Regulated change effects on boards of directors: a look at agency theory and resource dependency theory.

Bryant, Phil ; Davis, Charlotte

INTRODUCTION

Organizational theorists have examined the role of corporate boards of directors (BODs) from many different perspectives. Two major theoretical perspectives that provide insight into the role and structure of BODs are agency theory and resource dependency theory (Hillman, Cannella and Paetzold, 2000). In addition to academic attention, BODs have received much attention from the popular press as well. The most recent proliferation of attention paid to BODs is largely due to the Sarbanes-Oxley Act and the instigating events that led to its passage in 2002. The Sarbanes-Oxley Act of 2002, among other requirements, mandates strict controls by and of corporate boards of directors. Sarbanes-Oxley was passed in reaction to a series of corporate scandals of the late 1990s and early 2000s including at Enron, Tyco International, and WorldCom. Because of the impact of the Sarbanes-Oxley Act of 2002 on BODs, many questions have arisen in regards to the roles, responsibilities, accountabilities, and structures of BODs. Is the role of the BOD primarily administrative oversight and control, or is it primarily boundary spanning and environment linking? How can the BOD best be held accountable for the actions of the corporation? Are there corporate stakeholders outside of the shareholders to whom the BOD is also to be held accountable? What proportion of the BOD should be comprised of insiders and what proportion should be outsiders? Is the insider / outsider taxonomy the best way to categorize board members?

Although one of the most recent and salient, the Sarbanes-Oxley Act of 2002 is not the first government mandated regulation that requires major changes to be made by BODs. The 1978 deregulation of the United States Airline Industry and the 1980 deregulation of Savings and Loans associations followed by the subsequent Financial Institutions Reform, Recovery & Enforcement Act of 1989 are two additional examples of times that regulatory actions by the United States government caused major changes to be made by BODs. A third example of governmental actions requiring changes to be made by BODs is the Canadian government's 1983 amateur sports "Best Ever" program. It required radical changes of the volunteer BODs of Canada's National Sport Organizations (NSOs) (Amis, Slack, and Hinings, 2004a).

The intent of this paper is to consider the tenets of agency theory and resource dependency theory as they relate to the responses made by BODs in the face of major government regulated changes. In the remainder of this paper, we will first highlight the generally accepted major roles and responsibilities of BODs. This will provide a solid framework from which to examine the theoretical perspectives of agency and resource dependency regarding BODs. After highlighting the roles and responsibilities of BODs, we will then examine agency theory and resource dependency and their relation to BODs. Next, we consider four historical examples--the Sarbanes-Oxley Act of 2002, the 1978 deregulation of the United States airlines industry, the changes in Savings and Loans regulations of the 1980s, and Canada's Best Ever amateur sports initiative of 1983--as the contexts in which we will examine some historical responses of BODs to these government regulated changes. We conclude the paper with recommendations for the direction of further study.

ROLES, RESPONSIBILITIES & STRUCTURE OF CORPORATE BOARDS OF DIRECTORS

Pfeffer and Salancik (1978) divided the role of BODs into administrative and environmental linking responsibilities. Pfeffer and Salancik identified two areas of administrative duties: providing expert advice and counsel to the firm's management, and exercising monitoring responsibilities such as oversight and control over the firm's executive management team. The environmental linking responsibilities include providing access to information and other resources (Pfeffer & Salancik, 1978) and enhancing perceived legitimacy (Meyer & Rowan, 1977) of the organization. Inside board members, those who are currently, or were previously, employed by the organization (Pfeffer, 1972), generally serve the advice and counsel function while the oversight and control functions are generally served by outside board members (Baysinger & Butler, 1985). However, Daily and Dalton (1994) have shown that outside directors can also provide expert advice and counsel, especially in regards to boundary spanning and environmental linking issues such as the regulatory or competitive environment. Westphal (1999) has shown that both inside and outside directors can play several roles simultaneously and there are advantages to having a board structure with a mix of both insiders and outsiders. This insider / outsider taxonomy of BODs is the most widely used both in and out of academia and is influenced heavily by the agency theory perspective (Hillman, Cannella and Paetzold, 2000). A different taxonomy that disaggregates the outside director category (Hillman, Cannella and Paetzold, 2000) will also be considered.

