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Corporate Governance and Leadership: The Board as the Nexus of Leadership-in-Governance



This Element deals with leadership and governance of corporations from the point of view of the board. We expand our understanding of board leadership by focusing on the modern company as a legal person comprised of a capital fund and the relationships among directors, shareholders, management and stakeholders. We propose a model which integrates insights from the fields of leadership and corporate governance and establishes a theoretical link illustrated by empirical findings in three intersections: team leadership on the board, the chair's leadership of the board, and strategic leadership by the board. We maintain this integrative model provides a powerful means to further an understanding of the board as the nexus of leadership and governance. We close this Element by identifying the new research directions that our integrative model opens up. We also identify the implications for practice for those who either serve on boards or provide support to them.
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CIKALIUK ET AL. Corporate Governance and Leadership
This Element deals with leadership and governance of
corporations from the point of view of the board. We expand
our understanding of board leadership by focusing on the
modern company as a legal person comprised of a capital
fund and the relationships among directors, shareholders,
management and stakeholders. We propose a model which
integrates insights from the fields of leadership and corporate
governance and establishes a theoretical link illustrated by
empirical findings in three intersections: team leadership on
the board, the chair’s leadership of the board and strategic
leadership by the board. We maintain that this integrative model
provides a powerful means to further an understanding of the
board as the nexus of leadership and governance. We close
this Element by identifying the new research directions that our
integrative model opens up. We also identify the implications
for practice for those who either serve on boards or provide
support to them.
About the Series
The Elements series Corporate
Governance focuses on this significant
emerging field. Authoritative, lively and
compelling analyses includeexpert
surveys of the foundations of thediscipline,
original insights into controversial debates,
frontier developments, and masterclasses
on key issues.
Series Editor
Thomas Clarke
UTS Business School,
University of
Technology Sydney
Corporate Governance
ISSN 2515-7175 (online)
ISSN 2515-7167 (print)
and Leadership
Monique Cikaliuk,
Ljiljana Eraković,
Brad Jackson,
Chris Noonan and
Susan Watson
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Elements in Corporate Governance
edited by
Thomas Clarke
UTS Business School, University of Technology Sydney
The Board as the Nexus of
Monique Cikaliuk
University of Auckland
Ljiljana Eraković
University of Auckland
Brad Jackson
University of Waikato
Chris Noonan
University of Auckland
Susan Watson
University of Auckland
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DOI: 10.1017/9781108895385
© Monique Cikaliuk, Ljiljana Eraković, Brad Jackson, Chris Noonan
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Corporate Governance and Leadership
The Board as the Nexus of Leadership-in-Governance
Elements in Corporate Governance
DOI: 10.1017/9781108895385
First published online: July 2020
Monique Cikaliuk
University of Auckland
Ljiljana Eraković
University of Auckland
Brad Jackson
University of Waikato
Chris Noonan
University of Auckland
Susan Watson
University of Auckland
The authors are listed in alphabetical order.
Author for correspondence: Ljiljana Eraković,
Abstract: This Element deals with leadership and governance of
corporations from the point of view of the board. We expand our
understanding of board leadership by focusing on the modern
company as a legal person comprised of a capital fund and the
relationships among directors, shareholders, management and
stakeholders. We propose a model which integrates insights from the
elds of leadership and corporate governance and establishes
a theoretical link illustrated by empirical ndings in three intersections:
team leadership on the board, the chairs leadership of the board and
strategic leadership by the board. We maintain that this integrative
model provides a powerful means to further an understanding of the
board as the nexus of leadership and governance. We close this
Element by identifying the new research directions that our integrative
model opens up. We also identify the implications for practice for those
who either serve on boards or provide support to them.
Keywords: board of directors; corporate governance; leadership;
jurisprudence; corporate regulation
© Monique Cikaliuk, Ljiljana Eraković, Brad Jackson, Chris Noonan
and Susan Watson 2020
ISBNs: 9781108815499 (PB), 9781108895385 (OC)
ISSNs: 2515-7175 (online), 2515-7167 (print)
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1 Introduction 1
2 Our Work of Integrating Knowledge in Researching
Boards 3
3 What Is a Company? A View through a Legal Lens 6
4 The Role of People in the Legal Person 13
5 The Board as a Nexus of Relationships 25
6 How Boards Exercise Leadership 42
7 Leadership in Governance 52
8 Conclusion 62
References 65
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1 Introduction
Leadership and governance matter in creating organisations that work, espe-
cially during times of change. The dilemmas facing organisations are clearly
revealed as markets become globally integrated, new forms of competition arise
and digital technologies redene the way that companies operate. In this con-
text, companies can ill afford to stand still. Yet these developments create
unprecedented challenges for the corporate practice of organisations and their
boards. Routine, predictable approaches and conventional mindsets are
unsuited for generating new ways of thinking and acting to deal with the
transformations afoot.
For companies to survive and prosper, the importance of context is increas-
ingly recognised as signicant in understanding and practicing leadership and
governance. Despite the long-standing focus in the areas of leadership and
governance on similar phenomena, leadership and governance are rarely
discussed together. Each area has evolved into a signicant eld of interest
with developments taking place in parallel. As a result, the academic litera-
ture in each area has demonstrated a limited awareness of what is happening
in the other area at the same time. What is beguiling about this isolation is
that many boards of directors have shown that leadership in governance
accords with and complements processes to develop companies that evolve
with change.
There are undoubtedly many reasons for this persistent scholarly separation.
One reason for such isolation is the disparate philosophical underpinnings
which infuse leadership and corporate governance with resulting ways of
thinking that shape domains of study and implicitly guide the kinds of questions
for research and practice. Leadership is associated with the academic discipline
of organisation studies and allied with organisational behaviour, psychology,
psychoanalysis, sociology, economics, history and political science. Corporate
governance is rooted in economics and law.
Another reason is the different world views or images of organisations that
scholars working in different disciplines adopt (Morgan, 1997). The cultural
viewshows how the image of organisation rests in shared meanings, which is
closely allied with leadership and its emphasis on people and their interrelation-
ships. A very different view is typically taken in corporate governance. The
machine metaphorfocuses on an organisation as the relationship between
structures, roles and technology which highlights policies and procedures over
other dimensions. The images or world views show how a range of comple-
mentary and competing insights about the nature of organisations can be
generated and how they can be governed and led.
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It is difcult to put a nger on a single reason for the disciplinary-specic
scholarly tradition. An outcome, however, of the separation is that researchers
perpetuate ingrained assumptions to shape theoretical and empirical orienta-
tions for inquiry. As a result, perspectives and assumptions create, in partial
ways, interesting insights that inform an understanding of leadership or govern-
ance. To phrase it another way, the foregrounding of ideas and insights by one
perspective or theory creates a background. Other insights, ideas and perspec-
tives are consigned to the background, far from clear view. This process has
largely precluded scholars from considering how new questions and different
theoretical perspectives could mutually complement and build on the work of
others to broaden and deepen an understanding of leadership in governance.
The origin of this Element lies within a broader project to reinvigorate the
study and practice of corporate governance and leadership by boards. This
project is based on the belief that the corporate board plays an underappreciated
leadership role in corporations. That the board acts as leader is a notion uni-
versally accepted in business and management schools but denied by agency
theory and the private law understandings of the corporation.
The inner workings of the board have tended to be a black box to researchers.
An impetus for this research arises, in part, from a desire to illustrate board
leadership enacted in governance. Listed companies and those seeking to be
listed through a partial change in ownership lend themselves to a concise set of
empirical and conceptual inquiries for this Element than might otherwise occur.
Based on our research, we outline a framework of leadership in governance,
illustrating and discussing different aspects of leadership by the board. This
Element acknowledges the distinct roots of each eld in the disciplines of law
and organisational studies that inform the origins of the project and establishes
the salient differences that distinguish them. It makes the case that an integra-
tion of constructs between leadership and governance offers important oppor-
tunities for dialogue, empirical research and theoretical development for
scholars interested in understanding the board as a nexus for leadership. The
Element does not aim to provide a new theory of board leadership; rather, it is
integrative, making the case that there is much to be learned from each disci-
pline. This approach encourages researchers to expand the literature bases from
which they draw to further cross-fertilise and advance an understanding of the
board as the nexus of leadership and governance.
Identifying some of the inuences that perpetuate the scholarly isolation of
leadership and corporate governance research in this rst section helps to
explain the interdisciplinary approach taken in this Element. The remaining
sections of this Element are organised as follows: Section 2 places the inter-
disciplinary approach in broad perspective and sets the theoretical and
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analytical foundation for the board as the nexus in which leadership and
governance intersect. Section 3 provides an orientation to key theoretical
debates through a legal lens that focuses on the nature of the modern corporation
as a legal person comprised of a capital fund, arguing that the board must be
taken into account for how the company might be governed in a principled way.
Section 4 analyses what economic theory does and does not tell us about
leadership in the corporation and links the leadership role of the board to its
theoretical and empirical underpinnings. Section 5 introduces our integrative
model and explains the linkages between organisational studies and legal
disciplinary insights that inform our understandings of board leadership in
governance. Section 6 provides empirical evidence, illustrating three intersec-
tions in which boards enact leadership in governance: team leadership on the
board, the chairs leadership of the board and strategic leadership by the board.
Section 7 examines recent developments in board leadership research and
highlights the role of board leadership in strategy making. The nal section,
Section 8, draws together the themes of this Element to suggest avenues for
future research and implications for practice for those who serve on boards or
provide support to them.
2 Our Work of Integrating Knowledge in Researching
The board of directors, as a research topic, has its foundations in the eld of
corporate governance, dominated by the disciplines of law and economics, and
the discipline of organisation studies,
which includes the elds of organisa-
tional behaviour, strategy and leadership, among others.
Each of these academic perspectives offers a distinct position on the role,
tasks and functions of a governing body. Typically, the corporate governance
eld has focused on a boards formal and structural characteristics, and its
governance actors (directors, managers and shareholders) (Adams, Hermalin
& Weisbach, 2010). The research in this tradition has mainly investigated
governance mechanisms in relation to formal incentives (such as contracts)
and monitoring structures (Westphal & Zajac, 2013) which can produce positive
organisational performance. According to this view, the company is regarded as
a nexus of contracts, and the board of directors is treated as a control mechanism
whose main role is to monitor corporate management. Yet theory and practice of
In social science research, organisation studies is considered a discipline (see Clegg & Bailey,
2007;Zahra & Newey, 2009). It has its intellectual roots in economics, sociology, psychology,
anthropology and political science and includes elds such as management, organisational theory,
organisational behaviour, strategy and leadership, among others.
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corporate governance has undergone signicant reforms, recognising the lim-
itations of their own evangelisation.
From the corporate law point of view, there have been major discussions
about where the duciary obligations of directors rest with the shareholders
or the corporation. Traditionally (and in the economic literature (see Adams,
Hermalin & Weisbach, 2010, p. 91)), directors have a duty to protect the
interests of the shareholders, but, as Weinstein (2013) has noted, in most of
the countries in the Anglo-American legal domain, directors must act in the
interests of corporation(p. 52). Hence, this distinction marks two important
advancements in the legal understanding of boards. First, it is directorsnot
managersresponsibility to decide what are the real interests of the corpora-
tion. In her widely cited book The Shareholder Value Myth,LynnStout
(2012) clearly emphasised that The objective of any particular corporation
may be best determined not by regulators, judges, or professors, or even by
any individual shareholder or group of shareholders, but by a board of
directors(p. 115).
Second, in directing corporations, directors need to consider and appreciate
the interests of various constituencies (stakeholders) who are directly involved
in a corporations economic activity, and whose interests are not always com-
patible. Thus, directors need not only balance the interests of shareholders and
stakeholders but also different groups of non-shareholder stakeholders (see
Clarke, 2013). These two arguments have major implications for views on
duties and responsibilities of directors in a modern corporation, which we
discuss in detail in Sections 3 and 5of this Element.
Organisation studies scholars have changed their focus of attention from the
board composition (Finkelstein & Mooneys (2003) four usual suspects) and
its traditional consideration from the point of view of agency, stewardship,
resource dependence or management hegemony theories, to behavioural
aspects of board functioning. The research on boards in the last decade has
become directed towards internal board dynamics, board relationships with
various stakeholders and board value-adding activities (Huse, 2007,2009,
2018). Accordingly, conceptual lenses have been broadened to include social
network theory (e.g., McDonald, Khanna & Westphal, 2008;Nicholson,
Alexander & Kiel, 2004), the team production model (e.g., Huse &
Gabrielsson, 2012;Machold et al., 2011) and human and social capital theories
(e.g., Khanna, Jones & Boivie, 2014;Kor & Sundaramurthy, 2009), among
others, thus providing profound conceptual understandings of the work of
boards of directors.
However, one of the critical lenses has surprisingly been neglected leadership.
We, the authors of this Element, are based in elds of corporate governance,
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leadership, organisation theory, corporate law and strategy. At the time when we
started our conversations about boards of directors, in 2012, we noticed that there
were no signicant studies cross-fertilising research efforts between corporate
governance and leadership (Erakovic & Jackson, 2012).
Given that a board sits at the apex of governance in any corporation
directing (i.e., leading) an overall corporate strategy, this discovery surprised
us. In learning about the preoccupations and approaches of each others
elds, we stressed the importance of crossing the boundariesand integrat-
ing the work between the elds of corporate governance and leadership in
order to gain a more comprehensive understanding of the work of boards of
The strengths and weaknesses of these two elds, we argued (Erakovic &
Jackson, 2012), complement each other when the work of the board is con-
cerned. Corporate governance scholars have developed a sophisticated legal
understanding of organisational relationships and have considerable experience
working at its upper echelons. They have, however, tended to be constrained by
an obsession with formal, static and impersonal conceptual models. Leadership,
on the other hand, has traditionally been strong in casting light on signicant
informal, interpersonal dynamic processes within the middle and lower ranks of
the organisation, but has tended to exclude boards from its conceptual and
empirical focus. Therefore, crossing boundaries and creating a theoretical rap-
prochement between the two elds will have positive repercussions not only in
terms of fresh empirical insights and comprehensive understanding but also in
terms of improving and energising the everyday practice of corporate
In terms of practice, corporate governance provides a formal structure for the
relationships among organisational core constituencies, whereas leadership
provides the energy and determination to make corporate governance effective
in the achievement of the organisations purpose and goals (Davies, 2006).
