The changing role of the supervisory board chairman: the case of the Netherlands (1997–2007)

The roots of the contemporary Dutch open-economy can be found in the glory days of the Golden Age. In this era, when the Netherlands were one of the largest trading nations, the Dutch founded the ‘Dutch United East India Company’, the first joint stock company in the world. With a small group of large, internationally diversified firms and a GDP that is dependent on foreign investment and trade (more than 60%), the Dutch trade origins and international orientation are still prominent. The Netherlands are a welfare state with a long tradition of balancing the interests of societal groups. The Dutch corporate governance system is unique in the sense that company law explicitly defines corporations as legal entities which must take into account the rights of all stakeholders affected by the company. The institutionalized stakeholder approach is supported by a two-tier board model consisting of a management board and a supervisory board. The supervisory board solely consists of non-executive directors to assure its independence and has the duty by law to supervise and advise the management board while acting in the best interests of the company and all stakeholders involved (Akkermans et al. 2007; De Jong et al. 2005, 2006; Hooghiemstra and Van Manen 2004; Maassen 1999; Maassen and Van Den Bosch 1999).

Over the last decade, the corporate governance landscape in the Netherlands has changed dramatically with the internationalization of the shareholder base of listed firms. Particularly, the share of Anglo-American oriented investor groups (Abma 2006) and the number of foreign directors have increased (Spencer Stuart 2006a, b). As a result, board members are more exposed to foreign investors’ corporate governance expectations and their willingness to actively challenge boards of directors. Examples of “successful” shareholder activism by foreign investors are the ABN AMRO takeover by a consortium led by the now split up Fortis Bank, and Stork, a Dutch technology company, where a hedge fund forced the corporation to restructure. Corporate governance scandals (e.g., Ahold, Enron, WorldCom and Parmalat) also have fueled the Dutch debate and contributed to amendments to the Dutch company law in 2004 and the introduction of a new corporate governance code, the Tabaksblat Code, in 2003, which was amended by the committee Frijns in 2008. In sum, these developments have contributed to a convergence of the institutionalized stakeholder model and the Anglo-American shareholder model in the Netherlands (Bezemer et al. 2007).

Traditionally, the primary responsibility of the board of directors has been to control the top management team to ensure that executives act in the interests of shareholders. The boards’ control role is rooted in agency theory and deemed necessary for counteracting managerial opportunism that may arise as a result of the separation of corporate ownership from management (Davis et al. 1997; Zahra and Pearce 1989). In addition, scholars have recognized the service role of boards, i.e., board members may positively contribute to corporate decision-making by providing advice and counseling to executive directors (Huse 2005, 2007; Zahra and Pearce 1989). Both board roles appear to be conflicting as the control role requires board independence, distance and a focus on the prevention of managerial opportunism, while the service role requires from directors interdependence, closeness and a focus on joint value creation (Forbes and Milliken 1999; Van Hamel et al. 1998; Sundaramurthy and Lewis 2003).

The control and service roles of boards are organized differently in corporate governance systems around the globe. Most investors are familiar with the one-tier board model in which executives and non-executives are jointly responsible for both roles. In this model, executive directors provide in-depth knowledge of the daily operations of the corporation and may raise issues that might otherwise have been neglected in board meetings (Davis 1991; Kesner and Johnson 1990; Muth and Donaldson 1998). The presence of executive directors enables the board to contribute to the decision-making process and to evaluate the outcomes (Maassen 1999; Williamson 1985) at greater speed with fewer bureaucratic hurdles (Davis 1991; Muth and Donaldson 1998). However, scholars have observed that insider dominated boards may overlook the opportunities that outsiders may offer in terms of alternate knowledge (Carpenter and Westphal 2001; McNulty and Pettigrew 1999; Rindova 1999) and external relationships (Boyd 1990; Mizruchi 1996; Pfeffer and Salancik 1978; Westphal et al. 2001). Insider dominated boards may also jeopardize checks and balances as non-executive directors may be better able to provide independent board control (Daily et al. 2003; Sundaramurthy and Lewis 2003).