THEORETICAL PERSPECTIVE--AGENCY THEORY

As previously indicated, agency theory has played a major part in studies of BODs (Hillman, Cannella and Paetzold, 2000). The agency theory approach looks at intraorganizational processes from an economic perspective. The genesis of agency theory is often attributed to Jensen and Meckling's 1976, "Theory of the firm." Agency theory generally refers to the various ways that agents of a firm can influence the economic outcomes and "behaviors" of the firm (Fama & Jensen, 1983).

Agency theory broadly states, given that agents of an organization are responsible for conducting business in the interest of the organization, and given that an agent's own self interests will never align completely with the interests of the organization, agents of an organization will sometimes experience conflicts of interest when conducting business on behalf of the organization. Given also that people can be expected to act on behalf of their own self-interests when those interests conflict with that of another entity, and given that agents will sometimes experience conflicts of interests while conducting business on behalf of the organization, agents are more likely to act in the interests of the organization when their own interests are aligned with those of the organization or when their behavior is monitored or controlled against self-interested behavior. Thus, according to normative agency theory, corporations should either increase incentive structures that align the interests of owners and managers (Fama & Jensen, 1983) or increase monitoring, control and oversight of managers by owner principal delegates (e.g. BODs). In fact, Westphal (1999) found that "management incentives decrease the need for board monitoring as a control mechanism." In this respect, agency theory views the administrative function of monitoring and controlling top executive decisions and actions as the primary function of the BOD.

Agency theory is a powerful tool in understanding and prescribing the compensation structures of top executives and the structures and actions of BODs. Additionally, agency theory has proven to be a popular theoretical framework from which to investigate the role of BODs. Agency theory holds implicit several assumptions about human motivation and the goals of corporate ownership which deserve a closer look: 1) wealth maximization is the top priority for corporate owners; 2) the BOD is an appropriate owner principle delegate; 3) management and board actions and interactions are primarily outcomes of economic forces; and 4) the BOD acts as a single unitary actor (Zajac & Westphal, 2002). Of course there are other assumptions of agency theory, for example, that management interests will conflict with owners' interests. The ones assumptions listed above and discussed below, however, are important to examine to highlight the fact that, although agency theory is an important and useful theory, there are other organizational theories (such as resource dependency theory) that are just as important and useful in understanding the roles and responsibilities of BODs.

The first assumption of agency theory listed above, that wealth maximization is the primary goal of corporate owners, can be seen in the normative agency theoretical framework that often prescribes long-term, financial-outcome based incentives such as stock ownership, performance based stock options, or stock appreciation rights for senior executives. The logic behind these prescriptions is to ensure that management's self interests will be aligned with the principal owners' interests. This is expected to be the case if they share the same financial goals and incentives. Fiss and Zajac (2004), however, found that infusing shareholder wealth maximization goals into firms in Germany led to short-term acceptance of the wealth maximization goals and then subsequent adoption of additional, non-wealth maximization-related goals. A generalization of this phenomenon might lead agency theorists to consider interest alignment mechanisms beyond the traditional wealth maximization mechanisms primarily prescribed by normative agency theory.

The agency theory assumption that the BOD is the most appropriate owner principal delegate is interesting to consider. Agency theory generally states that the agency costs associated with managerial conflicts of interest are held in check by the BOD. The BOD, however, is only a delegate group of the stock owner corporate principals as a whole. For most publicly held and traded corporations, the amount of share ownership held by the BOD represents only a fractional proportion of all shares outstanding. It is worth considering that, as a group, the BOD may experience just as much conflict of interest as do the managers they are to hold in check. To mitigate this possibility, agency theory generally advocates that BODs have a large proportion of outside, independent members. But, as Westphal points out, the active role in board member nomination that is often played by CEOs can "render boards passive" and submissive to the power of the CEO (1999).