Corporate governance sets the stage for leadership at the apex of the organisa-
tion and has an indirect but signicant impact upon leadership processes at other
levels within the organisation. In this respect, good leadership can revitalise
corporate governance arrangements, while good governance can serve to sus-
tain corporate leadership.
One feature that corporate governance and leadership have in common is
their elusive nature when it comes to deciding on a common denition that can
explain their scope and intent. It is arguable, though, that leadership holds
a clear edge over governance in terms of its ambiguity and lack of agreement
(Bryman et al., 2011). For the purpose of this Element, we dene leadership as
an inuence relationship among leaders and followers who intend real changes
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that reect their mutual purposes(Rost, 1993, p. 10) and corporate governance
as the process whereby people in power direct, monitor and lead corporations,
and thereby either create, modify or destroy the structures and systems under
which they operate(McGregor, 2000, p. 11).
In summary, this Element represents an attempt to encourage scholars from
different elds and different parts of the world to look with new eyes at
corporate governance concepts and take the next step in a research agenda
that asks stimulating research questions, such as: What is the nature of
a company in modern society?and How is the boards work inuenced in
light of the previous question?The nature of a companyis a conceptual area
of law, whereas the work of the boardor board functioningbelongs more to
organisation studies. The remaining sections of this Element analyse these
conceptual issues that are fundamental to an improved understanding of the
board as the nexus of corporate participants in greater detail and examine
empirical evidence gained from those who are practicing governance in real
organisations. The signicance of our interdisciplinary approach is conrmed
by a persistent call by businesses, professional associations and the academic
community for a holistic (and more accurate) picture of governance practices.
3 What Is a Company? A View through a Legal Lens
What is a company and how should a company be governed, led and managed?
These wicked questions sit at the centre of the study of the modern company.
The answer to the rst question should determine the answer to the secondary
questions; it is only when we have a shared understanding of the essential nature
of the company that we can hope to determine its governance in a principled
way. In this section, we will set out our shared understanding of the structure of
the modern company and, in doing so, explain why we have identied the board
as the nexus of the company.
3.1 Theoretical Underpinnings
Two theories about the ultimate objective of the governance of the company
currently compete: shareholder primacy theory, where it is argued that the
company should be operated in the interests of shareholders, and stakeholder
theory. Stakeholder theory advocates adopt an institutional position, arguing
that the interests of all stakeholders should be balanced and accommodated
We chose a denition which, for the purpose of our research and our arguments, stresses three
important aspects of corporate governance: people (in power), leadership and outcomes (positive
and negative). In our opinion, structures, mechanisms and processes emphasised in common
corporate governance denitions are structural elements, not the core corporate governance
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(Freeman, 1984;Gibson, 2000). The debate about the merits of the two theories
is a long-standing one, perhaps epitomised by the exchange of articles on
corporate accountability which took place between A. A. Berle and
E. Merrick Dodd in the 1930s. It was Berles view that corporate powers were
powers in trust exercisable for the benet of all the shareholders (Berle, 1931).
Berles early views may form the foundation of shareholder primacy theory
(although Berle later resiled from a shareholder primacy conception of the
company (Berle, 1965)). The classic Berle and Means corporation was based
on a perception of the changed status of shareholders in large corporations
where power had shifted to management. This change was characterised as
a separation of ownership (by shareholders) from control (in management
including directors). It provided the rationale for agency theory (Jensen &
Meckling, 1976), which has dominated law-and-economics and to some extent
corporate law policy since the 1980s. Dodd (1932), on the other hand, viewed
corporations as economic institutions that had responsibilities not only to share-
holders but also to employees, customers and the public. Dodds arguments
form the foundation of stakeholder theory (see the discussion in Attenborough,
These two competing theories about what normatively should be the objec-
tive of the company may be underpinned by different conceptions of the
company. Many adherents of shareholder primacy conceive of the company
as an association of shareholders who combine together and obtain corporate
status through an incorporation statute. A logical consequence of this model is
that management is perceived to be the agent of the shareholders, charged with
acting in the best interests of the shareholders as a whole and as the company.
The signicance of the role of the board is ignored or downplayed as a monitor
for equity investors, with little or no differentiation between directors and
managers. Shareholdersinterests are assumed to be shareholder wealth max-
imisation. The role of corporate law seen through this shareholder primacy lens
is to minimise the agency problem, that was identied by Berle and Means,
which is brought about by the separation of ownership from control (Jensen &
Meckling, 1976).
We do not accept that shareholder wealth maximisation is the primary
objective of the corporation or corporate law because we reject the conception
of the company as being comprised of a contractually based association of
shareholders. We also consider that the two key characteristics of the company,
corporate legal personality and comprehensive limited liability, can only be
derived from the state through the incorporation statute. The reasons for our
stance are set out here. But we also do not base our work on a stakeholder
conception of the company. In determining the objective of the governance of
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companies, stakeholder theorists generally do not consider that the interests of
shareholders should be prioritised, arguing that shareholders are just another
stakeholder in the company. Margaret Blair, for example, argued for a shift from
contractual, exclusively prot-seeking entities (property conception) of cor-
porations to conceptualising them as social institutions that need to serve and
balance interests of stakeholders beyond just shareholders (Blair, 1995,1998).
Blair asserted that such a shift would have important consequences for corpo-
rate governance, especially regarding managements accountability for, and
monitoring of, the allocation of corporate resources.
In its broadest sense, a stakeholder in an organization is any group or
individual who can affect or is affected by the achievement of the organizations
objectives(Freeman, 1984, p. 32). Stakeholder theorists conceive of the
company as a type of organisation either surrounded by or comprised of
a network of stakeholders. In general terms, scholars discuss normative and
instrumental approaches to stakeholder theory (Donaldson & Preston, 1995;
Kaler, 2003;Maharaj, 2008). The normative approach to stakeholder theory
(moral stakeholder theory) and corresponding governance orientation empha-
sise the boards true care for (duty to) all corporate stakeholders. Stakeholders
have intrinsic value for the company. Therefore, the board makes true efforts to
balance various stakeholdersinterests and claims, and the board applies
a participative and inclusive approach towards various stakeholder groups.
The instrumental approach (strategic stakeholder theory) stresses the corpo-
rate-centred approach (Maharaj, 2008), where the board puts the interest of the
company rst. These interests might be the interests of survival, prot max-
imisation, competitive advantage or risk minimisation. Hence, this governance
orientation, although it may involve stakeholdersparticipation, leans towards
stakeholder management rather than stakeholder engagement.
In fact, adherents to shareholder primacy also accept the importance of
stakeholders while rejecting the argument that the company is an institution
comprised of stakeholders. Markets are not frictionless and conicts between
different agents can reduce the value of the rm (Knoll, 2018). In other words,
the value of the rm and the maximisation goal are inuenced by actions of
various internal and external stakeholders (who, with their diverse interests,
make the market complex/non-frictionless). Therefore, even in a shareholder
primacy model, shareholders will have to bear the agency costs directly asso-
ciated with the specic governance arrangements employed to controlvarious
stakeholder interests. The boards (and rms) engagement with stakeholders
incurs agency costs which, in the long run, inuence the value of the rm. Even
Michael Jensen, a major critic of stakeholder theory, suggests that Arm
cannot maximise value if it ignores the interest of its stakeholders(Jensen,
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2001, p. 298). The interests of stakeholders are taken instrumentally as they
need to be managed in order for a company to achieve its strategic objectives.
While seeing merit in both the normative and instrumental stakeholder
approach to corporate governance, our stance is that stakeholder theory is
based on an institutional model that does not recognise the distinct taxon-
omy of the modern company. Stakeholder theory does not set out what
distinguishes the company from other forms of business organisation or
institution. As discussed later, our model of the modern company is of an
entity that is a capital fund that is given the status of a legal person.
3.1.1 Pitfalls of Shareholder Primacy
In rejecting a stakeholder conception of the company, we do not accept the
alternative of shareholder primacy. Shareholder primacy theory is awed in
several fundamental ways. First, agency theory does not accurately describe
company law. Corporate law has a complexity that the shareholder primacy
theory does not identify and recognise. One of the precepts of agency theory
and law is that the agent is accountable to the principal. Yet, in company law,
directors as agentsare generally not accountable to shareholders as
aprincipalwhen acting as part of the board. Most jurisdictions have
business judgement rules or principles where business decisions of directors
are essentially not reviewable, so long as the directors comply with duciary
obligations of loyalty and care, and avoid conicts of interest. Moreover, the
scope of the business judgement rule in the United States is so wide that the
risk of liability for breach of the duty of care is virtually non-existent. Risk of
liability for breach of the duty of care looms somewhat larger in the United
Kingdom, Australia and New Zealand, but its application and enforcement
are inconsistent. Either through the development and application of the
business judgement rule, where courts will not retrospectively examine
business decisions made by boards, or through the interpretation of
a diverse array of statutory and common law rules from duciary duties to
the unfair prejudice remedy for shareholders, courts have long avoided being
forced to decide whether a particular company action maximises shareholder
It is clear, also, that shareholders as a class are, in fact, heterogeneous
investors. Shareholders have different time horizons and invest for different
purposes. Shareholders, directors and managers do not act with the pure and
aligned aim of maximising shareholder wealth all of the time. Shareholders
may, at times, be more focused on, for example, gaining control or growing the
enterprise; directors may have a conict of interest; management may wish to
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retain control and so forth. Many reasons explain such divergence, including
opportunistic behaviour by directors and managers, strategic or personal inter-
ests of shareholders, bounded rationality of all participants and satiscing
behaviour by all corporate participants, including the board.
Second, shareholder primacy theory fails to distinguish between directors
and managers and, in doing so, fails to recognise the legal taxonomy of the
company. Directors, when acting as part of the board as a primary organ or body
of the company, have a different legal relationship to the company to when
directors act as agents on behalf of the company. Directors are not always
corporate agents. When directors act as part of the board of directors, their
decisions are decisions of the company attributed to the company through the
primary rules of attribution (Meridian Global Funds Management Asia Ltd
v. Securities Commission, 1995 AC 2 (1995)).
Third, the existence of the classic Berle and Means corporation with separa-
tion of ownership and control may be the exception rather than the rule. The
assumptions that most large rms are run by professional managers and that
shareholders have relatively little say in the day-to-day operations or strategic
decisions of the rm sit behind the property rights/contractual models of the
rm (Burkart, Gromb & Panunzi, 1997). These assumptions do not hold in all or
even most cases. The UK and US stock markets are now dominated by institu-
tional investors, with the Australian stock market not too far behind. Individual
investors have substantial shareholdings in most listed companies. Tech com-
panies like Facebook and Amazon have founders who retain controlling stakes
(see Davis, 2016). In many cases, boards do not act to maximise the wealth of
the shareholders; instead, they pursue their own partisan interests or respond to
immediate nancial and other pressures. The coagulation of shareholdings in
many corporations gives empirical weight to the research on boards and corpo-
rate governance that views rms as involving political bargaining among
stakeholders (Deakin, 2019;Huse & Rindova, 2001). Shifting coalitions can
affect corporate decisions and goals.
Fourth, the development of capital maintenance rules by the common law and
statute in Commonwealth jurisdictions, as well as the more recent recognition
that directors will owe duties to creditors when the company approaches
insolvency, show that the equation of the interests of the company with the
nancial interests of the shareholders as a group was false.
Finally, the modern company is not a nexus of contracts (Eisenberg, 1989)and
is not purely a creature of private law. Shareholder primacy is based on an
understanding of the company as contractually based. In a shareholder primacy
conception, rather than being regarded as the primary characteristic of the com-
pany, a corporate legal personality is relegated to no more than a convenient
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heuristic formula, a type of collective noun that describes a combination of
characteristics (Watso n , 201 8 ). A modern company cannot exist without under-
going a process of incorporation set down by the state in a statute. The instant
before that process is complete, the company is not a legal person; the instance
after the process is completed, the company is a legal person. Another conse-
quence of the seminal corporate law case Salomon v. Salomon & Co Ltd (1897 AC
(1897)) was the determination that it is the process of incorporation meeting the
requirements in the incorporation statute, not the association of shareholders, that
causes the company to become a legal person. Corporate legal personality, the
dening and primary characteristic of the company, is not contractually derived
and could not be replicated through contracting. Comprehensive limited liability
has a statutory basis.
3.2 Company as an Entity
Corporate law cannot be explained in a pure system of private ordering, even
though it provides the parties with considerable exibility (in theory) as to how
the company is organised (Moore, 2014). It was the development of incorpora-
tion by registration in the mid-nineteenth century that resulted in the existence
of a company not being directly dependent on an association of shareholders
(Watson, 2015). Oneconsequence is that the legal personality of the corporation
needs to be central to the economic analysis of the corporation (Deakin et al.,
2017). Company law involves signicant mandatory statutory rules, which
embody policy choices. Neither true agreement nor hypothetical bargaining
can alone provide legitimacy for the decision-making within a public
Companies would not be separate legal entities and legal persons if it were
not for a statute. Nor would they have comprehensive limited liability.
explanation of the origins and central signicance of status as a legal person in
the history of the joint stock company strengthens arguments that corporate
legal personality cannot be explained away as an instance of contracting and
thus of private ordering (Moore, 2014). The key point is that the modern
company is a hybrid. It is not wholly private, as its two key characteristics
limited liability and separate legal personality provide it with enormous
advantages by allowing for the aggregation of capital and strong form asset
partitioning (including the extraction of value from its persona). The statute
does not perform a gap-lling function (Kraakman et al., 2017) but rather is key
to the existence of the company.
Companies do not need to be incorporated to contract for limited liability, but they could not
contract for limited liability with involuntary creditors such as tort victims of the company.
