Eythor Ivar Jonsson

Icelandic boards focus on strategy!

Limited research has been done on the strategic role of the board, or rather the strategic tasks that the board performs. In a recent study the question of boards focus on strategy was tested using a 14-item scale developed by Kanji and Sá (2001) and based on planning school concepts as: vision, mission, values and strategy. The study included 114 companies with less than 500 employees. The results indicate that these boards are ‘much’ (mean 4.44, 7 point Likert-scale) involved in strategic tasks. Indeed boards are involved in vision, mission, values and strategy.

The results are very interesting as there has been a tendency to think of boards as a monitoring device, which has minimum influence on strategy. The role of the board is to monitor and control that the manager of the company does not only feed his self-interests but rather serves to maximise shareholder value. It has, however, been argued that the role of the board could, and maybe should, be different when ownership is concentrated rather than dispersed as the thesis of the monitoring role takes for granted. When ownership is concentrated it quite common, and this is something that we can see in the above study, that owners themselves sit on the boards. It isn’t difficult to understand that owners, with major share in the company, want to influence the direction of the company. Therefore it shouldn’t be surprising to see the board performing strategic tasks. The role of the board becomes in effect the role of strategy.

Participation in strategic tasks, however, undermines the monitoring role of the board, as the board cannot effectively monitor itself. This is a classic dilemma. The monitoring function is, however, not as important for shareholder if the shareholder actually sits on the board and gets all the information needed to follow and influence the direction of the company. The board becomes a steward of the company, a pilot rather than a watchdog to use more descriptive labels.

There is, however, another problem, the rights of the minority shareholder to monitor and influence the direction of the company can be violated. There are cases in Icelandic business history, as well as in most other countries, where the rights of minority shareholders have been violated, as the board is either equipped or disabled to serve the interest of the majority stakeholder. The only solution for the minority owners is to vote with their feet, sell out and leave the board (if they have a seat on the board). This is something that has been disregarded too often where the arrogant argument is that if someone has the majority in an organisation he can do whatever with the organisation, although it might cost minority owners dearly. Independence of boards could help to secure a more just approach of running companies for all shareholders but very limited research exists about the issue.

The problem of boards being active in strategy does, however, not indicate that it is a wrong approach. Boards can offer a big picture view, a helicopter view, of the organisation, the market situation and development that managers do appreciate, as they tend to spend too much time on fire fighting. There is a valid argument that boards can be very valuable as an organ that helps to initiate and even implement strategic tasks for the organisation. Indeed the previous research indicates that the strategic role of the board has the strongest relationship with performance variables (although the relationship is weak). This is very important because it could imply that the monitoring focus as the only ‘true’ approach is flawed. It could imply that, at least in some cases, it is important that the board does have a strategic role. The research on Icelandic boards has indicated that boards are involved in strategy, which has positive relationship with organisational performance. Many Icelandic board members that have adopted the strategic perspective of the board are in little doubt that the strategic role of the board has helped to make Icelandic firms very successful in the last few years. They might be right!

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