Inside board members are those who are currently, or were previously, employed by the organization (Pfeffer, 1972). In contrast, outside directors are not corporate insiders. Additionally, independent directors are those outside directors that are not tied to the corporation through some contractual business arrangement or inter-firm board interlock situation. Whereas agency theory generally views outside, independent board members as better to control and monitor managers' decision-making and behavior, we will see later that from a resource dependency perspective, inside directors and outside inter-dependent directors can also play a positive role in the structure of BODs(Westphal, 1999).

The agency theory assumption that management and board actions and interactions are primarily outcomes of economic forces is closely related to the wealth maximization assumption. However, beyond assuming the adequacy of aligning managerial financial incentives with the financial incentives of owner principals, as does the wealth maximization assumption, this assumption also often ignores the social and political aspects of manager and board member relations. Westphal (1999) has shown, however, that board member and CEO friendly relationships often play an important role in non-control and monitoring functions of the BOD without sacrificing the functions of controlling and monitoring. Specifically, Westphal (1999) found that the collaborative advice and counsel function of the BOD is increased with increased CEO and board member friendships, while the controlling and monitoring activities of the same relatively friendly boards are no less than in less friendly boards. They also found that firm performance was not diminished for corporations with boards with high levels of CEO board member friendships when compared with those corporations with lower levels of CEO board member friendships. For the most part, agency theory largely ignores these social aspects of BODs.

The fourth and final assumption of agency theory applied to BODs listed above is that the BOD acts as a single unitary actor (Zajac & Westphal, 2002). Although agency theory generally treats BODs as though they act as one individual actor, BODs are affected by social, psychological, and political processes that are inherent in all small groups. The monitoring and controlling intentions of one board member may differ from those of other board members and the resultant monitoring and controlling actions of the BOD as a whole are products not only of combined individual intentions but of social and political small group processes as well. In a rare study of intra-board processes, Westphal and Milton (2000) examined demographic minorities in BODs and found that their level of influence within the BOD is related to their prior experience as board members on other boards as well as their social relationships with other board members on the focal board. This provides even further evidence that, although an important and very useful theory regarding the roles and responsibilities of BODs, traditional agency theory, with its highly economic focus, does not offer a complete explanation of BOD related phenomena.

Having looked at some of the implicit assumptions of agency theory, and some of the limitations of these assumptions, it remains important to understand that, in most applications, the explanatory and predictive power of agency theory in regards to BODs remains firmly intact. What then might agency theory explain or predict in regards to BODs in the face of government regulations requiring changes of or by BODs?

It would be expected, at least in the short-term, in the face of government regulations requiring organizational change, such as the Sarbanes-Oxley act of 2002, that making moves toward compliance with regulations is the best approach to protect shareholder wealth. If the organization were to refuse to comply or was slow in complying with the regulation, the government could impose costly financial fines on the organization. Once the BOD has made movements toward compliance, or enacted full compliance, they may then be expected to assess whether compliance makes long-term financial sense for the corporation. If the BOD decides that full and actual compliance is not in the long-term best financial interest of the organization, then the BOD might be expected to act in one of the following ways: 1) continue with surface level compliance but decouple every day administration from compliance (Meyer & Rowan, 1977), 2) continue with compliance but take actions in an attempt to change the new regulations (Child. 1972), or 3) retreat from compliance with a willingness to take the smaller financial risks associated with noncompliance. Traditional agency theory alone, with its emphasis on economic processes and shareholder wealth maximization, would not predict in this case that the BOD would choose to passively continue in compliance if the long term economic effect on the organization could be foreseen as negative. Additionally, structural changes in the BOD would not necessarily be predicted by traditional agency theory alone in this case.

