands and expectations from all these different groups of readers we believe that Prof. Huse has found a proper balance so that each type of reader will be satisfied. References: Cyert, R.M. and March, J.G.: 1963, A behavioral theory of the firm (Englewoods Cliffs, NJ: Prentice-Hall). Daily, C.M., Dalton, D.R. and Cannella, A.A.: 2003, Corporate Governance: Decades of Dialogue and Data, Academy of Management Review, 28 (3):

5 Demb, A. and Neubauer, F.-F.: (1992) The corporate board: Confronting the paradoxes. Oxford, England: Oxford University Press. Finkelstein, S. and Mooney, A.C.: 2003, Not the Usual Suspects: How to Use the Board Process to Make Boards Better, Academy of Management Executive, 17(2): Huse, M.: (1998) Researching the dynamics of board-stakeholder relations, Long Range Planning, 31: Huse, M., Minichilli, A. and Schøning, M.: (2005) Corporate boards as assets for operating in the new Europe: The value of process-oriented boardroom dynamics, Organizational Dynamics Huse, M and Eide, D.: (1996) Stakeholder management and the avoidance of corporate control, Business and Society, 35: Huse, M. and Solberg, A.: (2006) Gender-related boardroom dynamics: how women can and make contributions on corporate boards. Women in Management Review, 21: Lawrence, P.R. and Lorsch, J.W.: (1967) Organization and environment: Managing differentiations and integration. Cambridge, MA: Harvard University Press. Mace, M. L. (1971) Directors: myth and reality. Boston: Harvard University. Roberts, J.T., McNulty and Stiles, P. (2005) Beyond agency conceptions of the work of the nonexecutive director: creating accountability in the boardroom, British Journal of Management, 16 (Special Issue): Vance, S.C. (1983) Corporate leadership. New York: McGraw-Hill.

6 Send Complimentary book to: Dr. Taina Tukiainen Tuotantotalous Head of Department of Industrial Management Stadia Helsinki University of Professional Education Bulevardi 31, 00180, Helsinki Tel Mobile taina.tukiainen@stadia.fi