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Our stance is that shareholder primacy is based on a model of the company
that was legally superseded by the end of the nineteenth century. From the onset
of the joint stock company in the sixteenth century, the joint stock fund was
separate for accounting purposes from stockholders, a consequence of double
entry bookkeeping. Accounting separation made aggregation of capitals in the
fund possible. Separation and aggregation were the characteristic of the joint
stock company that was sought after by entrepreneurs from Elizabethan times
onwards. The introduction of limited liability in the second half of the nine-
teenth century saw a gradual and corresponding legal separation of the corpo-
rate fund from shareholders. That legal separation was driven in part by the
development of the capital maintenance rules that protected the corporate
capital fund from shareholders. That legal separation of shareholders from the
company was unequivocally recognised in Salomon v. Salomon & Co Ltd (1897
AC (1897)), the seminal corporate law case, where, among other things, the
House of Lords stated that interpretation of the Companies Act 1862 meant that,
on formation, the company was a separate legal person from the shareholders.
From that point onwards, correctly understood, shareholders were no longer
legally part of the corporate legal entity, (although shareholders collectively act
as an organ of the company, as discussed later).
Our shared conception of the modern company is of an entity that is a legal
person. This legal person is not comprised of people but rather of a capital fund.
That capital fund has the status of a legal person. The company as a legal person
has a persona that enables it to capture the more intangible forms of value
related to aspects like brand, reputation and goodwill. This conception of the
modern company coincides with the understanding that underpins integrated
reporting. Integrated reporting is a process of applying principles and concepts
to improve the quality of information available for more efcient and produc-
tive allocation of capital used by business to create value over time
(International Integrated Reporting Council, 2018). The capital used by busi-
ness is stocks of value that are affected or transformed by the activities and
outputs of an organisation, categorised as nancial, manufactured, intellectual,
human, social and relationship, and natural.
The legal person containing the capital fund has two decision-making organs
or bodies that animate it. One organ is the general meeting (the shareholders
operating collectively) and the other organ is the board (comprised of those
individuals occupying the position of director). The two decision-making
organs are responsible for different types of decisions on different matters.
The shareholders collectively, through the general meeting, operate behind
the corporate veilwith responsibility for rules of the gamedecisions about
the constitution of the company, the composition of the board and, in some
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jurisdictions, approval of major transactions and ratication rights over some
decisions made by the board outside its powers. The board is responsible for
decisions about the direction and management of the company, broadly dened.
It is the board that steps through the veil by acting as the representative of the
legal person in the world either itself or through corporate agents interacting
with other corporate participants and inducing rm-specic investments (Blair
& Stout, 2001). The board sits at the nexus of corporate participants.
Our model therefore places the board at the nexus of the corporate
participants who interact with the company as it operates in the world,
balancing at any time the interests of different stakeholders. We, however,
differ from many stakeholder theorists because we recognise the impor-
tance of shareholders when they act collectively through the general meet-
ing as an organ of the company. But it need not necessarily follow that
shareholder wealth maximisation is the purpose or objective of the cor-
poration. Instead, the role of the board is to act in the interests of the entity
itself; the legal person holding or comprised of a fund comprising different
types of capital.
For corporate law and governance, we argue for a shift in perspective from
attempts to solve perceived agency problems between shareholders and man-
agers to a focus on inuence and control. Such an eversion in perspective
would shift primarily to the board as the corporate organ normatively respon-
sible for determining the direction of the company. The aggregation of wealth
in the corporate fund means that corporate participants may seek to inuence
and control the entity. As well as representing the company, the board has the
role of acting as the guardian of the inanimate corporate legal person that is
a fund.
4 The Role of People in the Legal Person
This section begins with the identication of some of the salient features of
leadership. It then briey reviews how the economic theory of the corporation
might accommodate a role for leadership. The remainder of the section is
structured around the role of the board.
Three general ideas underpin this Element. First, subject to its constitution,
the business of a corporation is to be managed by or to be under the direction of
the board of directors. Second, competent board leadership is recognised as
essential for a well-functioning system of corporate governance (Huse, 2007;
Lorsch & MacIver, 1989). Third, a critical attribute of a high-performing
corporate board is its ability to act as a team (Conger & Lawler, 2009a;Huse
& Gabrielsson, 2012).
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Board leadership has, however, not overtly played a signicant role in
corporate law theory.
While, formally, much ultimate decision-making power
and responsibility within a corporation rests with the board, corporate govern-
ance theory has tended to assign to the board the relatively modest role of
monitoring management for equity investors. Defying everyday facts and the
current preoccupation with institutional investors, some strains of corporate law
theory go further to suggest that shareholders should not, and rationally would
not, be involved in such decisions (see, for example, Easterbrook & Fischel,
1996). This view of board leadership is also inuenced by information asym-
metries between individual board members, managers and shareholders, which
constrain the power of the board and may result in inefcient decision-making
and ineffective performance.
In practice, the board processes behind major corporate decisions are not
infrequently political. Individual shareholder and management interests may
not be aligned with the goal of shareholder wealth maximisation, or there may
be disagreement on how best to achieve that objective. Competing interests and
objectives need to be balanced and board leadership may be critical in this
context. Furthermore, decision outcomes are often negotiated or made only
after extensive consultation with parties to which the contractarian view of the
corporation does not give a formal decision-making role, such as creditors.
Corporate boards are at the nexus of a number of relationships that constitute the
corporation. The formal and informal relationships between the board and
shareholders and between the board and senior management are core, but, in
many cases, the board will also be at least in dialogue with company creditors,
customers, suppliers and employees, as well as the government and community.
Such consultation and negotiations are encouraged by many corporate govern-
ance guidelines and are now seen as necessary rather than optional by the board
(e.g., Institute of Chartered Secretaries and Administrators & The Investment
Association, 2017).
The concept of inuentiality,
we believe, helps to explain board leadership
within the context of corporate governance. Leadership generates that which
governance seeks to regulate inuence (Yukl, 2013). As inuence moves
towards control, regulation takes on increasing importance. Corporate law both
preserves space for leadership and demands governance. Inuentiality is an
amalgam of leadership and governance, not just leadership in governance.
In this Element, we refer to corporate law rather than company law to indicate that the relevant
legal rules extend beyond the subject matter of company law properto include aspects of
securities law and regulation, listing rules as well as soft law corporate governance codes.
The Oxford English Dictionary Third edition, 2009 cites as the source of the word T. Carlyles
(1841) Heroes:Keep your red-tape clerks, your inuentialities, your important businesses.
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Leadership, or inuence, may ow both in the same direction and against formal
accountabilities envisaged in traditional views of governance. The board, for
example, is not infrequently able to, and expected to, exercise leadership both in
relation to management and shareholders.
While the board formally delegates authority to management, the board is
dependent on management for information. The conuence of these counter-
vailing forces produces a zone for negotiation. Board decisions, especially
where dominated by non-executive directors, are a product of the boards
determination and persuasiveness rather than the pure exercise of at and
establishment of formal systems of reporting (Bainbridge, 2003). The appoint-
ment and removal of the CEO is a primary function of the board. However, to
allow the CEO and other senior management to manage the corporation effec-
tively, the board needs to credibly commit to not meddling in management
decisions, at least in the normal run of events.
By contrast, while the shareholders can in theory appoint and remove directors,
information and collective action problems mean that shareholders will only
sometimes be able to control appointments. The ability to control appointments
usually coincides with a shareholder acquiring a signicant parcel of shares. In the
classic Berle and Means corporation, individual shareholders with small parcels of
shares have little or no inuence. With the presence of substantial and institutional
shareholders, collective action becomes more credible. The board needs to com-
municate with and managethe relationship with the shareholders.
The board, and the chair of the board in particular, is at the centre of a number
of fundamental relationships within the corporation. From our perspective, the
board must intermediate between the shareholders, management and other
stakeholders. The board does so by providing leadership within each of these
three domains. This view might be seen as drawing on the economic theory of
the board as a mediating hierarchy (Blair & Stout, 1999), but team production
theory talks about the value of the board mediating between interest groups, but
does not explain how this happens (Vandewaerde et al., 2011). In addition, team
production theory considers the company from the perspectives of its stake-
holders, the team, rather than from the perspective of the corporate entity itself.
Team production theory is fundamentally a theory about optimisation within
a contractarian framework, rather than a process involving interacting with
a central nexus with a role for leadership for the board. It also does not account
sufciently for the signicance of shareholders within the corporate structure, in
particular for the possibility that shareholders can vote to remove directors, and
shareholders with a substantial but minority shareholding often have the inu-
ence to secure the appointment of one or more directors, thereby exercising
direct inuence over board decision-making.
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The concept of a mediating hierarchy is not an accurate portrayal of the
board, in the sense that the words risk implying that the board may be a passive
referee exercising Solomonic judgement between competing interests.
Notwithstanding its formal authority to do so, as suggested earlier, it is not
correct to see the board as simply able to make major decisions without direct
reference to management and shareholders. The scope for leadership and how
leadership may be manifested by the board depends on the circumstances of
each company, including the distribution of share ownership, the constitution of
the board and the competency of the management. We see the board able to
exercise leadership in an active way in its relationships with management,
shareholders and other stakeholder groups, as well as in relation to its own
In each of these relationships, the board can be either passive or active.
Boards can actively engage with each of these groups, or they can be inuenced
or even controlled by one or more of these groups. This inuence takes place
against the background of more formal legal structures and governance struc-
tures, but the legal and formal basis of these relationship will not necessarily
determine the inuence or control that the constituent groups may exercise. The
nature of the relationships that the board has with these groups and the extent to
which the relationships external to the board are dynamic (driven by the board
itself) or passive (driven by the other groups) are affected by, and impact, the
internal operation of the board and the extent to which the board leadsthe
The literature on board leadership has tended to examine the subject from one
of two perspectives, as opposed to the context of the four types of relationship
suggested in this Element. In the literature on the one hand, board leadership
may refer to the strategic decision-making by a corporation, and maybe even
hands-on leadership in times of crisis (see, for example, Finkelstein, Hambrick
& Cannella, 2009;Huse & Zattoni, 2008;Lorsch, 2009;McNulty et al., 2011;
Pugliese et al., 2009;Stiles & Taylor, 2001). On the other hand, leadership may
refer to the leadership within the board and individual directors, in particular the
chair and committee chairs (see, for example, Huse, 2005;Kakabadse,
Kakabadse & Barratt, 2006;Leblanc & Gillies, 2005;Levrau & van den
Berghe, 2013;Roberts, McNulty & Stiles, 2005;Roberts & Stiles, 1999).
4.1 What is Leadership?
Gary Yukl (2013) denes leadership as the process of inuencing others to
understand and agree about needs to be done and how to do it, and the process of
facilitating individual and collective efforts to accomplish shared objectives
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(p. 8). It is a useful point of departure and some key features of this denition
should be noted. First, leadership involves both role specialisation as well as
social inuence processes (Cartwright, 1965). Under the former conceptualisa-
tion, all groups are viewed as having role specialisation that includes
a leadership role with some responsibilities and functions that cannot be shared
too widely without jeopardising the effectiveness of the group. Under the latter,
leadership is seen as a social process or pattern. While some role specialisation
will occur within organisations, leadership may be shared or distributed, and
there might not always be a clear distinction between leaders and followers.
Second, leadership includes both emotive and rational processes. Under the
latter, followers follow because of the various rewards and punishments that the
leader has available to motivate or coerce. Neither charismatic nor unethical
leadership are excluded, but these qualities do not dene leadership. Leaders
can inuence the conduct of a group in many different ways, including through
the interpretation of external events for members; the choice of objectives and
strategies to pursue; the motivation of members to achieve the objectives; the
mutual trust and cooperation of members; the organisation and coordination of
work activities; the allocation of resources to activities and objectives; the
development of member skills and condence; the learning and sharing of
new knowledge by members; the enlistment of support and cooperation from
outsiders; the design of formal structure, programmes and systems; and the
shared beliefs and values of members (Yukl, 2013).
Third, leadership is about the process of inuence (Bass & Riggio, 2006;
Yukl, 2013). A number of contemporary writers, while retaining the ideas of
a relationship and inuence, no longer see the process as one-way but rather
leadership as the product of co-production (Pearce & Conger, 2003;Rost,
1993). The process need not result in a successfuloutcome, such as the
maximisation of shareholder value. Whether an outcome is successful will
depend on the perspective of the observer. The analytical separation of the
process of inuence from how leadership affects outcomes prevents the arti-
cial restriction of both the denition of leadership and, in the context of this
Element, the conceptualisation of the corporation.
Fourth, the concepts of followers and subordinates are distinct. Leadership
processes can occur even in the absence of a formal authority relationship. The
difference between leadership and management has been controversial. Most
researchers agree that successful management within a complex organisation
involves leadership. When signicant decisions are made by an organisation to
make changes within that organisation, authority as the formal power legiti-
mately acquired based on ones role (French & Raven, 1959) is unlikely to be
a sufcient basis for gaining the commitment of subordinates or for inuencing
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other people whose cooperation is necessary, such as peers or outsiders
(Anderson & Sun, 2017;Huxham & Vangen, 2000;Wang et al., 2011).
Leadership scholarship is diverse, and the subject dees easy conceptualisa-
tion. Scholars with a breadth of interests, theoretical traditions and methodolo-
gical approaches have been drawn to studying leadership, contributing to the
richness of the research on both the theoretical and empirical fronts and result-
ing in the increased diversity and specialisation of the eld (for a review, see
Jackson and Parry, 2018). On the one hand, the diversity has led to a multiplicity
of theories of how leaders shape organisations and systems, with overlaps
creating a blurring of distinctions between concepts (see, for example, reviews
of charismatic and transformational leadership by Judge and Piccolo, 2004;
Knippenberg and Sitkin, 2013). On the other hand, it has also led to tighter
denitions and the isolation of issues, such as the concentration on outcomes of
leadership rather than processes affecting the emergence of outcomes (Dinh
et al., 2014;Langley et al., 2013).