THEORETICAL PERSPECTIVE--RESOURCE DEPENDENCY THEORY

Whereas the administrative functions of the BOD can best be examined through the lenses of agency theory, the environmental linking functions of the BOD are best examined through the lens of resource dependency theory. Recall that the administrative functions of the BOD include providing expert advice and counsel to the firm's executive management and exercising monitoring responsibilities such as oversight and control over the firm's executive management (Pfeffer and Salincik, 1978). Recall also that the environmental linking responsibilities of the BOD include providing access to information and other resources and enhancing perceived legitimacy (Meyer & Rowan, 1977) of the organization.

Resource dependency theory states that organizations act in ways associated with their level of dependence upon various resources (Pfeffer & Salancik, 1978). Organizations act upon their environments in attempts to reduce dependency on certain resources and to maintain independence over other resources. Organizational power, from this perspective, arises from the ability to cope with uncertainty and minimize uncertainty for other organizations, the control over scarce resources, and the substitutability of the controlled resources (Pfeffer & Salncik, 1978). From this perspective then, the BOD can serve as a resource dependence reducing body for the organization. A BOD that can collectively bring to the executive management team environmental linking relationships, knowledge, or information that reduces uncertainty has power and adds power to the organization. BODs with collective access to scarce resources such as financing also add power to the organization. This power that the BOD brings to the firm is increased when the resources they bring to the firm are not easily substituted by other alternative resources. An example of this would be a board member's relationship with a unique client or supplier that would be difficult or even costly to replace.

The resource dependency view of the BOD dates back to Selznick (1949) and his historical research on the Tennessee Valley Authority. What Selznick found was that when faced with strong opposition, the Tennessee Valley Authority would include members of the opposition on its governing board. This strategy, termed cooptation, was a way to minimize external uncertainty by exercising some level of control over the source of uncertainty. This is an early example of an organization utilizing its BOD as a resource procuring body that can be used to gain an advantage within its environment.

Inspired by Selznick's (1949) Tennessee Valley Association research, Pfeffer's (1972) article, "Size and Composition of Corporate Boards of Directors: The Organization and its Environment," examined further the idea of the BOD as an environmental linking body. Pfeffer hypothesized that if BODs act as environmental linking bodies, then when an organization is faced with greater external resource dependencies it will maintain a larger BOD with a greater proportion of outside directors. He found support for positive correlations between number of directors and corporate resource dependencies related to sales and finance. He also found support for positive correlations between the proportion of outside directors and corporate resource dependencies related to finance and regulation. He interpreted these results to indicate that firms' BODs are structured in relation to the firm's external resource dependencies. In the same study, Pfeffer found that when the structure of BODs was different than the normative structure that he had observed for a given level of external resource dependence, corporate financial performance declined proportionately to the amount of the misalignment from the normative board structure (1972).

Hillman, Cannella and Paetzold (2000) noted that most other research regarding the structure of BODs has historically had an agency theory bias. Considering that an agency theory perspective is most appropriate for examining the administrative functions of the BOD, this perspective is adequate within this administrative function context. Within this framework, the typical BOD taxonomy makes a distinction between inside directors and outside directors as described above. In the spirit of Selznick (1949) and Pfeffer (1972), Hillman, Cannella and Paetzold (2000) offered a new kind of taxonomy for considering the resource dependency, environmental linking responsibilities of BODs. In their taxonomy, Hillman, Cannella and Paetzold (2000) retain the typical inside director category but disaggregate the outside directors into three distinct categories. Each director category in Hillman, Cannella and Paetzold's (2000) taxonomy serves a distinct resource dependency minimizing purpose. They hypothesized that inside directors play the role of meeting the internal resource dependency needs of the organization. As current or former officers of the firm, inside directors are able to provide knowledge and expertise regarding the strategy and day to day management needs of the firm. Outside directors are disaggregated into business experts, support specialists, and community influentials by Hillman, Cannella and Paetzold. Business experts, such as current or former officers or directors of other organizations, can provide for the strategy and competitive resource needs of the firm. Support specialists, such as attorneys, bankers, or accountants, can provide for the technical expertise or relationship resource needs of the firm that are directly related to their areas of specialty. Community influentials, such as politicians, clergy members, and university professors, can provide for the resource dependence needs of the organization that are related to non-stockholder stakeholders of the firm. All categories of outside directors, according to Hillman, Cannella, and Paetzold, may also provide for the legitimacy needs of the firm (2000).

