Academic journal article Academy of Strategic Management Journal

Regulated Change Effects on Boards of Directors: A Look at Agency Theory and Resource Dependency Theory

Academic journal article Academy of Strategic Management Journal

Regulated Change Effects on Boards of Directors: A Look at Agency Theory and Resource Dependency Theory

Article excerpt

ABSTRACT

This paper investigates the effect of new governmental regulations on corporate Boards of Directors (BODs). We have reviewed the literature pertaining to agency theory and resource dependency theory, both of which have been assumed to explain the actions of BODs. We examine the predictions of both agency theory and resource dependence theory regarding both the structure and actions of BODs in times of governmental regulatory change. We then describe four historical events in which radical changes were required by certain governmental regulations, and discuss responses by BODs to each event, and present a discussion of these responses and how they adhere to or stray from the predictions of both agency theory and resource dependence theory. We conclude the paper with recommendations for the direction of further study.

INTRODUCTION

Organizational theorists have examined the role of corporate boards of directors (BODs) from many different perspectives. Two major theoretical perspectives that provide insight into the role and structure of BODs are agency theory and resource dependency theory (Hillman, Cannella and Paetzold, 2000). In addition to academic attention, BODs have received much attention from the popular press as well. The most recent proliferation of attention paid to BODs is largely due to the Sarbanes-Oxley Act and the instigating events that led to its passage in 2002. The Sarbanes-Oxley Act of 2002, among other requirements, mandates strict controls by and of corporate boards of directors. Sarbanes-Oxley was passed in reaction to a series of corporate scandals of the late 1990s and early 2000s including at Enron, Tyco International, and WorldCom. Because of the impact of the Sarbanes-Oxley Act of 2002 on BODs, many questions have arisen in regards to the roles, responsibilities, accountabilities, and structures of BODs. Is the role of the BOD primarily administrative oversight and control, or is it primarily boundary spanning and environment linking? How can the BOD best be held accountable for the actions of the corporation? Are there corporate stakeholders outside of the shareholders to whom the BOD is also to be held accountable? What proportion of the BOD should be comprised of insiders and what proportion should be outsiders? Is the insider / outsider taxonomy the best way to categorize board members?

Although one of the most recent and salient, the Sarbanes-Oxley Act of 2002 is not the first government mandated regulation that requires major changes to be made by BODs. The 1978 deregulation of the United States Airline Industry and the 1980 deregulation of Savings and Loans associations followed by the subsequent Financial Institutions Reform, Recovery & Enforcement Act of 1989 are two additional examples of times that regulatory actions by the United States government caused major changes to be made by BODs. A third example of governmental actions requiring changes to be made by BODs is the Canadian government's 1983 amateur sports "Best Ever" program. It required radical changes of the volunteer BODs of Canada's National Sport Organizations (NSOs) (Amis, Slack, and Hinings, 2004a).

The intent of this paper is to consider the tenets of agency theory and resource dependency theory as they relate to the responses made by BODs in the face of major government regulated changes. In the remainder of this paper, we will first highlight the generally accepted major roles and responsibilities of BODs. This will provide a solid framework from which to examine the theoretical perspectives of agency and resource dependency regarding BODs. After highlighting the roles and responsibilities of BODs, we will then examine agency theory and resource dependency and their relation to BODs. Next, we consider four historical examples - the Sarbanes-Oxley Act of 2002, the 1978 deregulation of the United States airlines industry, the changes in Savings and Loans regulations of the 1980s, and Canada's Best Ever amateur sports initiative of 1983 - as the contexts in which we will examine some historical responses of BODs to these government regulated changes. …

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