Transformational leadership, one of the most widely studied contemporary
leadership theories (Dinh et al., 2014;Gardner et al., 2010), brought to the fore
leadership enacted at the individual, group and organisational level to create
commitment and enhanced (superior) performance. In conceptualising leader-
ship as a process, researchers see leadership as not restricted to an individual in
a group who has a formal position of power (Bass et al., 2003). Leadership, as
a process, takes place between leaders and followers towards the achievement
of a desired end point or towards a goal to be realised together. The effect of
transformational leadership goes well beyond the quid pro quo approach of
contingent social and economic rewards and sanctions of transactional leader-
ship. It accommodates aspects of leadership that are positively oriented and
associated with good outcomes as well as those negatively oriented aspects
linked with destructive outcomes (Bass & Steidlmeier, 1999;Schyns &
Schilling, 2013;Tourish, 2013).
More recently, the emergence of shared or team leadership has drawn attention
to the tensions between individual and collective dimensions of leadership
(Jackson & Parry, 2018;Mehra et al., 2006;Pearce, Conger & Locke, 2008;
Thorpe, Gold & Lawler, 2011). This approach suggests that shared leadership
arises through the social interactions among team members rather than as an
aggregation of the characteristics of individual team members. Team members
rely on skills, knowledge and expertise to exercise individual leadership among
one another to meet shared goals and objectives. In this way, leadership is
dispersed rather than concentrated in the hands of one individual. Leadership, as
a function or activity rather than a role, is shared among members of the group to
facilitate adaptive, coordinated and integrated action/performance. Collectively,
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the trend towards the study of relational and team forms of leadership suggests
that social context, including the emergence of shared leadership within teams,
contributes insights to an improved understanding of leadership. The orientation
towards contextualised theorising of leadership suggests the importance of dif-
ferent organisational settings and issues where leadership is understood within the
demands of various roles and functions of organisations (Wilson et al., 2018).
4.2 Integrating Leadership into the Economic Analysis
of the Corporation
While countless books have been written on leadership, the topic has received
scant attention from economists. Reasons stem, in part, from strong assump-
tions about rationality and utility maximising; and multi-period models of
decision-making with asymmetric information quickly become complex and
contain multiple equilibria (Zupan, 2010). What literature there is tends to focus
on the CEO rather than the board.
A review of some of the economics literature helps to connect leadership to
the economic theory that structures much of the analysis of corporate govern-
ance and corporate law, including revealing some of the limitations of the
analysis. The application of economic analysis of leadership to boards provides
insight into the role of the board and its treatment in corporate law.
An early model conceived the problems of leadership within an organisation as
the difculty that the leader has to motivate his or her followers within the
organisation (Rotemberg & Saloner, 1993). Like the traditional principalagent
problem, Rotemberg and Saloner (1993) see the leader as having the problem of
incentivising the followers to exert effort to improve the rms overall perfor-
mance. In their model, the very fact that an improvement might be fully evaluated
and taken into account is a sufcient incentive for followers to make suggestions.
Inspired by kaizen (or continual improvement), the leaders problem is to credibly
commit to being a good listener and communicator, which can be solved if the
leader has the welfare of the whole organisation at heart.
Based on the private information that the leader has about the return of effort for
the team as a whole, Hermalins model shows that self-interested agents can be
motivated by a leader exerting high effort (Hermalin, 1998).Leadingbyexample
makes credible the leaders belief in what he or she is doing. The model has been
extended to a repeated game context and a team setting (Hermalin, 2007;Huck&
Rey-Biel, 2006). This, and other models based on information (e.g., Kobayashi &
Suehiro, 2005), seems less relevant to a boards relationship to management, where
non-executive directors are almost always at a signicant information disadvantage
relative to management, but perhaps not to shareholders.
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Where followers would like to coordinate but cannot because they do not
know what others believe, the leader can communicate information that facil-
itates coordination (Dewan & Myatt, 2008;Ferreira & Rezende, 2007).
Building on the prisoners dilemma, Zupan (2010) argues that leadership can
be understood from an economic perspective as moving people stuck in an
inferior equilibrium of the game (a one-shot game) into a superior equilibrium
(an indenitely repeated game). Many of the commonly cited requirements for
good leadership can, he claims, be accommodated.
Behavioural characteristics of individuals matter. The nance literature has
examined how overcondent executives can attract and motivate followers and
win tournaments (Gervais & Goldstein, 2007;Goel & Thakor, 2008;Steen,
2005). The overcondence of CEOs has been viewed by some as problematic,
especially in a post-nancial crisis environment. In these circumstances, the
board has a role in critically evaluating signicant proposed management
Bolton, Brunnermeier and Veldkamp (2010,2012), building on the principal
agent framework, present an economic model of leadership that species an
organisational leaders challenge as credibly communicating a mission that
enables coordinated actions by followers in the face of potential changes. The
problem can be partially solved by the appointment of a leader known for his or
her resoluteness, which was interpreted as the leader sticking to the decided
course even when he or she would rationally change course in light of subse-
quent information. The implication is that the leaders behavioural traits and
interaction with followers are important determinants of a corporations
Bolton and colleagues (Bolton, Brunnermeier and Veldkamp, 2012) specu-
lated that a board may appoint different types of leaders at different stages in
arms life cycle. At times, a more resolute leader able to foster greater
coordination may be critical. Our study of the successive appointment of an
airlines CEOs could be interpreted in this light (Cikaliuk et al., 2018a).
Further implications are that the resoluteness of the board may affect the
continuing tenure or compensation of the CEO. The same issue of time incon-
sistency that can affect the CEO can also affect the board, raising questions
about the role of the board in formulating as opposed to reviewing strategy.
Director primacy, in the form of decision by at, may also not be without its
costs. The resoluteness of the board can be enhanced by controlling changes in
board membership and making decisions by consensus.
The economic literature is seeking to capture some of the factors that have
long been features of the management literature, but little evidence of pre-
dictive power or correlation with improved performance has been uncovered.
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While economic theory recognised a role for the CEO to motivate, commu-
nicate, coordinate and commit, it does not capture the complexity of the
relationships within an organisation. It does not, for example, address the
potential role of the board in coordinating between management and share-
holders, and perhaps other stakeholders, simultaneously. The attempt to
explain all of corporate governance with economic models risks signicantly
truncating the richer and more complex mechanisms appreciated by corporate
law and management.
4.3 The Role of the Board through the Lens of Leadership
If corporate governance theory is a rigid box, leadership is a shapeless and
ghost-like presence. Despite the wealth of scholarly attention devoted to leader-
ship in organisations and leadership of organisations, a focus on the role of the
board from a leadership perspective has been slow to emerge (Erakovic &
Jackson, 2012). This may be due, in part, to the sense that the highest and
best use of the board was a monitoring role. The dominance of the principal
agent issue limited the focus of the boards role to oversight of the performance
of the executive ofce and the selection and dismissal of the CEO. Subsequent
theoretical and empirical contributions have made evident the limitations and
partiality of explanations of the boards leadership role in the absence of actual
board behaviour (Huse, 2005,2007;Pettigrew & McNulty, 1995). In seeking to
expand an understanding of the boards role beyond monitoring, Zahra and
Pearce (1989) and Pettigrew (1992) were among the early scholars who encour-
aged researchers to engage with directors and governance contexts as much
remained to be learned about behaviours, relationships and effects.
Scholars coming from different research traditions have been drawn to this
opportunity and viewed the role of the board through different lenses, reecting
their different backgrounds. Collectively, boards are expected to perform their
role and to perform it well. However, uncertainties about the effects of boards
has generated a type of haziness that is very much associated with different
understandings of precisely what is the role of the board from a leadership
perspective. This is, by no means, a deciency as it provides opportunity for
scholars to learn more about the nature of the boards role from a leadership lens
through investigation.
One such study has linked leadership to the practice of governance in three
modes: duciary, strategy and generative (Chait, Ryan & Taylor, 2005). The
duciary mode encompasses the traditional/conventional aspects of oversight of
management and assets. The strategic mode involves a partnership/collaborative
approach with management to shape the future viability and sustainability of the
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organisation. The generative mode features relationships of trust with others to
bring about transformational change.
The distinction is that the duciary and strategy modes utilise and leverage
the resource base whereas the generative mode provides an opportunity for
leadership to be enacted. The generative mode subsumes the duciary and
strategy modes. In the generative mode, leadership can be exercised, in part,
because there is a relationship among the directors and with the CEO. These
relationships, not just a linkage, leave room for ambiguity, adaptability and
interdependence to affect the performance of the board.
This suggests that boards are more than a collection of talented individuals
operating in isolation; boards involve collaboration and cooperation. Effort
needs to be directed at the continuous development and renement of processes
that enable boards to leverage knowledge, skills and know-how in order to
create hospitable environments to bring about effective board dynamics. In this
way, boards operate as teams in accumulating and sharing knowledge to
enhance a companys value-creating activities. A team leadership perspective
is particularly appropriate for understanding the role of the board as a locus of
decision-making as it involves understanding what is going on between people.
The emergence of team leadership within a board is facilitated by a boardroom
culture that supports the collective contribution of each director in aiding the
board to realise its designated role. Although the composition of the board
changes over time as individual directors are elected and subsequently retire
from the board, leadership continues to be enacted by the board. In this way, as
a collective entity, the board itself demonstrates leadership.
Huse, who has produced a series of inuential works and books (Huse, 2005,
2007), set the agenda for subsequent investigations of the boards role to operate
as a team. Key ideas expounded include the boards role in affecting organisa-
tional outcomes through collective or joint efforts as a group rather than as
a collection of disparate directors with skills and knowledge elected or
appointed to the board. This has directed attention to how boards accomplish
their tasks through relationships within the boardroom and beyond which
emphasise collective efforts, regardless of formal role (Ees, Gabrielsson &
Huse, 2009;Machold et al., 2011;Minichilli et al., 2012).
The processes and mechanisms for enacting the role of the board are
allied with leadership concepts which include the role of the board chair.
There is widespread acceptance among those who examine board leadership
dynamics that the role of the chairperson is central and critical (Carter &
Lorsch, 2004;Huse, 2009;Leblanc, 2005;McNulty et al., 2011). The board
chairsroleisinuenced, in part, by the monitoring aspect and the func-
tioning of the board as a whole. In fullling their role, board chairs engage
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in leadership to build relationships within the board and external to the
board and to achieve the tasks/responsibilities aspect of the boardsrole.
Previous work has identied the board chairs role in terms of value
creation. Huse (2009) identied tasks undertaken by board chairs for
value creation, including to build trustful relationships among board mem-
bers and with the CEO; to support the board members to become effective
team members by motivating and providing them with all of the informa-
tion that they might need; to encourage open communications within and
outside the boardroom; to facilitate robust discussions at the meetings; and
to actively develop and rene governance structures and processes.
Research on trait theories (which includes demographics as a category),
leadership skill and competence, and leadership style (including transforma-
tional and transactional leadership) has begun to explore the role of board chairs.
There is a small but growing body of research on gender and board chairs
(Cikaliuk et al., 2018b), the decision-making style of board chairs (Levrau & van
den Berghe, 2013) and the attributes of an effective board chair (Huse, 2009;
Kakabadse, Kakabadse & Barratt, 2006). Others have examined the role of the
board chair in relation to CEOs and building a trust-based working relationship
among directors (Gabrielsson, Huse & Minichilli, 2007).
Another leadership concept that is particularly useful is transactional leader-
ship. Transactional leadership focuses on the more conventional and widely
recognised hierarchical relationship between the board and CEO. In the proto-
typical version of this form of leadership, reward-based transactions (or
exchanges) that occur among leaders (such as the board) and CEO are
Transactional leadership is most closely allied with the principalagent
relationship in which monitoring and oversight occurs and outcomes are speci-
ed, such as a contract for the CEO (Eisenhardt, 1989). It is here that agency
theory and transactional leadership appear to align in addressing perceived CEO
self-interest and the attempt to motivate behaviours through the promise of
reward. In the exchange, which is based on a discussion with the CEO to
identify what is required (goal achievement), conditions are specied and
rewards identied that will be allocated if the requirements are fullled (con-
tingent reward). In this way, transactional leadership enacted between the board
and CEO results in CEOs fullling their end of the deal by meeting performance
targets and they are rewarded accordingly (Judge and Piccolo, 2004). It is here
that another key role of the board chair emerges that of mediator (Gabrielsson,
Huse & Minichilli, 2007;Roberts & Stiles, 1999). The board chair smooths
relations among sceptical directors, procures resources and provides inspiration
when problems appear to be insurmountable.
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In situations where the board of directors is oriented towards monitoring and
controlling roles, the CEO will align her/his orientation with the board and
avoid risk-taking behaviours. This type of board/CEO leadership promotes
short-term performance in which the CEO is rewarded for incremental change
which allows companies to earn a living in the present. In other words, the
board/CEO leads the company in doing what they do, but better. This type of
board/CEO relationship tends to support organisational exploitation rather than
exploration (March, 1991). Exploitation promotes governance practices (and
forms of governance) which are linked to an established strategy and strategic
decision-making operates to support preservation of current organisational
legitimacy (Kraatz & Block, 2008). The challenge is for boards/CEOs to nd
ways to retain characteristics of exploitation (short-term goals, improvements
of existing capabilities and resources, repetition, systematic reasoning, coordi-
nating activities, monitoring) and exploration (long-term vision, development
of new strategies, risk-taking behaviour, mentoring, creativity) and dynamically
balance them. Too little exploration may be as detrimental to the companys
long-term survival as too much.