Hillman, Cannella, and Paetzold (2000) found support for each of their hypotheses. In doing so, they provided further evidence of the resource dependency theory's relevance to BODs.

So what might resource dependency theory predict about BODs facing radical governmental regulatory change? Certain board actions and board structure configurations might be predicted. First, a BOD that is efficiently performing its resource dependency roles might be able to anticipate the change before it occurs. In this case, the board might be expected to take action in regards to the regulation even before it goes into effect. Early proactive steps might include an attempt to either stop the legislation from occurring (if it is seen as negative to the corporation), assist in pushing the legislation through (if it is seen as positive to the corporation), or modify the legislation to the advantage of the firm before it is passed. Once the legislation is passed and in effect, a resource dependence efficient BOD can be expected to be very active in providing advice and opening doors to the executive management team in regards to complying with the new legislation. In addition to these proposed actions of the BOD, the BOD structure could also be expected to change. As Pfeffer (1972) and Hillman, Cannella, and Paetzold (2000) found, a resource dependence efficient BOD would be expected to modify its structure by adding additional outside directors in the categories of business experts, support specialists, or community influentials as the new resource dependencies may require.

We have reviewed much of the literature pertaining to agency theory and resource dependency theory. We have proposed some BOD actions and structural changes in the face of radical governmental regulations that might affect the Board, and what these two theories might predict in the case of these changes. We now turn to a brief examination of four historical events in which governmental regulations required radical changes to be made by BODs. For each of the historical events--the Sarbanes-Oxley Act of 2002, the 1978 deregulation of the United States airline industry, the 1982-1989 regulations of Savings and Loans, and Canada's 1984 Best Ever amateur sports initiative--we will describe the pertinent regulation(s), responses made by BODs, and then discuss how these responses adhere to or stray from the predictions made by agency theory and resource dependency theory.

SARBANES-OXLEY ACT OF 2002, CHANGE, & BOARDS OF DIRECTORS

The Sarbanes-Oxley Act of 2002 (SOX) was passed in the wake of a series of corporate scandals of the late 1990s and early 2000s including those at Enron, Tyco International, and WorldCom. Due to these corporate scandals and the proliferation of corporate bankruptcies and financial restatements by publicly held and traded United States corporations, Senators Paul Sarbanes (D-Md.) and Michael Oxley (R-Ohio) led a campaign for legislative reform of corporate governance. The ensuing legislation came to be known as SOX. The two most daunting requirements of SOX are found in Sections 302 and 404. In short, Section 302 requires independent auditors to certify financial statements, while Section 404 requires executive management to report annually on the effectiveness of internal controls. Because the act authorizes heavy fines and imprisonment of executive officers for noncompliance, publicly held and traded U.S. firms have taken the act very seriously, and compliance has not been easy. "The first full year of compliance was one of hand-wringing and pulling one's hair out as a result of unclear and sometimes conflicting requirements (Zabrosky, 2005)." Compliance with SOX has proven to be costly. Estimated total compliance costs for all of U.S. firms during 2005 range from $6.1 billion (Bulkeley & Forelle, 2005) to $15.5 billion (Hoffman, 2005).

How have U.S. corporations responded to SOX, with its steep compliance costs and heavy noncompliance fines and repercussions? With the amount of money spent on compliance, it appears that companies have rushed to comply. We are unaware of any truly scientific empirical studies that have determined whether or not compliance has been decoupled from day to day management of firms. Indeed, measuring this would prove to be difficult, for who would admit that their company's compliance with the act is only surface-level? Jeff Rodek (2004), CEO and Chairman of the BOD at Hyperion Solutions, stated that, "Many [CEOs] spoke of compliance as something that happens separately from and takes away from running a sound and profitable business." It appears as though, at least in some cases, decoupling SOX compliance from the true day to day actions of the company has occurred. Other organizations appear to be taking true compliance with SOX more seriously. Again, Jeffrey Rodek (2004) states, "The idea that compliance and performance are linked is very much in the spirit of Sarbanes-Oxley. There is a good business case for beefing up compliance and governance." At least at Hyperion Solutions, compliance appears to be taken seriously.

