| Chapter 1: | Theoretical Review |
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not to increase firm performance per se but to have better access to information, and to increase a particular group’s involvement in the decision-making process of the firm. Second, even if firm performance is an indirect objective, it is likely to have multiple definitions due to the heterogeneity of shareholder risk and time horizon preferences. An institutional investor with a “green agenda” (a commitment to greater social responsibility) may measure firm performance differently than a large pension fund looking for a maximization of financial returns. Institutional investors, furthermore, depending on the time horizon for their investments, have different definitions and criteria for measuring performance.
Under the agency theory, the separation between corporate ownership and control results in delegation of the latter to a small group within the company. The emergence of proactive institutional investors does not challenge the premises of this theory but it could affect the composition of the board. In this context, the board serves the interests of the shareholders through monitoring, and institutional investors may influence the selection process of directors who support their corporate objectives. For instance, institutional investors frequently impose directors with management and governance expertise onto the boards of start-ups. They also appoint directors on the boards of mature organizations to monitor the performance of those organizations in which their institutions have a substantial stake. In this respect, the control exercised by owners has become more effective than in Berle and Means’ context of the 1930s.
1.3. Placing the Board Within
the Organizational Context
Having reviewed the board’s functions and discussed trends regarding its composition, it is now essential to place the board within its organizational context, since the link between the board and the environment of the firm forms an important basis for understanding changes in board composition.