Another leadership concept is relevant co-leadership. Heenan and Bennis
(1999) coined the term and dened co-leadership as two leaders in vertically
contiguous positions who share the responsibilities of leadership and are truly
exceptional deputies. Although we continue to be mesmerized by celebrity and
preoccupied with being No. 1, this tends to overestimate the value of the
contributions of the chair or CEO and undervalues those made by many
different people in the organisation (Heenan & Bennis, 1999, p. 6). This
approach recognises that, as companies expand and diversify, it becomes
increasingly more difcult for one person to have the skills, knowledge and
experience to lead organisations in realising their full value-creating potential
(OToole, Galbraith & Lawler, 2002). As Heenan and Bennis (1999, p. viii)
pointed out, The genius of our age is truly collaborativeand the shrewd
leaders of the future are those who recognize the signicance of creating
alliances with others whose fates are correlated with their own. When it
comes to leadership, a two-in-the-box model may engender strengthened per-
formance in the long term.
Co-leadership reinforces a conception that leadership is not a solitary activ-
ity; it thrives on collaboration. Despite limited rigorous analysis, several scho-
lars have suggested that it improves leadership effectiveness (Alvarez &
Svejenova, 2005;Heenan & Bennis, 1999;OToole, Galbraith & Lawler,
2002;Sally, 2002). Hambrick and Mason (1984) theorised that the perceptions
of senior executives, that is, their experiences, values and personalities, are
highly inuential in how companies respond to and cope with changes in the
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environment, shaping them in ways that resemble their views on strategy and
risk. The upper echelons theory advanced by Hambrick and Mason (1984)
proposes that organisations become reections of the top management teams
strategic choices, suggesting that the complexity of organisations make it
improbable for one individual to exert great inuence over all members.
Other researchers, with different perspectives, similarly maintain that there is
a lack of research evidence that single individuals have the kind of dramatic
impact on organisational performance (Thorpe, Gold & Lawler, 2011).
A formal co-leadership (i.e., co-CEO, co-chair, co-director) structure can help
to make this more likely, but these remain the notable exception rather than the
It is the boards leadership in strategy where its role in value creation is
brought into greater focus. Through engagement with the business environ-
ment, relationships and the promotion of shared interests(Freeman, 1984,
p. 192), the board acts to ensure the long-term success of the company. Along
with understanding the external business environment (ecosystem) within
which the company operates, the board balances and integrates multiple rela-
tionships that taken together affect value creation. Such a perspective positions
the boards leadership role as bringing about survival and value creation.
Forbes and Milliken (1999) were among the earliest scholars to discuss
boards as strategic decision-making groups. They proposed a model that links
factors with board-level outcomes, such as task performance and cohesiveness,
and then relates them with rm performance. A decade later, Pugliese et al.
(2009) found from their review of the literature on boards and strategy that
boards are engaged in strategy. They identied the nature of boardsstrategic
involvement as including an active role to dene it at a general level,
a responsibility for specic outcomes and some level of participation in the
strategy-making process.
The role of the board from a leadership lens is subject to multiple conceptual
treatments. Each of these provide important insights that contribute to an
understanding of the role of the board. Perhaps the most important theoretical
insight emerges from a consideration of purpose. In many respects, the role of
the board through a leadership lens involves ensuring the viability of the
company and promoting its sustainability. Our understanding of the boards
role is to add value by enacting leadership in governance.
5 The Board as a Nexus of Relationships
In this section, the integrative model is introduced. We start by examining how
the board is traditionally characterised in corporate governance theory and
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commonly in corporate law scholarship, as well as point to some of the
inadequacies of these theories. It does not claim that concerns about board
leadership are, or have ever, shaped corporate law. It may, however, be possible
to say that corporate law is consistent with the board exercising and coordinat-
ing inuence across several domains. To put it colloquially, some play in the
joints is required if leadership is to matter. The remaining part of this section
examines the board at the centre or nexus of the participants who interact with
and around the modern corporation. It explains how the relationships of the
board with shareholders, among the directors, management and non-
shareholding stakeholders, position the board to normatively govern and lead
the company. We elaborate on aspects of organisational studies and legal
disciplinary insights which inform the integrative model and new directions
evoked for scholars and practitioners to pursue.
5.1 Towards an Integrative Model
The primary role of the board normatively is to act in the best interests of the
corporate legal entity, which is a legal or juridical person. The board is also
charged with safeguarding the corporate legal entity. In doing so, the board
should protect the corporate fund as well as the other forms of value which
the company acquires and generates as it operates in the world.
The ability of corporate boards to take account of the interests of the employ-
ees, environment and local community when seeking to act in the interests of the
company as a whole is now widely accepted. The limited reviewability of board
decisions creates further scope for the board to bargain with stakeholder groups
and the ability of stakeholder groups to pressure the board to bargain.
The directors who comprise the board are therefore a collective charged
with complex decision-making (Lorsch & Clark, 2008). The board will
engage with corporate participants or stakeholders that interact with the
company. At the same time, the board must ensure that the inuence over
decision-making by corporate participants does not morph into control by
those participants.
The relationship between the board and shareholders is complex and differs
from any of the other relationships that the board has with other corporate
participants. The founding shareholders come together to form the company. On
incorporation, a separate juridical entity or legal person is created that owns or
controls the corporate fund. The founding shareholders specify, in the constitu-
tion, articles of incorporation or equivalent, the procedures which will be
followed to operate the venture. The existence of a default constitution or
equivalent solves the problem of incomplete contracting for shareholders as
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initial participants (Robé, 2011). In return, shareholders are issued shares.
Although the company as a legal person owns the corporate fund, shareholders
own shares.
Those shares typically have rights attached to them. The rights include in
personam rights for shareholders such as the right to receive notice of and
participate in shareholder meetings as part of one of the decision-making organs
of the company. Rights also attach to the shares and might be called capital
rights. Examples of capital rights are entitlements to pro rata shares of dividends
and residual rights on dissolution. Those rights affect shareholders as investors.
Shareholders also usually have voting rights on the election of board members.
It is now common for voting rights to be attached to shares rather than persons.
In practice, this right affects the number of votes each shareholder has (a
shareholder will vote all of his/her or its votes in the same way). But share-
holders are also stakeholders; like all stakeholders, some shareholders indivi-
dually or in groups will seek to inuence decision-making by boards. The
potential ability of shareholders through participation in the corporate organ
of the company, the meeting, or the voting to appoint or remove directors from
the board means that the inuence of shareholders with big voting blocs may be
great. That does not mean that the shareholders own the company; rather,
through the voting rights attached to their shares, they have the potential to
inuence or even control the board. And as discussed in Section 3.2, the share-
holding organ, the meeting, has some decision-making rights.
The recognition that no single body is in charge of all decisions as well as the
non-contractual side to corporate law suggests that the legal structure of the
company cannot in theory be guaranteed to lead to the maximisation of share-
holder wealth. The neoclassical assumptions underpinning the principalagent
approach to corporation law have been under sustained attack for several
decades from behavioural theorists that have shown that much behaviour can
be explained through the concepts of bounded rationality, satiscing, the rou-
tinisation of decision-making in standard operating procedures and the domi-
nant coalition. Leadership could play a positive or negative role within such an
Positively, leadership can, for example, reduce the satiscing behaviour of
individual managers or directors. This is consistent with the fairly basic eco-
nomic models of the motivational role of a leader.
Two implications arise from the multitude of reasons why corporate direc-
tors, managers and shareholders might not be relentlessly focused on a common
vision of shareholder wealth maximising. First, there might be a diversity of
actors, with a diversity of objectives within the company. Second, where control
is not absolute, that is, where both director and shareholder primacy are missing,
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corporate decisions will be negotiated. In any event, conceptions of shareholder
wealth maximisation and associated time horizons are likely to differ between
directors, managers and shareholders.
Drawing a slightly longer bow, a further implication is that simple rules,
derived from the property-based duciary duties of directors, such as the duty
not to prot from ofce and the duty to avoid conicts of interest, ostensibly
aimed at protecting shareholder wealth, are an insufcient basis for a system of
corporate governance. Arguably, not all duciary duties can be contracted out
(Lim, 2015). The concern of the law is to regulate the conduct of shareholders as
well as directors where shareholders misuse power. Courts and legislatures will
not permit shareholders that hold the majority of shares to act unconscionably
towards minority-interest shareholders.
In listed companies, day-to-day management is delegated by the board to
senior executives. The information acquired by executives and their day-to-day
involvement with the operation of the company creates potential information
asymmetries between the board and executive management that have been
recognised by the literature. Less often identied but discussed in this
Element is the consequential potential inuence and control by management.
Companies will also have employees. Much economic literature treats the
relationship between the company and employees as based on contract.
Although employees collectively are not an organ of the company, employees,
together with management, contribute human capital or value to the company.
Although not measurable in the same way as nancial capital, human capital is
part of the value of a corporate legal entity. Human capital is used to generate
value for the company that can be converted to nancial capital. Many civil law
jurisdictions, most notably Germany, recognise the signicance of employees to
the company by allowing employee representation on the supervisory board of
the company. Such representation is also recognition of the impact of the
company on employees. In common law jurisdictions, employee representation
on boards is not common, although the British prime minister Theresa May did
suggest employee representation when she was made prime minister (Baker,
2016). Intermediate steps such as employee committees that meet with boards
have been mooted. Such initiatives are instances of boards interacting with
a stakeholder group.
Shareholders have a number of relationships with the company. As well as
shares giving individual rights to shareholders to act through the general meet-
ing as an organ of the company, shareholders are also investors. Accumulation
of blocs of shares by major shareholders, the rise of socially responsible
investment and increasingly active institutional investors like BlackRock
mean that boards meet with investor groups.
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Beyond the identied stakeholders, companies operate in a world where, at
any time, a moving and changing web of stakeholders will either be affected by
the company or will affect the company. An active board will interact with the
moving and changing stakeholder groups. Those stakeholder groups may legiti-
mately collude with each other to inuence the board and therefore the com-
pany. An example might be environmental bodies joining with regulatory
bodies to encourage sustainable behaviour by a company. Sometimes stake-
holder interests may not align. An example might be a sustainable environ-
mental initiative that may result in loss of jobs by employees. The role of the
board is not to mediate between interest groups that may be in conict we do
not consider the board to be a mediating hierarchy (Blair & Stout, 1999).
Instead, the role of the board is to make decisions that are in the interests of
the corporate legal person and the corporate legal entity. But as well as making
the best decision possible for the company at any time, the board, when acting in
the long-term interests of the company, must ensure that its relationships with
stakeholder groups are maintained.
Increasingly the importance of board diversity is being recognised. However,
with diversity comes a range of world views that may result in differences of
opinion about the direction a company should take. In addition, nominee
directors appointed by shareholders may advocate for a direction that benets
the nominator. The extent to which members of the board should be represen-
tative of corporate constituents and the extent to which members of the board
should be independent remain contested.
5.2 The Board and Shareholders
While never quite able to monopolise the eld, for many years, agency theory
has been the dominant paradigm in the practice and study of corporate govern-
ance. In their review of academic journal articles on board leadership, Ya r
Hamidi and Gabrielsson (2014a) found that the research predominantly inves-
tigated CEO/chair duality, focused on publicly listed companies, used
a quantitative methodology and archival data, relied strongly on agency theory,
and was mainly based on US data. Within this paradigm, the directors and senior
management on the board are seen as agents of the shareholders. Corporate law
and governance practices are intended to align the incentives of managerial
agents with the interest of shareholders as the principal also deterring opportu-
nistic behaviour by the board and management. A distinction is also drawn
between management and the governance role of the board.
The legitimacy and desirability of contractarian models are built on the notions
of individual rationality and agreement (Moore, 2014). While shareholders are
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the residual risk bearers (at least while the corporation remains solvent) and
collectively have the power to appoint the directors, contractarianism does not
expect shareholders to be active participants in corporate governance
(Easterbrook & Fischel, 1996). Indeed, it is generally suspicious of any exercises
of shareholder voting power. The informational and collective action impedi-
ments to the effective functioning of the shareholder franchise within large public
corporations with widely dispersed shareholdings are indeed signicant.
If shareholders were actually the simple rational maximisers that they are
assumed to be, there would be limited need for active board engagement with
shareholders, at least beyond communications from the board to the share-
holders. If a diversied portfolio is the only practical option open to share-
holders to protect their interests, due to informational and collective action
problems, there would be no scope or need for the board to exercise leadership
in relation to shareholders. While shareholder passivity is presented by con-
tractarians as a virtue, empirical evidence demonstrates that shareholders are
not always passive.
These ideas are helpful in charting the relationship between the board and
shareholders. Despite the formal authority that shareholders may possess, and the
legitimate concerns about lax or opportunistic behaviour of management, some
boards are able to exercise leadership in their relations with shareholders. Statutorily
mandated communication between the board and the shareholders, such as annual
meetings and reports, are not simply compliance activities, nor perhaps even
primarily a means of ensuring board accountability to shareholders. Two-way
communication between the board and shareholders can help tame shareholder
activism, garner additional resources for the company, and more generally build
greater trust between the company and its longer-term shareholders.
Enhanced levels of shareholder communication and engagement have been
witnessed in a number of jurisdictions, notably the UK and the United States,
and has become an established part of conventional good governance recom-
mendations (Aguilar, 2015). Several reasons for increased shareholder engage-
ment have been suggested, including say-on-pay legislation, inuence of proxy
advisory rms and concentration of share ownership, in particular in the hands
of institutional investors.
The legal framework provides space, albeit imperfectly, for this model of
leadership in governance to operate. The shareholders as a group have formal
powers to elect directors and approve a few signicant corporate decisions.
Nonetheless, a set of rules can be identied that protect the space for the board to
act as leaders.
The topic of insulated boards has generated considerable discussion in
the United States (Bebchuk, 2013;Strine, 2014). Corporate law writings
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and debates question claims that insulating or shielding boards from share-
holder pressure by limiting their rights and powers serves the long-term
interests of publicly traded companies and their long-term shareholders.
The centre of gravity within the discussion differs from the usual position
under Anglo-Australasian law where shareholders have generally had
greater control, de jure or de facto, over corporate boards. The listing
requirements now provide for a minimum number of independent directors.
The rules also recognise that directors may (at least initially) be appointed
by other directors. The board has inuence over the future constitution of
the board. With limited exceptions, nominee directors have a duty to act in
the interests of the company and not their appointor and a duty not to fetter
their discretion.