One interesting effect of SOX is how it has encouraged some BODs to pursue new business strategies. Many of Inc. Magazine's 500 fastest growing private companies of 2005 were buoyed by pursuing SOX compliance related strategies:

"Just when we had gotten the hang of always referring to a certain piece of legislation as 'the accursed Sarbanes-Oxley,' the Inc. 500 comes along and tells us this: Some companies are thriving by helping business adjust to and unhappily comply with SOX... SOX requirements are giving a boost to defense contractors, IT companies, and developers of security software" (Roberts, 2005).

Another interesting side effect of SOX is that the role of Chief Financial Officer (CFO) is playing a much greater role in corporations. "If the CFO had not been one of the key players in board activities before Sarbanes-Oxley, he or she certainly has come to the forefront now (Zabrosky, 2005)." BODs are spending more time and resources listening to the CFO than they did before SOX. CFOs are not only receiving more attention in the corporate board room, they are also receiving additional compensation for their more prominent roles. Whereas the median CEO compensation rose 4% during the first full year of SOX, the median CFO compensation has increased by 17% over the same time period (Thurm & Needleman 2005).

As has been shown, many resources have been diverted toward compliance with SOX and many BODs have made strategy changes related to its requirements. Both agency theory and resource dependency theory apply to what has been seen in BODs in response to SOX. Agency theory applies because it is exactly the problem of agency costs and conflicts of management and shareholder interests that SOX is directly intended to combat. Resource dependency theory is seen at work in that BODs have taken steps to reduce environmental uncertainty and have procured and devoted resources toward efforts at compliance with the Act's requirements.

1978 DEREGULATION OF THE AIRLINE INDUSTRY, CHANGE, & BOARDS OF DIRECTORS

Whereas SOX is a case of increased regulation, Hillman, Cannella, and Paetzold (2000) studied a case of deregulation and its effects on BODs. Prior to 1978, the U. S. airlines industry was heavily regulated. Hillman and her colleagues hypothesized that airline BODs during the regulated time period (before 1978) would be structured differently than after deregulation (after 1978). According to Hillman and her colleagues, resource dependency theory predicted that inside directors would be more pertinent during eras of regulation and conversely, that outside directors would be more pertinent during eras of deregulation. This hypothesis was based on the source of uncertainty. Under regulation, the external environment is quite stable and relatively certain. Uncertainty then was expected to emerge mostly from within the organization. The opposite was expected to be true during deregulation. Uncertainty was seen as most likely occurring from the external environment than the internal environment. Therefore, Hillman and her colleagues (2000) predicted that as more internal resources were necessary during regulation, then more inside directors would replace outside directors during this time period. Alternatively, as more outside resources were needed during deregulation, then during this period, more outside directors would replace inside directors.

Recall that Hillman and her colleagues (2000) disaggregated outside directors into three distinct categories, business experts, support specialists, and community influentials. They relied on further assumptions under resource dependency theory to make more fine grained hypotheses regarding the different categories of outside directors. Specifically, they hypothesized that general business experts would be more necessary during times of deregulation than times of regulation and that, therefore, more business experts would join BODs after deregulation than before deregulation. They also hypothesized that support specialists, being more oriented toward the internal environment of the firm than the other categories of outside directors, would replace existing directors more often during regulation than deregulation. Finally they hypothesized that community influentials, being the most externally focused of all director categories, would be added to BODs more often during times of deregulation than times of regulation.