While the one-tier model integrates decision management and decision control (Fama and Jensen 1983), the two-tier board model provides for a formal separation of executive and non-executive directors who operate in separate boards with their own specific roles. Executive directors are responsible for the day-to-day operations of the firm and the supervisory board is responsible for the supervision of management and for providing advice and counseling to executives (Christensen and Westenholz 1999; Hooghiemstra and Van Manen 2004; Maassen and Van Den Bosch 1999). The independence of the board from management is provided by law to ensure that “checks and balances” are in place as the supervisory board has the duty to act in the best interests of the firm and its stakeholders. Non-executives also may bring in useful resources and knowledge. For instance, directors of banks have always played an important role in the inter-corporate network in the Netherlands (Heemskerk 2007). A disadvantage of the two-tier system, however, is the additional bureaucratic burden on the corporation that may hamper the speed of decision-making (Maassen 1999; Muth and Donaldson 1998) and create information asymmetries among executive directors and non-executive directors (Davis 1991; Hooghiemstra and Van Manen 2004).

Scholars have observed that chairmen of boards perform their role(s) in a wide variety of ways in different board models (Kakabadse and Kakabadse 2007a; Stewart 1991). However, all board chairmen are responsible for: (i) the conduct and composition of the board (ii) determining the agenda of board meetings (iii) appointing and dismissing the CEO (iv) chairing the annual general meeting of shareholders and (v) ensuring that all board members have the necessary information to perform their job (Hill 1995; McNulty and Pettigrew 1999; Roberts and Stiles 1999). Furthermore, the chairman’s responsibility to maintain a healthy bilateral dialogue with managing directors is often posited as critical to the effectiveness of boards of directors and their contribution to a firm’s long-term survival (Kakabadse and Kakabadse 2007a).

While the basic role expectations of chairmen are shared on one-tier and two-tier boards, the differences between both board models have a significant imprint on the role and position of chairmen. Whereas the role of board chairmen in the two-tier model is to refrain from day-to-day management of the firm and to focus on decision control, chairmen of one-tier boards are often actively involved in both decision management and decision control. Instead of being a distant monitor, board chairmen in one-tier boards are often operating as “chairman-leader”. Parker (1990, 35), for example, describes that the typical board chairman “entertained important customers and shareholders; that he spoke for the company in the City and elsewhere; and when appropriate, conducted high-level negotiations with governments and major customers”. Accordingly, Garratt (1999, 33) argues that “CEOs need to accept that the chairman is the boss of the board. The managing director, or CEO, is the boss of the operations of the company”. Furthermore, Treadwell (2006, 66) posits that the “chairman is the primary interface with the institutions along with the CEO and the finance director”. In sum, these studies highlight that while board chairmen in two-tier boards are mainly responsible for ensuring that the board of directors adequately supervises management, board chairmen on one-tier boards more often operate at the forefront and appear to have broader responsibilities.

The different role requirements also manifest themselves in the structural position of board chairmen. For example, in the two-tier model, chairmen cannot hold the position of CEO or another executive position in the firm simultaneously. However, CEO duality is not uncommon for one-tier boards (Faleye 2007; Davidson et al. 2008; Spencer Stuart 2006a, b, 2008). Furthermore, as a result of the supervisory board chairmen’ distance from daily management, the liabilities of chairmen in two-tier boards are generally significantly lower compared to chairmen who have the same legal position as executive directors. Finally, the average time spent on a board chairmanship is significantly higher on one-tier boards as the responsibilities generally appear to be broader than for chairmen of two-tier boards. As a consequence, board chairmen of one-tier boards generally earn significantly more than chairmen on supervisory boards (Spencer Stuart 2006a, b). Table 1 provides a concluding summary of the main communalities and differences between the role and position of chairmen in both board models. In the remainder of this paper, we will discuss how the traditional role and position of the supervisory board chairman have evolved during the period 1997–2007 in the Netherlands.