Of the boards we have studied, the board of an airline perhaps come
closest to the ideal of the insulated board. Notwithstanding the government
owning approximately 80 per cent of the shares, successive shareholding
ministers left the board alone to make strategic decisions for the company
(see Section 6.3).
The discretion of the board is also protected by the same rules that protect
minority shareholders. The unfair prejudice remedy and the derivative action
protect the board from being subject to the demands of majority shareholders. It
appears that shareholders even acting unanimously do not have the power to
usurp the decision-making role allocated to directors in the corporate constitu-
tion. Furthermore, the business decisions of the board are not subject to review
by the courts (Howard Smith Ltd v. Ampol Petroleum Ltd, 1974 AC (1974)). The
deference to the boards business decisions is also reected in the nature of the
obligations imposed on directors. For example, the unfair prejudice remedy has
been interpreted to preclude complaints about decisions that can be attributed to
business judgement. The duciary duties of directors are intended to ensure
directors work zealously for the company, but strict rules dealing with conicts
of interest and accounts of prots do invite the courts to make business judge-
ments, including on whether a company could have taken advantage of
a business opportunity (Fhr European Ventures Llp v. Cedar Capital Partners
LLC, 2014 UKSC (2014)).
Whether the duty of loyalty is seen as a duciary duty or a separate duty
reinforced by duciary duties, loyalty is primarily assessed as a subjective duty
(In re Smith and Fawcett Ltd, 1942 Ch. (1942)). Where elements of objectivity
have crept into the duty, particularly in cases involving corporate groups and
passive-follower directors, the duty has been articulated in procedural terms.
The question the courts have asked is: did the director consider the interests of
the company?
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5.3 Within the Board
In an era of accelerating economic and technological change, boards that merely
react to events cannot hope to be effective. Boards must work to foresee the
challenges and opportunities that their companies face. Many experts advise that
boards needto think deeply about the business, bringing new ideas and analysis to
the table, engage in long-term strategic planning, and be prepared to challenge the
status quo and catalyse change when necessary (Dailey & Koblentz, 2012). For
this to occur, the board must not only have the appropriate skills, experience and
judgement, but also the requisite leadership and governance.
From this perspective, discussions of term limits and diversity of board
members are elements of a broader task of reviewing the performance of the
board. The board may show leadership in relation to its own make up and
decision-making processes. Having the rightpeople is part of this. But there
will also be trade-offs that need to be made, between skills and diversity and
representation of shareholders.
While investors more or less systematically review the performance of
boards, as discussed earlier, the inuence of shareholders is often by design or
in practice signicantly attenuated. The board frequently has inuence over
directorial appointments. The performance of the board is therefore a matter that
the board itself needs to periodically review. The review needs to encompass the
boards composition, leadership, interpersonal dynamics, governance policies,
strategic vision and so on (Institute of Corporate Directors, Canada, 2015).
Virtually all S&P 500 companies have established a framework for evaluating
their performance as a group, but only about a third evaluate the performance of
individual directors (SpencerStuart, 2018).
The governance processes, both within the board and in the broader corporate
environment, help to mediate between the competing objectives by providing
for information gathering, monitoring, review and consultation. In a number of
jurisdictions, regulation or reporting requirements have sought to promote, inter
alia, diversity, directorial renewal and other restrictions on board make-up and
tenure. Agency theory-based research on the effect of board structure on share-
holder wealth has not produced strong results. While individually important,
and increasingly addressed in listing requirements and good governance guide-
lines, a general review of the specic requirements is beyond the scope of the
present work (for a discussion of best practice, see Conger & Lawler, 2009a).
Two issues merit specic attention in this Element because they arise from
primary rather than secondary corporate law: rst, leadership within the board,
particularly the role of the chairperson, and second, the balance between
collective action and individual responsibility.
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5.3.1 Leadership and Self-governance
The legal characterisation of the corporate board in Anglo-Australasian law
remains contested. Whether or not the board is correctly described as an organ
of the company, the board of directors is at times a group of individuals but it is
also a collective body a team. The two sides are evident in the much-cited
statement of Lord Woolf MR in Re Westmid Packing Services Ltd, Secretary of
State for Trade and Industry v. Grifths:
[T]he collegiate or collective responsibility of the board of directors of
a company is of fundamental importance to corporate governance under
English company law. That collegiate or collective responsibility must how-
ever be based on individual responsibility. Each individual director owes
duties to the company to inform himself about its affairs and to join with his
co-directors in supervising and controlling them. (In Re Westmid Packing
Services Ltd, 1998 All ER 2 (1998), p. 653)
The collective responsibility of the board for the long-term success of the
company is the rst of the main principles in the UK Corporate Governance
Code (Financial Reporting Council, 2018). By contrast, directorsduties are
applied to individual directors.
A similar tension is evident in the study of team leadership and shared
leadership (Pearce & Sims, 2000;Yukl, 2013). While little linkage between
the research on board leadership and traditional leadership research exists,
interestingly, some research on shared leadership on corporate boards has
been undertaken (Conger and Lawler, 2009a;Vandewaerde et al., 2011).
Pearce and Conger (2003) dene shared leadership as a dynamic, interactive
inuence process among individuals in groups for which the objective is to
lead one another to the achievement of group or organization goals or both
and this inuence process involves peer, or lateral, inuence and at other
times involves upwards or downwards hierarchical inuence(p. 1). Team
leadership involves collective construction processes where the exercise of
agency is practiced by individuals, shared by members of the team or both.
Team leadership must also involve more than recognition that board members
change from time to time. While the chair of the board often represents the
board as the public face, the board acts as a collective, generally by
5.3.2 Chair of the Board
While the role of the chair is barely recognised in Anglo-Australasian company
law statutes, corporate governance codes attach considerable importance to
chair of the board of directors. The UK Corporate Governance Code, for
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example, states that the chair is responsible for the leadership of the board and
for ensuring its effectiveness in all aspects of its role (Financial Reporting
Council, 2018). It then elaborates on the general duty, making the chair respon-
sible for setting the boards agenda; promoting a culture of openness and debate
by facilitating the effective contribution of non-executive directors in particular;
ensuring constructive relations between executive and non-executive directors;
and ensuring effective communication with shareholders generally.
The responsibilities undertaken by an individual director in a company can
affect the scope of his or her duty. Anglo-Australasian law might recognise
additional requirements for a board chair to comply with his or her directorial
duties. Duty of care for a chair may be different than that of an ordinary
executive director. Similarly, members of board subcommittees that are dele-
gated a particular function might nd themselves held to a different and higher
standard in relation to certain matters. These examples are still exceptions to the
general rule.
The constitution of most companies provides that the chair of the board
would normally also chair meetings of the board. There is, however, no require-
ment that the chair be neutral. The chair of the board can chair a company
meeting even where the matter to be discussed is the removal of all of the
directors of the company, including the chair.
Notwithstanding the recent emphasis on the role of the chair of the board, the
courts are clear that the board as a whole and individual directors must not allow
one individual to dominate. For example, in Madoff Securities International Ltd
v. Raven (2013 EWHC (2013)), Popplewell said that it is a breach of duty for
a director to allow himself to be dominated, bamboozled or manipulated by
a dominant fellow directorleading to a total abrogation of responsibility (p.
191). The same is true where the dominance is exercised by a subset of the
directors rather than a single individual (see, for example, Re AG (Manchester)
Ltd, Ofcial Receiver v. Watson, 2008 EWHC (2008)). The UK Corporate
Governance Code states that non-executive directors should be responsible
for performance evaluation of the chair, taking into account the views of the
executive directors (Financial Reporting Council, 2018).
Although law and legal literature have not sufciently recognised the role of
the chair, scholars from a behavioural perspective on boards (see, for example,
Erakovic & Jackson, 2012;Kakabadse, Kakabadse & Barratt, 2006;Levrau &
van den Berghe, 2013;Yar Hamidi & Gabrielsson, 2014b, among others) have
explored various aspects of chair leadership. Leblanc (2005) clearly stressed the
importance of the chair appointment, arguing that the choice of the chair of
a board and the effectiveness of that chair once in that position could be
considered to be the most important decision that a board of directors makes
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(p. 655). In governance practice, the chair is a director of the board as a peer
among equalsand cannot act independently to make substantive decisions, as
already emphasised by law. McNulty and colleagues (2011) maintained that
there are two primary ways that a board chair can inuence good collective
decisions. They argue that behavioural and relational factors, along with the
structural leadership position/role of the chairperson, affect the ability of the
chairperson to inuence decisions. Levrau and van den Berghe (2013) argued
that eye-to-eye decision-making style (among others) was the preferred style of
board chairs and the most effective.
The role of an effective chair can be seen as a mix of monitoring, deciding
and advising in exercising the boards responsibilities (Carter & Lorsch,
2004). As Leblanc and Gillies (2005) suggested, effective chairmanship can
be most closely associated with the role of conductor. For the chair to be
effective, she/he needs to have such attributes as presence, maturity and
a sense of independence of mind along with the ability to work through
tensions in achieving consensus (Kakabadse, Kakabadse & Barratt, 2006).
However, the authors also noted that the the contribution of the chairman
substantially differs from one company to the other, according to variance in
context, principally company performance, and the nature of critical decisions
required(p. 141).
Effective chairs develop high-quality relationships with others (fellow direc-
tors, management, shareholders and other stakeholders) and such variance in
the perception of chair leadership effectiveness may be inuenced by person-
ality qualities and characteristics such as emotional and spiritual intelligence
(Harrison & Murray, 2012). In their study of board chair leadership in non-prot
organisations, the authors examined and identied attributes such as being
committed, proactive, clear about their leadership role, aware of key issues
and able to see the big picture, handle conict, and act collaborativelyas
critical qualities of chairmanship (Harrison & Murray, 2012, p. 432). Another
group of authors (Gabrielsson, Huse & Minichilli, 2007) argued that the attri-
butes of an effective chair include the ability to motivate and use the compe-
tence of each board member (e.g., coach effectively and emphasise attributes of
high-performance teamwork), having an open and trustful leadership style,
working well together with the CEO, and continually developing the working
structures and processes of the board. While these works represent perspectives
from multiple disciplines outside of the mainstream leadership literature, they
share the unifying theme that board chair behaviours and processes are
a signicant factor in board effectiveness. At the same time, leadership and
governance are context dependent, suggesting that studies at the micro level of
leadership and board chairs in differing contexts are desirable.
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5.3.3 Group Loyalty and Individual Accountability for the Group
Loyalty of individual directors to each other and the group of directors as
a whole is often a requirement for the board to be able to have a leadership
role in relation to shareholders, management and other stakeholders. If the
directors are uninchingly loyal to their appointors, then the board will not be
able to function as a group and lead the company. Such directors may also risk
being in breach of their fundamental duty of loyalty to the company. On the
other hand, if the board members were pushed too far to monitor each others
conduct, the board may struggle to form a collective identity.
Board decisions tend, in practice, to be made by consensus. Legal rules,
however, push in the direction of individual accountability and the need for
directors to monitor each others behaviour. The rules governing the pro-
ceedings of the board facilitate informal decision-making by the board,
while presuming any director present at a meeting of the board to have
agreed to, and to have voted in favour of, a resolution of the board unless he
or she expressly dissents from or votes against the resolution of the meet-
ing. These rules are part of a scheme to provide for accountability of the
board to the shareholders and creditors, and contrast with the rules that
facilitate the board controlling its own proceedings, constitution and review
of its performance.
An examination of when company law rules require directors to be disloyal to
the directors as a collective shows how company law mediates the need for the
board to demonstrate team leadership and lead the company.
A director has a duty to exercise independent judgement (Clark v. Workman,
1920 IR 1 (1920); Companies Act 2006). The duty does not prevent a director
relying on professional advice or honestly and reasonably relying on a fellow
director with greater experience or expertise. Directors may enter contracts on
behalf of the company with third parties that bind them to take further action at
board meetings or otherwise necessary to carry out the contract, where the
decision to enter the contract was a bona de exercise of discretion (Fulham
Football Club Ltd v. Cabra Estates Plc, 1994 BCLC 1 (1994); Thorby
v. Goldberg, 112 CLR (1964)). The directors, however, cannot contract to do
something that is contrary to their duties to the company or the shareholders.
Davies and Worthington (2008) go further, saying the starting point is that
directors cannot validly contract (either with one another or with third parties)
as to how they shall vote at future board meetings or otherwise conduct
themselves in the future(p. 526). The cases tend to involve shareholder consent
for the transfer of assets or a takeover, and commitments by directors to make
certain recommendations to shareholder or not to cooperate with rival bids.
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The risk of nancial consequences from a breach of the duty of care,
particularly by non-executive directors, is virtually non-existent in the United
States (Armour et al., 2009;Black, Chefns & Klausner, 2006). Well-known
Australian decisions demonstrate a real risk of liability for executive and non-
executive directors that fail to exercise reasonable care to understand the
business and implications of all decisions of the board (ASIC v. Hellicar, 286
ALR 501 (2012)). These directions push the board towards taking a more active
role and towards exercising leadership over management.
The duties of directors require the directors to be each others keepers.
A number of cases have recognised that one key function of non-executive
directors is to monitor the executive directors and executive management
generally (see Conger & Lawler, 2009b; Roberts, McNulty & Stiles, 2005).
Despite some contrary case law, the duty of care for executive directors may be
higher than non-executive directors. The more recent corporate governance
codes are likely to reinforce this judicial trend. Duty of good faith requires
directors to report breaches by other directors. They cannot stand by and watch
another director act in a breach of duty without becoming implicated.
The common law conict of interest rule, now modied by statute, would
make a decision voidable if one director had a conict. The rule of proper
purpose is different, requiring a majority of directors to be motivated by an
improper purpose.
5.4 The Board and Management
Numerous good governance codes and empirical research reveal a belief that the
board has a role in developing or at least inspiring corporate strategy. The relation-
ship between the board and management is what is seen as the classic domain for
the exercise of leadership in line with the formal hierarchy of authority.