All of Hillman, Cannella, and Paetzold's (2000) hypotheses were supported by the data. This influential study provided evidence that resource dependency applies to BODs at least as much as agency theory. It also showed that the typical agency theory influenced taxonomy of BODs as insiders or outsiders may not be sufficient when considering the resource dependencies of the firm. The new taxonomy offered by Hillman and her colleagues (insiders, business experts, support specialists, and community influentials) was found to possibly be a better way of delimiting the director categories when studying resource dependency forces playing on the firm. Finally, Hillman and her colleagues added even more evidence to that already provided by Selznick (1949) and Pfeffer (1972) that BODs act upon the resource dependency needs of the firm within its environment.

1980-1989 REGULATIONS OF SAVINGS & LOANS, CHANGE, & BOARDS OF DIRECTORS

The time period from 1980 to 1989 was a turbulent one for Savings and Loan (S&L) institutions in the U.S. This time period was marked by massive deregulation, followed by what is known commonly today as the S&L Crisis marked by an increasing number of failures within the S&L industry, and finally increased regulatory attempts to curb financial losses and put the S&L Crisis to an end. Before 1980, the S&L industry was highly regulated, and conservatively managed. During that time period, the traditional business model of S&Ls consisted of providing moderate interest housing mortgage loans funded by low interest deposit offerings. As long as the housing mortgage loans earned a modestly higher interest rate than the rates they paid out on deposits, and as long as the deposits were, in aggregate, large enough to fund the housing mortgage loans, S&L institutions were profitable. The industry was marked by governmental regulation that protected S&L institutions from competition with other financial institutions such as banks as well as competition from other S&Ls across geographic regions (Warf & Cox, 1996).

By the 1980s, the federal government began taking a decidedly more laissez-faire approach to businesses. In 1980, the Depository Institutions Deregulation and Monetary Control Act was passed. In 1982 the Garn-St. Germain Act was passed, and during the same time period, the Federal S&L Insurance Corporation (FSLIC) began covering deposits of up to $100,000, substantially greater than the previously covered maximum of $40,000 (Warf & Cox, 1996). Additionally, the previous rule restricting S&Ls from serving customers outside a 100 mile radius of their corporate offices was repealed. According to Warf and Cox, "Deregulation and increased FSLIC coverage, in short, created a virtually risk-free climate in which the benefits of investments would be privatized and the costs would be socialized (1996)." Unfortunately, the S&L institutions were not prepared for the new competitive environment. This fact, coupled with other environmental factors led to the S&L Crisis (Warf & Cox, 1996).

The other environmental factors in the mix of the S&L Crisis included skyrocketing interest rates and heavy speculation in commercial real estate investments. With rising interest rates and increased competition S&Ls found that they were beginning to pay greater interest on deposits than their fixed mortgages were returning. As an industry, S&Ls ventured into the higher yield commercial real estate mortgages. However, speculation on commercial real estate began to slow and S&Ls found themselves in need of alternative, high yielding investments. Many S&Ls turned to junk bonds. Many of the junk bonds (especially those tied to commercial real estate and oil speculation) began to fail, and with them so did many of the S&L institutions. During the time period 1985 to 1993, a total of 974 (4.1%) failed in the U.S. The debts left by the failed S&L institutions were so great (approximately $1 trillion) the FSLIC could not bail them out and subsequently went bankrupt in 1989 (Warf & Cox, 1996).

In response to the S&L Crisis, the federal government passed the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA). The goals of FIRREA included: 1) improve supervision over savings institutions, 2) limit the use of junk bonds by savings institutions, 3) improve and standardize the accounting practices of savings institutions, and 4) create the Savings Association Insurance Fund (SAIC) (Madura & Wiley, 2000). At the time, the FIRREA was considered the most far reaching legislation over financial institutions since the Great Depression.