To analyze the evolving role of supervisory board chairmen in the Netherlands between 1997 and 2007, we utilize two research methods. In collaboration with Spencer Stuart Amsterdam, thirty semi-structured interviews were held in 2007/2008 with supervisory board chairmen and CEOs of listed firms on the NYSE Euronext in the Netherlands (see Appendix A). As to the selection of participants, we used convenience sampling (all interviewees were contacts of Spencer Stuart Amsterdam), given well-known difficulties for researchers to obtain access to individuals at this level of analysis (Daily et al. 2003; Pettigrew 1992). We approached both supervisory board chairmen (22) and CEOs (8). We chose this approach in order to ensure that we obtained a comprehensive overview where CEOs might highlight other environmental developments and related changes in role expectations of board chairmen than the chairmen. As the participants were asked to reflect on the developments during the period 1997–2007, we made sure that they already had experience with supervisory boards in 1997, so that all participants at least had a senior management position in 1997. The thirty interviews lasted one to two hours and were conducted in the mother tongue of the interviewee (Dutch or English). Given the sensitivity and confidentiality of the discussions, we were not allowed to record the interviews. Notes were taken by two interviewers and interviewees were asked to fill in a short questionnaire. Among others, directors were asked to provide a top-3 of changes in their environments and a top-3 of implications for the role of the supervisory board chairman.

To analyze the structural position of the supervisory board chairman over time, we tracked chairmen’ demographics, network position, board activities, remuneration and turnover. More specifically, we collected the following demographic information: (i) the age in number of years (ii) the tenure in a focal firm in number of years (iii) gender and (iv) nationality. The network position of chairmen was mapped with (i) the number of additional board positions of a chairman at other top-100 listed firms and (ii) the number of additional chairmanships at other top-100 listed firms in the Netherlands. To portray the board activities of chairmen, we used two indicators for the formal involvement of chairmen in corporate decision-making: (i) the number of chaired board meetings during a specific year and (ii) the number of board committees they worked with during a specific year. We also collected data on chairmen’ annual cash remuneration in Euros and turnover as the percentage of the chairmen whose contracts expired during a specific year. Finally, we statistically analyzed differences with independent-samples t-tests.

Scholars and practitioners have observed that corporate governance has been in transition over the last decade (i.e., Ingley and Van Der Walt 2005; Kiel and Nicholson 2003). Yet, to date, relatively little is known about (i) which environmental changes are perceived as important by supervisory board chairmen (ii) what these developments imply for their day-to-day functioning, and (iii) how their structural position (i.e., demographics, network position, board activities, remuneration and turnover) has co-evolved with changes in the environment. In the following paragraphs these aspects will be discussed.

Over the last decade, the corporate governance context in most Western countries has been changing rapidly and intensively (e.g., Ingley and Van Der Walt 2005; Kiel and Nicholson 2003; Yoshikawa et al. 2007). Generally, scholars have shown that these changes had a significant impact on the “checks and balances” and role of different stakeholders. In this paper, we have discussed the impact of institutional change on the role and position of the chairman on Dutch supervisory boards. A combination of thirty semi-structured interviews with supervisory board chairmen and CEOs, and archival data on the structural position of chairmen within the top-100 listed firms in the Netherlands, revealed that their role has been in transition during the period 1997–2007. Triggered by more regulation, greater influence of (activist) shareholders, corporate governance scandals and increasing convergence of the one-tier and two-tier board models, supervisory board chairmen have become more involved in their control and service roles. Interestingly, the opinions regarding the desirability of the evolving role of board chairmen varied widely within our sample. This development has also coincided with an increased workload (more board committees and meetings) resulting in fewer other board positions (interlocks), more cash remuneration and higher levels of chairman turnover during our observation window. At the same time, the demographic profile of chairmen has remained unaltered during the last decade.