The contrary view, advanced strongly in agency cost-inspired contractarian
literature, is that strategy is the province of management. The board has power
to frame its relationship with management. The informational advantages of
management over non-executive directors makes the delegation of authority to
management credible (Aghion & Tirole, 1997).
While management may be formally accountable to the board, the freedom of
management to manage may also be built to varying extent into a CEOs employ-
ment contract. The information asymmetry between the board and management,
long recognised, may limit the ability of the board to develop strategy effectively.
As discussed earlier, in some economic models, freedom from board meddling
(outside a crisis) may be important for the senior management to perform their
leadership roles within the corporation. There is clear scope for management to
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exercise leadership vis-à-vis the board. Board leadership requires board self-
control over the potential to exercise its powers in relation to management.
The power of the board to delegate to management the day-to-day running of the
company is subject to the corporate law requirements that such delegation is
reasonable and monitored by the board. Something akin to the observer effect in
physics seems to exist in corporate law: one cannot measure certain systems without
affecting the system. The mere monitoring of management will affect management
decisions, and different monitoring systems will have different effects.
Legal duties on directors make a purely passive approach to directorship
untenable. This would seem to narrow the gap between legal requirements of
directors and the recent governance literature ideal of boards developing and
inspiring corporate strategy. At the very least, directors cannot monitor corpo-
rate strategy without affecting the content of that strategy.
Agency theory has supported a sharp distinction between governance and
management: directors govern, managers manage. As noted earlier, leadership
has little role to play in a model based around rational utility maximisers
inhabiting the agency model. To be sure, management responds to the nancial
and other incentives created by the board in remuneration packages. The extent
to which management respond and the alignment between the interests of the
shareholders and the incentives set by management has been contested in recent
years. These uncertainties and partial alignments suggest a possible role for
board leadership in relation to management.
The monitoring role of directors is important, but it cannot be understood
simply as a mechanism to control self-interested or objectively incompetent
behaviour. The overcondence of management critiqued in the behavioural
economics literature is the charismatic leadership described in the leadership
literature. The board needs to work with the CEO to encourage entrepreneurship
and appropriate risk taking. The board needs to show leadership by restraining
excessive risk taking by management. This should feed into the assessment of
the duty of care of directors.
5.5 The Board and Stakeholders
Corporate stakeholders have different interests and will seek to advance those
interests through bargaining. Key nancial backers to companies frequently
retain the contractual right to withdraw nance in specied circumstances. The
threat to withdraw nance is likely to compel the management and/or board to
enter into negotiations with the nanciers. Community and environmental
groups will engage not only with the broader public about corporate activities,
but also the management, board and shareholders.
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The role of the board is not simply a restraint on management in these
circumstances. While the board may be formally obliged to act in what it
believes to be the best interests of the company as a whole and as an entity,
the best interests of the company cannot be identied independently of the
bargaining process. A behavioural perspective (Ees, Gabrielsson & Huse, 2009)
on goal formation would not assume the goals of the corporate constituents
would inevitably align around the maximisation of shareholder value through
maximisation of the nancial capital in the fund.
If the determination of the best interests of the company is indeed a political
exercise, new light is shed on the duty to act in good faith and in the best
interests of the company. In discussing the boards concerns for stakeholders,
the legal literature emphasises that stakeholders have claims, while rms have
obligations and duties (Fassin, 2009). Without an objective function,
a directors assessment of the best interests of the company will be primarily
subjective. This might provide an alternative, perhaps better, explanation for the
subjective nature of the duty of each director than concerns about intruding into
the decision-making power of directors and the moralnature of the duty. Other
commentators have observed that the duty of good faith is more a duty not to act
in bad faith (Summers, 1968). This usually involves the director acting for
a collateral purpose or acting in circumstances where the director could reason-
ably be thought to have a collateral purpose. Hence the rules on conict of
interest and account of prots. Traditionalists have objected to the (occasional)
judicial objectication of the duty. These cases have typically involved a failure
of a director to consider a decision independently or the failure of a director (or
the whole board) to consider the interests of a member of a corporate group.
These slipsare perhaps best not seen as slipsinto objectication, but
a concern to ensure that the director is actually considering all relevant interests
and balancing them. The directors acting collectively need to assess and balance
all relevant interests a political task.
The managerial interpretation centres its arguments around the boards
responsibility for the companys long-term strategies. The board, as
a corporate leader and core decision-making body, engages in the development
of a corporate future in relation to its stakeholders (Hung, 2011). Management
theorists argue that the genuine value of the board (especially non-executive
directors) is their boundary-spanning contribution (see Barratt & Korac-
Kakabadse, 2002;Filatotchev & Nakajima, 2014;Geletkanycz & Hambrick,
1997;Pugliese et al., 2009, among others). A directors ability to reach and
involve a variety of stakeholders can be a source of competitive advantage for
the company. In cases where the board determines that direct engagement with
certain stakeholder groups or on specic issues is warranted, the majority takes
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place at the executive/operational level. The board, with its overview of the
totality of the engagement, may opt for alternative or additional ways to engage
with the stakeholders concerned. Stakeholder engagement can inform board
decisions about the products and services that the company develops and offers,
its strategic direction, its relationship with its workforce and, more broadly, the
contributions and risks it poses in relation to the economic, social and natural
environment (Freeman, Harrison & Zyglidopoulos, 2018). Thus, from both
perspectives, directors and company ofcers should consider the interests of
all corporate constituencies. The question, from a legal angle, is about their
duciary duty (responsibility).
In the last decade or so, directorsresponsibilities towards the companys
stakeholders have been a subject of major legal debate in the Western world
(see Clarke, 2014;Plessis, 2016). The most recent adjustmentsin the sphere of
corporate law have demonstrated that no company law system insists on boards
focusing only on returns to shareholders(Sjåfjell, 2016, p. 383). For example, the
UK Companies Act 2006 (section 172.1) adopted a model that Clarke (2014)
labelled a discretionary pluralism model(p. 276). This model, which retains the
shareholder primacy perspective, provides an inclusive list of directorsduties in
relation to the interests of other stakeholders (Esser & du Plessis, 2007). In
Australia, corporate law reform last took place in 2001, but the present percep-
tions of directorsbroader accountabilities and the changing role of corporations
in society point to a clear legal recognition of stakeholder interests in practice
(Plessis, 2017). Canadians adopted a stakeholder remedy model(Plessis, 2017,
p. 41), whereby stakeholder groups can, under the Canadian Corporations Act
1995, protect or secure their interests in legal proceedings (statutory derivative
actions). It seems that these changes are promoting boardspositive recognition
of a broader spectrum of stakeholders. In recent legal corporate governance
literature that discusses these models (Gunasekara, 2013;Plessis, 2016,2017;
Sjåfjell, 2016;Vasudev, 2013), it appears that more commonalities with the
stakeholder principle in management theory are being found.
Furthermore, researchers from both camps have acknowledged major new
developments in organisational forms and business cooperation in which sta-
keholders are becoming directly included in value creation. Many companies
adopt open business models in which customers become involved in co-creation
processes (Kortmann & Piller, 2016; Prahalad & Ramaswamy, 2000).
Importantly, for our research, new business models promote a redenition of
the rm and its key actors, as they allow internal and external stakeholders not
only to share nancial prots, but also to participate in strategic decisions.
In summary, the increasing importance, power and actions of various stake-
holders, their contribution to the company goals and the companys
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responsibility to stakeholderswell-being are documented in legal and manage-
rial theory contributions on the subject. From numerous legal cases, it is evident
that law cannot ignore these trends (see Letza, Sun & Kirkbride, 2004;Plessis,
2017;Vasudev, 2013). As Harrison and Wicks (2013) stressed, the total value
created by a rm is the sum of the utility created for each of a rms legitimate
stakeholders(p. 102). We agree that there are differences between claims and
interests (Vasudev, 2012), legal prioritisation of company constituencies and
strategic satiscing of stakeholder needs, but the primary duty of directors is
intended to not just protect but also mandate a leadership role for the board in
dealing with various corporate stakeholders.
5.6 Summary and Conclusion
Board leadership takes what is essentially a static view of the regard for the
interests of certain stakeholders (compliance) and transforms it into one that
can encompass a competitive advantage in a dynamic context. In this way,
the core work of the board of directors involves building strategic relation-
ships with those groups (stakeholders) directly or indirectly affected by
a companys activities as well as those which may have a positive or
negative effect on the companys ability to operate. The board is at the
nexus of these relationships with its internal and external stakeholders
shareholders, management and non-shareholding stakeholders. We maintain
that the boards leadership role in this nexus of relationships is better
understood by an integration of key concepts and ndings between the
disciplines of management and law. In so doing, we contend a more com-
prehensive understanding of the board as the nexus of these relationships
can be developed.
We reject the notion that the models based on agency costs and property
rights provide an adequate and complete basis for the theory and practice of
corporate governance. While advocating a more people-centred and less prop-
erty-centred view of the corporation, the baby should not be thrown out with the
bathwater. The agency costs and property rights model contains important
insights. Our advocacy of the need to give greater consideration to people
associated with a corporation and their relations with each other is consistent
with recent scholarship that argues that greater importance needs to be attached
to behavioural aspects of board functioning. However, corporate governance
also contains rules that determine roles of shareholders, directors and, to a lesser
extent, other stakeholders. The complex relationships between the board and
corporate stakeholders cannot be understood in terms of principalagent rela-
tionships and residual rights of control.
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Corporate practice of modern organisations and their boards, as elaborated in
numerous studies over the last two decades (for an overview, see for example,
Huse, 2007,2018;Letza, Sun & Kirkbride, 2004;Lorsch, 2017,Westphal &
Zajac, 2013), conrms our points about the board as a nexus of corporate
relationships. Our own research presented in the next section provides evidence
of board leadership (or lack of it) for realising enormous benet and grievous
6 How Boards Exercise Leadership
This section examines board leadership enacted through four types of relation-
ships in which competing and complementary interests are aligned/reconciled,
resisted or transformed to affect board effectiveness and impact rm perfor-
mance. The board, as the nexus of relationships, is expected to enact leadership
among shareholders, management, directors and stakeholders for value creation
and protection. We examined board leadership in a companys transition to
a new ownership structure through an initial public offering in publicly held
corporations and a founder-CEO-listed company. Next, we studied how positive
board dynamics (or board leadership enacted among directors) contributed to
the development of sound corporate strategy and ameliorated governance
processes. We also explored board leadership in relation to CEO succession
planning and development of a transformational chairCEO relationship in the
context of a listed (partially privatised) state-owned enterprise and a publicly
listed company. Finally, we observed board leadership in building relationships
with internal and external stakeholders.
Our examples, vignettes and illustrations of various types of leadership
exercised by boards are generated from our in-depth case study research on
leadership in governance within companies from different industries and with
different ownership structures. We adopt the narrative analysis approach, argu-
ably one of the qualitative approaches best suited to capturing the dynamic
sequences of events and the temporal ordering of ideas and processes (Creswell
& Poth, 2017;Langley, 1999;Vaara, Sonenshein & Boje, 2016). We track board
leadership across multiple relationships, over time and events, thereby avoiding
the issue of inductively leaping from a single instance to the board as a whole
(Miles & Huberman, 1994). Our cases are drawn from an Anglo-Australasian
context. This context, with its institutions of corporate governance, interpreta-
tions of the purpose and roles of boards of directors, as well as governance
practices, inuences board leadership. We are aware that the nature of relation-
ships between corporate constituencies in different systems of corporate gov-
ernance has a reection on various aspects of board functioning and leadership
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(for a comparative overview of board roles, functions and designs in different
systems of corporate governance, see Clarke, 2017). However, we believe that
our examples provide insights into universal complexities and practicalities of
board leadership.
6.1 Board Leadership in Dealing with Shareholders
6.1.1 Non-market Shareowners in the Initial Public Oering
We studied the boards role in two cases (both in the energy sector) of an initial
public offering. We rst present an example of the board of a state-owned
enterprise, which made several proactive (but unsuccessful) attempts to trans-
form the companys relationship with the non-market shareholder (govern-
ment). The case illustrates that board leadership in setting strategic direction
is tempered by government control, and efforts to reconcile conicting visions
are difcult, resulting in a forced or compromised decision. In 2011, primarily
as a result of ideological commitments by the recently elected government, the
board chair was advised to prepare the coal-based energy company for partial
privatisation. The board had developed a dynamic, evolving relationship with
the shareholder and had anticipated the potential change in the companys
ownership structure. The chair approached the government with a proposal to
improve the long-term risk and reward prole of the company through an
energy diversication strategy that included alternative renewable energy in
return for an exemption from public oatation. The board chair persisted in his
efforts to engage in constructive dialogue with the government about the vision
of the company, the commitment to diversify its assets base, and the role of the
board in the value creation and protection for current and prospective share-
holders. The government rejected all board efforts. The board learned that the
governments commitment to the privatisation of all energy-based state-owned
enterprises was critical for perceived economic progress and political
By 2012, the government had lost condence that the board would
implement the changes necessary for the impending initial public offering.
The board realised that differences in the vision of the company and the role
of the board in governing the company were insurmountable. In this context,
a rapprochement between the board and shareholder (government) could not
be developed in the absence of mutual commitment to develop an under-
standing of the differences and generate a shared strategic perspective of the
future of the company. The board chair recognised that his capacity to affect
the strategic direction of the company was severely constrained; he
resigned. The government withdrew the company from the initial public
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offering process and appointed new directors, chair and management. The
subsequent volatility in the coal market precluded any further privatisation
Another energy companys initial public offering is a notable example of
board leadership transforming the listing companys relationship with its non-
market shareholder. The board chair of this company was skilled at using the
knowledge base of directors in ways that fostered the timely and frequent
sharing of knowledge among directors and with its shareholder (government).
