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Doctoral study locates the boundaries of decision-making power for public company boards

Vigorous delegation weakens the board's significance as a representative of shareholders.

Jari Melgin from Aalto University School of Business has completed a doctoral study which is internationally the first of its kind. The study systematically analyses the division of decision-making power in the management of public companies by using the decision-making principles published by company boards. The study is based on extensive data from across Europe.

'Company boards have an interesting self-regulating role: they themselves decide on the rules which determine how much power they keep for themselves and how much they delegate to the management. Around half of the companies studied make publicly available at least the essential aspects of the power-sharing arrangements, but Finland is one of the countries where such public information is still rare', Mr Melgin points out.

Jari Melgin's research indicates that European company boards conceive of their role in a wide variety of different ways. By setting a low threshold for essential decisions, the board in practice becomes an operational one, whereas in companies where decision-making power has been widely delegated to the management, the board's significance as a shareholder representative is small.

In Melgin's opinion it can also be asked whether, with increases in business size, current management structures even meet the necessary requirements for representing the business owners' desires, as it is difficult to identify which decisions are essential in very large companies. Because of this, it is possible for boards to become simply formal structures without any real decision-making power.

The research found that the average decision-making threshold point was only 0.6% of the company's market value. This provides a good point of comparison for boards when they consider the threshold for essential matters in their company. Information on a board's decision-making thresholds helps shareholders to assess their representatives actions. It would also be of advantage to Finnish companies if their boards would publish more details of which matters are their responsibility and which are delegated to the management.
 

The board – investor's representative?

Jari Melgin's doctoral dissertation also analyses the relationship between the board and investors in situations where the company is facing challenges with financing.

'The board is generally seen as a representative of the business owners, but in companies facing severe economic difficulties it can be observed that the board shifts from representing the owners to representing the investors. In situations where the owner's company share is very small in comparison to the investors' risk, boards seek to restrict the management's freedom of action to protect both the investors' interests as well as their own reputation.

Mr Melgin considers the relationship between board and owner from the perspective of Representation theory. The basic concepts involved are drawn from political theory with the central idea being that any organisation which has a large number of beneficiaries requires a representative body in order to function. This body directs and supervises the decision-making process on the beneficiaries behalf.
 

Public examination of the doctoral dissertation

The public examination of the doctoral dissertation of Jari Melgin (M. Sc (Econ) and M. Soc. Sc.), in the subject area of management accounting and entitled ”Representation, Materiality and Decision Control – Essays on the role of Board of Directors as an Intermediate Actor in Corporate Governance”, will take place in Aalto University School of Business on Friday 6 May 2016 at 12 pm.  Professor Morten Huse from BI Norwegian Business School will be acting as opponent, and the custodian will be Aalto University School of Business Vice Dean and Professor Seppo Ikäheimo.

Further information:

Jari Melgin
tel. +358 40 540 1779
[email protected]

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