3.5.2 Board composition according to the stewardship theory

Since management is considered to be trustworthy, the corporate governance and more specifically the composition of the board should facilitate and empower the incumbent management and the CEO to lead the company rather than monitor and control them (Donaldson and Davis 1991: 52; Davis et al. 1997: 26). Board dependence on management is synonymous with management control and consequently the best possible solution for increasing company performance (Muth and Donaldson 1998: 9). Hence, the advice of stewardship theorists is the opposite of the advice of agency theorists.

To realise a dependent board, the positions of CEO and chairman should be combined and the majority of the board should consist of executive directors (Donaldson 1990: 377). The situation of CEO duality is an important feature of the board in a stewardship theory framework, because ‘command becomes unified, removing role ambiguities and conflicts that could otherwise arise where power is shared’ (Muth and Donaldson 1998: 9). As a reward for the trust and empowerment received, the CEO will work hard to provide good leadership to the company and he will achieve high performance for the long term (Baysinger and Hoskisson 1990: 74). A higher number of executive directors on the board will have a positive effect on efficiency and consequently company performance as well. The fact that executive directors are employed by the company provides them with easier access to information of larger amount and higher quality in comparison to information possessed by (independent) NEDs (Nicholson and Kiel 2007: 588). The better stream of information enables insiders to take decisions based on more and better information, which will ultimately result in decisions of higher quality and consequently in higher company performance (Muth and Donaldson 1998: 9).

Views on board size, average age and average tenure of board members are the opposite of those of agency theorists, like the opinions on CEO duality and independence of the board. A smaller board is more responsive to the needs of the company due to the positive group dynamics that utilise the individual talents and abilities of directors to the utmost. Furthermore, a small board offers more opportunities for effective interpersonal communication, fewer opportunities for individual boisterous members to dominate the total board, a lower likelihood of conflicts between segmented factions and it requires less effort by the CEO to coordinate (Bantel and Jackson 1989: 109-110). The dependence and quality of the board are expected to increase when the average age is lower. ‘First, some cognitive abilities seem to diminish with age, including learning ability, reasoning and memory. Second, younger managers are likely to have received their education more recently than older managers, so their technical knowledge should be superior. Third, younger managers have been found to have more favourable attitudes toward risk-taking’ (Bantel and Jackson (1998: 10) cited by Muth and Donaldson (1998: 10)). The performance of a company is bound to be higher when the average age of directors is lower. The reverse is true for the tenure, because higher average tenure is associated with higher company performance according to the stewardship theory, as the longer tenure will result in larger social cohesion between board members, a better ability to reach consensus quickly due to shared experience, higher commitment and loyalty to the company and better knowledge of the values and norms of the company (Davis et al. 1997: 26).

Boards dependent on management are associated with better access to information and consequently high-quality decision-making, which ultimately results in high company performance. These structures empower management, CEO and executive directors instead of monitoring and controlling them (Donaldson and Davis 1994: 157-159). The absence of monitoring and control is self-evident in a stewardship theory framework, because a board is not able to check management effectively and is not required to do so either. The inability is caused by the lack of background and time of the NEDs. Since executives and managers are employed full-time by the company, NEDs have a comparative disadvantage by definition. An independent NED is an amateur where controlling management is concerned. A board is furthermore not required to carry out monitoring and control, because managers are genuinely trustworthy and do not aim to expropriate corporate assets, resources and profits.