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

are the key to monitoring effectiveness; aligning the board’s incentives with those of shareholders will create better monitoring of management. The agency theory focus on incentives, however, overlooks the board’s ability to monitor, advise, and interface. Here, the resource dependence perspective points to the ability of external board members to bring their own human capital, skills, experience, expertise, knowledge, and contacts to help effectively monitor the CEO, evaluate strategy implementation, plan succession, and rewarding top management (Hillman & Dalziel, 2003; Westphal & Fredrickson, 2001).

On the other hand, Mizruchi and Stearns (1994) focused on the impact of board composition on the level of borrowing as one form of resource dependence. These authors posited that when a firm’s board of directors contains either a financial institution representative, or a CEO with a finance background, these are indications of a level of borrowing. The authors found that one of the strongest predictors of a company’s financial leverage was having representatives from these institutions on the firm’s board.

For resource dependence theorists, the role of the board is critical to interface with the environment and secure needed resources for the organization. In that context, well-known board members also enhance the reputation of the organization. This, in turn, could affect the composition of the board as selection is influenced by the ability of potential board members to secure needed resources and provide the legitimacy necessary to the survival of the organization.

1.3.2. Institutional Theory

Institutional theory examines how structures, practices, routines, and norms become legitimized as accepted patterns for the functioning of organizations, both within the organization and externally in the environment in which it is operating (Scott, 2005). Compared to resource dependence theorists, institutional theorists place greater emphasis on the analysis of the internal environment and the organization’s internal processes. In this context, an organization’s internal structures enhance its legitimacy if they fit the pattern developed by other organizations