Representation, Materiality and Decision Control - Essays on the Role of Board of Directors as an Intermediate Actor in Corporate Governance

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Journal Title
Journal ISSN
Volume Title
School of Business | Doctoral thesis (article-based) | Defence date: 2016-05-06
Date
2016
Major/Subject
Mcode
Degree programme
Language
en
Pages
250
Series
Aalto University publication series DOCTORAL DISSERTATIONS, 72/2016
Abstract
Board of directors has an independent and intermediate role in corporate governance. The role of board consists of two related but separate relationships, one towards shareholders and the other towards management. Shareholders delegate the majority of their powers to directors, and directors independently determine which decision rights they hold and which they further delegate to management. Boards have the challenging task of channeling a diverse collection of shareholder preferences into an organized decision-making structure that is capable of action. This dissertation consists of four essays that investigate the distinct role of the board. The general framework for all essays arises from a Principal-representative-delegate model of governance, which can be seen as a refinement of classical agency theory. In this model, shareholders are seen as principals, board as representatives of shareholders and management as delegates or agents of directors. Board determined decision rights are used as a lens throughout the dissertation to explore board relationships, first essay building the basis for subsequent empirical analysis by investigating the concept of materiality from ex ante decision-making perspective, rather than the ex post approach of audit and legal research. Second essay focuses on representation and accountability which define the relationship between board and shareholders, arguing that in closely held companies boards act as delegates, showing face-to-face accountability towards largest shareholders, while in widely held companies they act as trustees, using independent judgment and establishing their accountability through more extensive disclosure. The third essay analyzes the determinants of division of power between directors and management finding that board decision control is independent on ownership structures, directors effectively mitigating horizontal agency problems.  However, duality of CEO/Chairman roles reduces board powers, suggesting that traces of vertical problem still remain. The final essay investigates what happens to the role of the board in situations of financial distress, where creditor interests surpass those of shareholders, discussing the role of directors in controlling the potential moral hazard when most of the financial risk falls on creditors. The dissertation is the first study systematically investigating matters reserved to the board through collecting and analyzing board rules and decision thresholds as determined by directors in 600 largest European companies by market capitalization. This hand-picked material provides novel data for understanding board's role as the epicenter of corporate decision-making, and opens up new avenues for understanding what boards actually do by analyzing their influence on decision control.  Allocation of decision rights is crucial for governance process.  If they are set too low, boards become de-facto managements, while if they are set too high, boards fail to represent shareholder interests properly.
Description
Supervising professor
Ikäheimo, Seppo, Prof., Aalto University, Department of Accounting, Finland
Keywords
board, materiality, representation, decision control
Other note
Parts
  • [Publication 1]: Melgin, Jari (2015). Materiality in Corporate Governance An earlier version of this paper was presented in the 7th Conference on Performance Measurement and Management Control, Barcelona, Spain, September 18-20, 2013. The full text is included in the pdf-file of the dissertation.
  • [Publication 2]: Melgin, Jari (2015). Representation, Accountability and Disclosure – A Principal-Representative-Delegate Model of Corporate Governance This essay was presented in the EAA Talent workshop, Madrid, November 6.-7. 2015. The full text is included in the pdf-file of the dissertation.
  • [Publication 3]: Melgin, Jari (2015). Power and Decision Control An earlier version of this paper was presented in the 37th Annual Congress of the EAA in Tallinn, May 2014. The full text is included in the pdf-file of the dissertation.
  • [Publication 4]: Melgin, Jari (2015). Corporate Governance in Financial Distress – Board Decision Rules and the Third Agency Problem An earlier version of this paper was presented in Accounting Doctoral Tutorial, 21.-22.August 2014, Sannäs, Finland. The full text is included in the pdf-file of the dissertation.
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