The above may give some indication as to why 4.1% of all S&Ls failed between 1985 and 1993. But what about those S&Ls that were able to survive the turbulent time of deregulation and subsequent strict regulation? The answer may be partially explained by the structure of the BOD. Scott Lee conducted a study of the BODs of 86 S&L institutions (Gerbig, 2002). Twenty-six failed during 1983 to 1995 and the remainder survived through 1995. What Lee found was that those that survived generally had more independent board members than affiliated board members. The opposite was true for those S&Ls that failed. Lee attributes these findings to: 1) independent, outside directors being better able to defend the interests of shareholders than insiders, and 2) insider directors doing a poor job of providing wise counsel during the time of crisis and volatility (Gerbig, 2002). These findings and interpretations support both agency theory and resource dependency theory.

CANADA'S 1983 BEST EVER SPORTS INITIATIVE, CHANGE, & BOARDS OF DIRECTORS

In an attempt to improve Olympic performance, Canada initiated its Best Ever program in 1983. The goal of the program was to win more international sporting events and progress was measured by the number of Olympic medal wins (Amis, Slack, & Hinings, 2002). The path to the goal required that all of Canada's national sport organizations (NSOs) undergo radical structural changes. Before the Best Ever initiative, the traditional NSO design was an informal organization led and actively managed by volunteers assisted by a professional support staff. The new organizational structure mandated by the Best Ever program was to be bureaucratic. Day to day management was to be carried out by a large staff of paid professionals and the volunteer directors were to take a much less active role in management and concentrate mainly on setting policy. Under the new structure, decision making was to be accomplished by the paid professionals (Amis, Slack, & Hinings, 2004b). By 1996 much of the emphasis on Olympic performance by the Canadian government had waned in the wake of evidence of widespread use of illegal performance enhancing drugs. The pressure to conform to the prescribed archetypal organization structure had diminished, and so had most of the governmental funding of the NSOs (Amis, Slack, & Hinings, 2004b). Although the NSOs were not for profit corporations and their BODs were comprised of volunteers, their BODs were still affected by government regulations.

Amis, Slack, and Hinings found several variables that played roles throughout the orchestrated change process (2002, 2004a, & 2004b). Of interest here, they found that: 1) values, 2) interests, 3) power structure, 4) capacity for change, and 5) sequence of change each play their own role in radical regulatory mandated change. In regards to values and change, they found that "a radical transformation will not be possible in an organization with an elite value structure inconsistent with the prescribed change," and "a radical transformation will only be possible if the dominant value set held by nonelite organization members is consistent with the prescribed changes" (Amis, Slack, and Hinings, 2002). In other words, for real radical change to occur, both the elite (BOD and senior executives) as well as the dominant nonelite must be on board with the values behind the prescribed change. In regards to interests, they found that the BODs of the NSOs that successfully completed the required changes considered the interests of the organization and its subunits throughout the change process (Amis, Slack, and Hinings, 2004b). In regards to power structure, they found that in the NSOs that did not successfully complete the required changes the concentration of power remained with the BODs throughout the change process. In regards to change capacity, they found that the NSOs that were able to successfully make the required changes had leadership who could articulate a clear vision, whereas those NSOs that failed in the change attempt lacked a clear vision from leadership (2004b). Finally, in regards to sequence, they found that successful change began in the "high-impact organizational elements (2004a)." By way of generalizing their findings, BODs should: 1) maintain values consistent with the direction of the organization, 2) consider the interests of all stakeholders, 3) be willing to share power when necessary, 4) be able to clearly articulate the vision for the organization, and 5) be willing to make the necessary changes within their own governing body before attempting to roll the change out to the entire organization. Both agency theory (as seen in the importance of interests) and resource dependency theory (as seen in the importance of power) were found to be important in the changes made of the NSOs from 1984 to 1996.

CONCLUSION

We have looked at various predictions that agency theory and resource dependency theory would make regarding the structure and actions of BODs during times of government regulated change. We have also looked at four historical events of government mandated change and the recognized structural changes and actions made by BODs at the time. The predictions of both agency theory and resource dependency theory were largely supported by the historical actions of BODs reviewed herein.

REFERENCES

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Phil Bryant, Columbus State University

Charlotte Davis, University of Memphis