Corporate GovernanceIndependent non-executive directors strategic role – some evidence from MalaysiaHairul Azlan Annuar

Article information:To cite this document:Hairul Azlan Annuar , (2014),"Independent non-executive directors strategic role – some evidence from Malaysia", CorporateGovernance, Vol. 14 Iss 3 pp. 339 - 351Permanent link to this document:http://dx.doi.org/10.1108/CG-10-2011-0075

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Independent non-executive directorsstrategic role – some evidence fromMalaysia

Hairul Azlan Annuar

Hairul Azlan Annuar is anAssistant Professor in theDepartment of Accounting,International IslamicUniversity Malaysia, KualaLumpur, Malaysia.

AbstractPurpose – The overall purpose of the research presented is to ascertain whether independentnon-executive directors (INEDs) in Malaysian publicly listed companies (PLCs) are involved incorporate strategy.Design/methodology/approach – A qualitative approach, consisting of a series of interviews withboard members, was chosen. The sampling frame was made as large as possible and, for the purposeof this study, consisted of board members who sit on PLCs of the main board and Malaysian-owned.Findings – The findings reveal that INEDs in Malaysia may display the same types of involvement in theformulation phase as their counterparts in UK, which McNulty and Pettigrew (1999) categorised astaking strategic decisions, shaping strategic decisions and shaping the context, conduct and contentof strategy. The findings also show that the three phases of strategy are linked and that INEDs’behaviour during evaluation may be moderated by the strategy’s success or failure and by theirinvolvement in the earlier phases.Research limitations/implications – This research utilised interviews. Generalisations may be anissue when interviews are used as the method of inquiry. Also, the sample is not random, as access tomany directors depended on recommendations. In addition, respondents were consciously selected toobtain various board positions that include independent and non-independent directors.Practical implications – Findings from this research suggest that the involvement of INEDs in differentphases of corporate strategy is an indication that INEDs are no longer focusing much on policing themanagement. Although control is still a major issue on the board agenda, their strategic involvementmay suggest that INEDs are adequately meeting their responsibilities of providing long-term direction totheir companies and also suggests that INEDs are in a position to support the Chair effectively. Theiractive involvement is likely to result in successful strategic formalization and conclusion.Originality/value – There is a lack of work on studying barriers to INEDs’ effectiveness in developingcountries, whereby previous work and literature review were predominantly based upon the experienceof Western economies.

Keywords Corporate governance, Independent directors

Paper type Research paper

1. Introduction

The board of directors is central to the understanding of the concept of corporategovernance (Zahra and Pearce, 1989). The power to govern a corporate rests firmly withthe board, and by acting on behalf of the shareholders, it ensures good governance isachieved (Pye and Camm, 2003). It has been argued, however, that a board should notconsist solely of inside executives. Research has shown that the presence of anindependent element in the form of non-executive directors (NEDs) on board hassignificantly benefited the board in performing its role. In addition to that, corporategovernance researchers have demonstrated that NEDs do perform other roles apart fromcontrol that has often been associated with them, and those include involvement incorporate strategy. Until now, however, research into the strategic role of NEDs has largelybeen based upon the scenarios of developed nations such as the USA, UK and Australia. Thispaper highlights the framework upon which the final analysis and results will add to the literature

Received 2 October 2011Revised 2 October 2011Accepted 24 August 2012

DOI 10.1108/CG-10-2011-0075 VOL. 14 NO. 3 2014, pp. 339-351, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 339

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through a report prepared from a perspective of a developing nation. It presents the literaturereview, methodology used and the findings of a study aimed at understanding the role,contribution and influence of independent non-executive directors (INEDs) within the strategicarena of Malaysian publicly listed companies (PLCs).

