Corporate Governance & Organization Life Cycle: The Changing Role ...

system for monitoring executive behavior. From an operational point of view, and because of its central role, the “richness of board information” is essential. It can be measured broadly in terms of “characteristics such as frequency of board meetings, number of board subcommittees, number of long tenured board members, number of board members with managerial and industry experience, and number of board members representing specific ownership groups” (p. 65).

For Eisenhardt, the trade-off between (1) the cost of measuring behavior and (2) the cost of measuring outcomes and transferring risk to the agent constitutes the heart of the principal-agent theory. As a result, a board’s role centers on its monitoring function, mainly for the benefit of shareholder interests. Zahra and Pearce (1989), while also noting the importance of the monitoring function in agency theory, added emphasis to the strategy-advising function of the board in agency theory, notably for major strategies such as those involving acquisitions, mergers, or divestitures of operating units. Recent studies have gone one step further. While acknowledging the contribution of agency theory to the field of governance, they have posited that, even with regard to the monitoring function, there is scant evidence that a more independent board leads to better governance or a more effective defense of the shareholders’ long-term interests (Daily, Dalton, & Cannella, 2003; Deutsch, 2005).

In sum, agency theory is a starting point for the analysis of this study. It describes the rationale underlying the relationships among three key stakeholders of the corporation: shareholders, top management, and the board. These relationships have implications with regard to the board’s role and its composition. For instance, to properly monitor the management team, a director may need a minimum knowledge of the industry. Alternatively, an organization entering a new industry may wish to add a director knowledgeable about this industry to provide advice on strategic planning and to monitor progress made during the implementation phase. The main emphasis of agency theory is on the economic and legal aspects of the relationship between shareholder-owners (as principals) and managers (as agents) in the operation of the firm, with governance handled via the board’s monitoring of the managers on behalf of