The changing level and scope of the involvement of supervisory board chairmen has three major implications. First, greater societal expectations pose new challenges to board chairmen as they operate beyond their traditional roles and legal requirements in the two-tier model. In particular, supervisory board chairmen are increasingly challenged to combine the seemingly conflicting demands of control (such as independence, distance, and focus on the prevention of managerial opportunism) and service (i.e., interdependence, closeness, and focus on value creation) in their role fulfillment (Forbes and Milliken 1999; Van Hamel et al. 1998; Sundaramurthy and Lewis 2003). However, Dutch corporate law does not provide clear guidance on this matter. As a consequence, supervisory board chairmen increasingly operate in a grey area in which their independent non-executive position is at stake. The tensions between the new expectations of chairmen and the regulatory context manifest themselves especially in the ongoing national debate whether or not to employ the one-tier board model as a legal alternative to the two-tier board model in the Netherlands. Second, the combination of increased workloads and liabilities for supervisory board chairmen is putting more pressure on supervisory board chairmen and the pool of willing and qualified future candidates. While the unchanged demographics suggest that firms are still searching for supervisory board chairman with the same background and demographic profile, the developments may provide opportunities for executive search firms. Their services may become more valuable as it may be more difficult for corporations to find qualified candidates who are able to perform multiple roles. The need for such firms to provide aid in educating and evaluating supervisory board chairmen may increase as well. In this context, it can be expected that the market for directors will lead to a professionalization of the function of the board chairman (Peij 2005; Schilling 2001). Third, while the growing involvement of the supervisory board chairman may have a positive impact on the functioning of the board of directors and corporate performance, this development may also have negative consequences. The emphasis on board control, compliance, and shareholder value may result in more risk-averse behavior, more focus on short term efficiency and less a focus on innovation, R&D and strategic renewal (Hendry and Kiel 2004; Sundaramurthy and Lewis 2003). Furthermore, the decreasing network connectivity of supervisory board chairmen may limit the number of learning opportunities for firms. Both social network theory and resource dependency theory have emphasized that board ties are an important learning vehicle through which firms can tap into the knowledge base of interlocking partners (Boyd 1990; Mizruchi 1996; Westphal et al. 2001) and are useful devices to co-opt resources from the environment on which corporations are dependent (Mizruchi 1996; Pfeffer and Salancik 1978). Board chairmen and regulatory bodies should be aware of these positive and negative consequences of the contemporary corporate governance developments and should take them into account in their role fulfillment.

The study has several limitations, but also provides avenues for future research. First, this study has treated all supervisory board chairmanships similarly in order to establish a general trend. However, the changing role of the supervisory board chairman may be contingent on the specifics of a firm’s internal and external context. For example, future studies could investigate how a firm’s size, ownership structure (family versus dispersed ownership), network structure (peripheral versus central network position) and international exposure affect the extent to which the role of the supervisory board chairman has changed as a result of national and international corporate governance developments. Furthermore, in line with our choice for the individual as the unit of analysis, the evolving role of the board chairman might be contingent on a chairman’s background, i.e., his/her status, professional training and experience. Second, the study has remained silent on the impact of the changing role of the board chairman on board processes, boards’ task performance and corporate performance (Hambrick et al. 2008; Huse 2005, 2007; Pugliese et al. 2009). Ideally, future research could examine these issues by taking a longitudinal and multi-level approach, i.e., an in-depth investigation of the individual and group behavior of directors during an extensive time period. Third, the evolving role of the supervisory board chairman may be contingent on the Dutch context. Future research studies could examine to which extent the similar developments are observable in other countries with a two-tier board model (for instance, Austria and Germany) and in countries with mixed board models (for instance, Denmark, France, Italy and Macedonia). The growing popularity and use of ‘lead directors’ on one-tier boards suggest that the observed trend may actually be part of a two-way convergence of board models. Fourth, given the exploratory nature and relatively limited number of study participants, a total of thirty board members were selected through convenience sampling, our empirical findings should be interpreted with care. Future research at a larger scale is necessary to confirm the observed developments.

Our study has shown that the role of the supervisory board chairman is undergoing significant changes in the Netherlands. The changing role expectations pose new challenges and provide new opportunities for managers and supervisory board members, shareholders, regulators and executive search firms. In particular, regulators are being confronted with shareholder and societal expectations that go beyond the legal possibilities that exist in the two-tier board model. And last but not least, supervisory board chairmen are facing the challenge to manage the increasing complexity and conflicting stakeholder expectations. The future will show how supervisory board chairmen will cope with these tensions and to what extent their role will converge to that of the “one tier board chairman”.