12.1 Introduction

The opinion of supervisors involved in the discussion about social relationships is addressed in this chapter, because the previous chapters in this study have varying views on this matter. Social relationships are here considered to be relationships that are ‘normatively free of instrumental and calculative orientation’ (Silver 1990: 1474).

The economic part concludes that the importance of independence is heavily dependent on the economic theoretical framework. Especially the agency theory and TCE theory attribute importance to independence and prescribe high levels of board independence in order to improve monitoring and consequently performance. Social relationships are in this respect believed to hamper independence. The legal part of this study found, in the person building blocks of independence in the three countries – the United Kingdom, the Netherlands and Sweden – that social relationships are not a reason to disqualify a supervisor from being independent. However, the United Kingdom and Sweden allow the board to take more relationships and circumstances into consideration by determining whether a supervisor is independent. They consider independence in fact and in appearance as well, instead of independence in form only. This enables them to base the determination of independence on a social relationship as well. This is not possible in the Netherlands, the system of which focuses solely on independence in form. Although the UKCGC and SCCG offer possibilities to take social relationships into account, the absence of this relationship in the list of independence criteria might be a sign of very little importance being attributed to it by the regulators.

The lack of social relationships in lists of independence criteria is not new. In 1982, Brudney already remarks about the independence criteria that ‘[n]o definition of independence yet offered precludes an independent director from being a social friend of, or a member of the same clubs, associations, or charitable efforts as, the persons whose compensation or self-dealing transactions he is asked to assess’ (1982: 613).

The reason for the lack of social relationships in lists of independence criteria can possibly be found in section 11.3. It shows that these social relationships between supervisors and executive directors and members of the management (board) might have a positive influence on monitoring. Due to the existence of a certain kind of relationship, supervisors are able to gain better information about the company, which is needed for their monitoring task. This information is acquired during advisory sessions or informal meetings with executive directors. Executive directors and members of the management board are prepared to share this possibly sensitive information with their supervisors only if there is mutual respect that gives the supervisor credibility within the company.

Due to this multitude of views on social relationships, this chapter’s aim is to give some reflections on this matter from people involved in supervision. A survey by De Bos and Lückerath-Rovers (2008) among 417 supervisory directors in the Netherlands is used, who were asked which relationships hamper the independence of supervisors in their opinion. This chapter analyses and interprets the survey and the results are presented here. Of special interest here are the social relationships. By using this approach, the survey asks whether social relationships harm independence in fact and in appearance. Since the social relationship is currently not a part of independence in form, this type of independence is also addressed in this chapter. Figure 12-1 shows that all three types of independence are covered here. It is also investigated whether this view differs between groups of supervisors. To this end, the respondents were asked which stakeholders’ interests they have in mind when monitoring management. Research generally focuses on supervisory directors of listed companies. This survey also includes supervisory directors of non-listed and family-owned companies, as well as supervisory directors in non-profit organisations: healthcare institutions and housing associations.1 It is analysed whether these aforementioned groups do indeed differ with respect to the view on independence.

Figure 12-1: The relationship between independence in fact, in appearance and in form. The survey is concerned with all three types of independence.

It is expected that supervisory directors in family-owned businesses will differ from those in listed companies due to the existence of altruism, because a family relationship is involved in the company. Altruism entails that the utility of one person depends positively on the utility of somebody else (Bergstrom 1989: 1139). Due to altruism the family members, who are (part-)owners of the company, act in such a way that they have a claim on the company (Schulze et al. 2003: 477). In family-owned companies less monitoring is therefore needed, because the family members are supposed to behave like owners. Chen and Nowland (2010: 4) confirm this by having found evidence in a sample of Asian family-owned companies that less monitoring is needed when family members are more involved in the management of the company. Therefore, it is expected that supervisors in family-owned companies pay less attention to independence than supervisors in other organisations.

Differences are also expected between profit and non-profit organisations. Fama and Jensen (1983) consider non-profit organisations to be different due to the lack of a residual claimholder, such as a shareholder in a profit organisation. Although there is no residual claimholder to expropriate, there are other constituents whose interests need to be protected against management. They note that boards in nonprofit organisations are not disciplined by market power or the threat of takeovers. As a consequence more independent monitoring is necessary in these organisations. Independence is therefore expected to be considered to be of greater concern in non-profit organisations than in profit organisations.

These differences are important to consider as corporate governance reforms for listed companies are used as a source of inspiration for corporate governance codes of other types of companies or organisations. The respondents are all members of dual board structures in the Netherlands, and the results may therefore not be directly applicable to situations for other board structures and in other countries. This chapter proceeds as follows. Section 12.2 describes the research design, the results are presented in section 12.3 and section 12.4 concludes.