The board believed that, consistent with its role in value generation and protec-
tion, a change in ownership structure through an initial public offering was in
the best interest for the future of the company. The company would be entering
an already-crowded energy market as the third company making the transition
from a state-owned enterprise to a mixed-ownership model in 2014. Among its
initial decisions in preparing for the initial public offering, the board decided to
be the rst company in the country to use a new prospectus format rather than
the conventional model preferred by the government. The boards decision
reected its commitment that new beliefs and practices needed to become
visibly, explicitly institutionalised throughout the company. The board had
weighed the choices, recognising that its twin goals of maximising share sales
and minimising the risks associated with the initial public offering could be
aligned with the interests of the government. A systematic process of board
decisions using the mutually shared goal throughout the initial public offering
aided in an integrated, coherent set of decisions and actions, including the use of
the new prospectus format, for the change in ownership structure. As demon-
strated through the initial public offering process, the boards leadership in
identifying, interpreting and adapting to the challenges in shifting from a single
shareholder to a multitude of shareholders aided in constructively shaping
a dynamic new relationship with government.
6.1.2 Bloc Shareholders
The case of a large international airport company illustrates that a board can ill-
afford to marginalise the interests of bloc shareholders in the pursuit of deliver-
ing strong and consistent returns for shareholders. The company was listed in
1998 when the government pursued the privatisation of infrastructural assets. Its
most recent top-ten position on a domestic stock exchange was characterised by
periods of both at and strong prot growth.
In 2006, an external independent board chair was appointed as successor,
following the retirement of the long-serving incumbent chair. The board
decided that the company needed an infusion of capital to bring about the
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long-term development of its infrastructure and assets to support its new
vision as the countrys gateway airport. The board decided that the sale of
the company to a foreign buyer would overcome the nancial impediment
and the new company would be well positioned to deliver strong and con-
sistent returns for its shareholders. The board failed to inspire bloc share-
holders and instil condence that the strategy was in the interests of all
shareholders. The perceived lack of engagement by the board with the bloc
shareholders in the formation of the strategy resulted in shareholdersloss of
condence in the board. The boards decisions culminated in the resignation
of the board chair after one year in the role, the appointment of shareholder
nominee directors to the board and the re-classication of the airport as
a strategic asset by the government, terminating any future foreign acquisition
6.1.3 Controlling Shareholder
In our research, we came across two listed companies with controlling share-
holders. The case of a large and old retail group illustrates board dealings with
an individual controlling shareholder. The company is 156 years old and is
partially listed on a domestic share market. In 1988, a foreign entrepreneur
acquired the company at a time when its image as an industrial retailer, coupled
with high costs and low sales, had jeopardised its survival. The entrepreneur
transformed the company by reconguring its business model, customers and
stores. In 2001, the company was listed on a domestic stock exchange with the
entrepreneur as the controlling shareholder acting as the managing director. The
managing director drew on his own network and the network of his trusted
advisors to identify board members with the distinct knowledge, skills and
experiences. In developing the corporate strategy, the board sought to balance
decisions for growth in sales and prots to satisfy shareholder expectations with
decisions to avoid value destruction. The board did make strategic errors despite
the alignment of non-independent shareholdersand managementsinterests.
The board decided to diversify into a new luxury retail segment. The retail
groups competitive advantage derived, in part, from its ability to transfer
knowledge across its two distinct brands. The company, however, lacked the
capabilities to convert its low-cost retailing expertise to benet the new high-
end initiative. The board decided to exit from the luxury segment and wound
down the stores.
In 2008, the retail group board recognised that embarking on a digitalisation
business-to-customer strategy, led by the board, would demand understanding
the nature and magnitude of the transformation to all aspects of the company,
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including its business model. The board had chosen to delay its entry into
e-commerce, preferring an incremental, sequenced approach to enable the
company to apply the insights gained from its initial internal digital initiatives
applied to inventory control and product range to its subsequent digital initia-
tives. The continuity in board composition, including the chair, had generated
a respectful candour among the directors and with management in expressing
their viewpoints and having those viewpoints heard. In so doing, the directors
identied a gap in their collective knowledge base of the requisite differentiated
knowledge and skills required for their pursuit of the digitalisation strategy. The
board closed this gap, in part, through the new appointment of a director
experienced in digital retail transformation. In 2011, the board made its move
to take on the e-commerce challenge more directly and launched its Web
commerce strategy as the digital growth vehicle for the company. The board
evolved the strategy to align the physical stores with its online presence to
provide its customers with a consistent retail experience. In 2016, the board
achieved its fth consecutive year of record-setting prot with its online sales
continuing to grow faster than its brick-and-mortar stores.
Our second case, a nance company, distinguished itself from the nearly
100 nance companies operating nationwide by listing on the domestic stock
exchange in 2002. This nance company went from raising US$11 million on
its initial prospectus to attracting new capital of US$170 million at the height
of its loan offer, primarily to property developers, in 2007. The companys
competitive advantage resided, in part, with its high-prole board of indepen-
dent non-executive directors, which included two justice ministers and
aformerpressofcer to Her Majesty Elizabeth the Second. Due to the
directorscelebrity status and long-term public service, this board was ranked
as one of the most trustworthy nationally. The chair parlayed his visibility as
a distinguished treaty negotiator through his testimonials in marketing mate-
rials to attract new capital from individual investors. The founder and con-
trolling shareholder (owning approximately 65 per cent of the shares) was the
companys CEO and managing director. In 2007, the board, seemingly ill-
informed about the precarious nancial state, approved a new prospectus and
continued to promote the company to prospective investors. The board did not
appear to organise its activities in order to facilitate the timely sharing of
information between the directors and controlling shareholder/CEO to make
better and faster decisions for long-term growth, not just current earnings. The
directors did not appear to ask questions about the risks to the viability of the
company given the impairment of loan repayments, challenge the accuracy of
the nancial statements considering signicant discrepancies or discuss an
audit report that detailed the magnitude of the issues. The past success of the
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board appeared to inculcate a sense of infallibility in the directorsdecisions
coupled with a lack of interest in the companys performance. The directors
believed that they had made the right decisions in their role to protect share-
holdersinterests and increase their wealth. In 2008, the boardsperfunctory
approach to governance resulted in calamity. The company, unable to make
payments, entered receivership, owing US$77 million to 4,400 investors. The
directors were found guilty of breaching directorsduties.
6.2 Building Board Collective Capabilities
6.2.1 Creating and Mobilising Knowledge
Board leadership involves the accumulation and mobilisation of knowledge to
foster new ideas, encourage constructive dissent and promote innovation. One
approach to cultivating capacity to acquire and use new knowledge among
directors is to further develop directorsknowledge, skills and experience
through personal professional learning development so that their participation
in wealth creation activities adds value. In this way, board leadership involves
a recognition of the cognitive diversity within a board as a strength and is
accompanied by processes to enable the board to reconcile diverse
This aspect of board leadership is illustrated well by a large bank operating
for almost 160 years. The bank faced fundamental shifts in the industry,
increased competition and threats to its positioning. The board, an early adopter
of gender diversity in the selection and appointment of directors, supported the
creation of an ad hoc committee to recommend ways to improve the banks
protability through a strategy of diversity and inclusion. The committee,
supported by a consultant, prepared and delivered fact-based material and
professional development activities to improve the directorsand manage-
ments ability to understand diversity and transform it into a competitive
advantage. In a range of diversity workshops, the exploration of directors
personal perspectives fostered open debate, created space for the emergence
of new ideas and enabled an integration of perspectives, which compelled
support for the company-wide implementation of the strategy. The diversity
strategy, supported by policy and practice, owed throughout the company,
achieving the reconguration of conventional operating processes from
employee selection and recruitment to the creation of new specialised client
business units.
The board also enacted a complementary approach to facilitating knowledge
building at the individual director level by assembling a diverse knowledge base
at the board level. The board specied diversity in the selection criteria for the
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appointment of new directors to increase knowledge of cultures and markets as
a competitive imperative. Board appointment decisions that placed a high value
on factors such as age, gender, education and language aided in the acceleration
of the boards capacity to cultivate an understanding of diverse markets.
6.2.2 Board Leadership to Institutionalise Governance Processes
In the case of a software development company, poor governance practices,
which had resulted in multiple violations of the domestic stock exchange listing
rules, illustrate how leadership enacted by the board chair and newly appointed
independent directors brought about the transformation of the boards govern-
ance practices. Following his 24 per cent ownership stake in the company, the
board chair challenged the persistent governance failures and envisioned
a board that added value to the young companys growth and protability.
The transformation unfolded in two phases: a clear assessment of the boards
structure and processes and directorscapabilities, and engagement with the
directors and CEO to develop and integrate new practices. Each phase entailed
leadership enacted individually and collectively by the chair and the directors:
the rst involved generating director support for the assessment, and the second,
implementing new governance practices.
The new independent directors, empowered by the chair, conducted
a detailed assessment with the assistance of two law rms given the com-
panys incorporation in the United States and its listing on a foreign stock
exchange. The review and analysis encompassed the initial public offering
from ve years earlier to contemporary board practices, exposing the depth
and magnitude of the boards oversights and listing violations. The chair
accepted the report and, through the collective efforts of all directors, the
board was able to come to terms with the vulnerabilities for the company
created by the persistent lack of governance processes. A shared understand-
ing emerged among the directors which conrmed that the identied risks
required visible and comprehensive action that combined immediate imple-
mentation along with a long-term orientation to generate transformational
Desired behaviours and practices in the boards change process were brought
about by the leadership enacted by the chair, the directors and new senior
management. A sustained collective commitment among the directors to ensure
the companys market leadership position as the worlds most widely used
board portal service served as a powerful mechanism to cultivate effective
governance processes and practices and resolve threats to the companys repu-
tation, protability and viability as a listed company.
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6.3 Developing BoardManagement Relationships
6.3.1 Board Leadership in CEO Succession Planning
The case of an airline, a national ag carrier, represents a remarkable example
of board leadership in the dynamic design and implementation of a CEO
succession process for long-term value creation. The airline was the rst
mixed-ownership company listed on the domestic stock exchange, with the
government as its largest shareowner. The board had discretion in its con-
sideration of each CEOs appointment in the companys evolution. The
boards success in identifying and attracting international CEO talent over
fteen years resulting in three CEO appointments can be traced to board
leadership in synthesising diverse knowledge bases to inform a coherent
strategy and a set of decisions and actions. The board facilitated an open and
rich dialogue about envisioning the future of the company which allowed for
an evolving strategic direction for the company. It also informed the collective
board decision of the desired knowledge, skills and capabilities in
a prospective CEO to bring about the emerging strategy. The board explored
widely each time to identify candidates internal and external to the company
as well as within and outside of the industry, which gave them the advantage of
attracting and selecting candidates that would help the company in its goal to
capture and sustain market leadership. Board leadership in developing
a planned, repeatable and regular process for CEO succession created, in
part, the companys competitive advantage.
6.3.2 Cultivating Board ChairCEO Leadership
Leadership is enacted by board chairs and CEOs as they build and evolve
a relationship over time. They engage in processes to cultivate an adaptable
relationship in the face of changing conditions. Consider another illustration of
a different chairCEO relationship of the previously mentioned international
airport, which reected an evolution and adaptation of the CEOs experience.
Initially, the chair drew from her own experience as a CEO to cultivate a mentor
relationship with the rst-time CEO of the airport. The chair guided the transi-
tion of the former executive manager to his new role as a CEO, providing
feedback, support and resources. Following her retirement from the board,
a new chair and CEO developed a tightloose relationship that created
a space to ask questions, foster innovation and encourage exploration in crafting
solutions to organisational issues. The mutual experience acquired by the CEO
and chair through their interactions over time reected the dynamic nature of
their coaching relationship.
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Leadership enacted between the CEO and board involves exibility to
respond to challenges and seize opportunities that may create long-lasting
value for the company. The transition from a start-up (entrepreneurial) company
to a listed company presents an opportunity for founder-CEOs to formalise
informal systems and routinise improvisational processes to aid in value crea-
tion. As noted earlier, the board has a role in serving as a source of value
creation. In engaging with founder-CEOs, the board acts to ensure account-
ability by guiding and shaping decisions and instilling integrity in the beha-
viours of management and the veracity of nancial data. Boards help to create
value through the development and renement of a viable long-term strategy by
focusing founder-CEOs efforts on gaining access to different resources, build-
ing new skills and capabilities, and identifying opportunities for growth. The
case of a software company illustrates how the relationship between a founder-
CEO and a compliant board led to a calamitous outcome the resignation and
conviction of the founder-CEO. That was the rst case of market manipulation
in New Zealand. The founder-CEO had become the face(brand) of the
technology company, featuring prominently in the marketing materials. He
developed an international blue-chip client base, persuasively articulating
a compelling vision for the company to become the global leader in how
board materials are produced, delivered and reviewed. In 2007, as the founder-
CEO prepared the company for an initial public offering on the domestic stock
market, ve experienced international and domestic independent directors and
a chair were appointed to the board to complement the four executive directors.
The initial public offering did not unfold as the board anticipated. An ethical
lapse by the board and founder in their failure to reveal his role as a director of
a bankrupt company impaired the companys share sales. The founder resigned
within twenty-four hours of the initial public offering from his CEO role but
retained his role as a director. The board concluded that the founder was
instrumental to value creation as he had the knowledge, skills and experience
to lead growth opportunities.
One year later, the board restructured; the chair and international directors
resigned. The board struggled to operationalise governance systems and
processes to protect and generate shareholder wealth. Efforts were compli-
cated, in part, by asymmetric knowledge among the directors of domestic
listing rules and a US-incorporated company. Board leadership for identifying
and bridging this gap through creating knowledge-sharing opportunities did
not emerge. The directors remained focused on growth opportunities. They
did not appear to recognise that the risk incurred by their failure to ask
questions would have long-term unintended consequences. Unknown to the
board, the former CEO had access to the domestic stock exchange trading
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system. He engaged in stock manipulation by articially changing the share
prices without any change in ownership of the shares. The former CEO, who
retained a 20 per cent ownership in the company, claimed his actions resulted
in minimal negative impact for shareholders. His explanations positioned him
simultaneously as a victimof bad advice from the board in not disclosing
his full background and as an inept trader for failing to grasp the concept of