2. Malaysian code of corporate governance

In July 1997, the Malaysian economy started to be badly affected by the East Asian crisis.Apart from macroeconomic policies that were unstable and banking procedures that weresusceptible to fraudulent manoeuvres (see Krugman, 1998; Clarke, 2000; Ghazali, 2001;Narine, 2002; Suto, 2003), the ineffectiveness of the corporate governance systems waspartly blamed in causing the crisis to be widespread (Mitton, 2002). The ineffectivenesswas a consequence of several factors pertaining to market discipline such as highownership concentration, shareholder passivity and weak enforcement mechanisms(Haniffa and Hudaib, 2006). Despite some early warnings by virtue of corporate scandals,it was not taken seriously enough by all market participants (Clarke, 2000). As a responseto the crisis, the Malaysian code of corporate governance (MCCG) was introduced andincorporated into the listing requirements in 2001. The focus of the code is on monitoringand control of the board of directors especially by the INEDs, as well as by shareholders,most notably, the institutional investors. The MCCG recommendation largely applied theagency theory as the fundamental line of reasoning. The code was subsequently revised in2007 to further elucidate the importance of the board’s monitoring function and includesuggestions of more active participation of the board in corporate matters such ascorporate strategy.

3. Literature review

In developed countries such as the UK and the USA, NEDs have been urged through policyinitiatives and increased shareholders’ activism to be more active in the development ofcorporate strategy by activities such as influencing strategy-related decisions and advisingmanagement on achieving the corporate’s mission and objectives (Judge and Zeithaml,1992; Hung, 1998; Stiles, 2001; Hendry and Kiel, 2004). In the UK, for instance, policyinitiatives such as the Hampel and Higgs Reports have placed NEDs’ strategic role aheadof their monitoring role (Belcher, 2003). In Malaysia, the Finance Committee Report hadalso indicated the importance of the strategic role using the exact words of Hampels’,which states that “INEDs are normally appointed for their contribution to the developmentof corporate strategy” (Finance Committee on Corporate Governance, 1999, para 2.1.16).

Two oft-quoted early studies are by Mace (1971) and Lorsch and MacIver (1989). Usinginterviews with directors of US corporations, they find that NEDs get involved in strategicmatters only in times of crisis, lending support to the argument of board passivity. In a morerecent study, McNulty and Pettigrew (1999) reinforce this line of argument when theyanalyse the results of their interviews with part-time board members consisting of the Chairand INEDs of UK companies, where they find out that, apart from crisis, the only otheroccasions on which part-time members are also active is during times of corporatetransition and poor profitability. They also discover that the INEDs (p. 861), “[. . .] find itmuch easier to say no – to prevent things from happening, to express negative influence,than to initiate and determine positive influence”.

However, other recent research has provided contrasting results to the above finding,where it was shown that boards of directors are no longer as passive as they once were andare making themselves more involved in areas which were once the sole domain of theCEO and the management team. For instance, Pye (2001) who finds that the three areas ofstrategic focus, shareholder value and corporate governance are the main concerns of UKorganisations in the aftermath of corporate scandals and the consequent effort of improvingthe governance of organisations through the introduction of various committees over there.Daily et al. (2003) indicate that both executive directors (EDs) and INEDs concern

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themselves with the effectiveness of the firm’s strategy, because the firm’s performancedirectly impacts on their individual performance. In relation to this, Hill and Snell (1988),Baysinger et al. (1991) and Goodstein et al. (1994) note that board composition influencescompanies’ behaviour towards strategy. Baysinger and Hoskisson (1990) add that insideand outside directors complement each other in the strategic processes of the companies.In turn, Rindova (1999) emphasises that INEDs’ general expertise enables them to makeimportant contributions to strategy. Stiles (2001) added that EDs attain INEDs’ knowledgeeither formally during board meetings or informally outside meetings.

Judge and Zeithaml (1992) note that the board’s influence on the strategy process is seento be greater in the two phases of formulation and evaluation, leaving the third phase ofstrategy implementation in the hands of the management. According to Stiles (2001), in theformulation phase, board involvement ranged from directly working with management todevelop corporate strategy to merely ratifying management’s proposals, while in theevaluation phase, boards either probe management’s evaluation of resource allocation orsimply accept the evaluation provided by top management. O’Neal and Thomas (1995)point out that analysis of the board’s strategic role has focused entirely on the context ofoverseeing or ratifying strategy, largely ignoring the possibility of a more active role instrategy formulation. In response to that, in a study of part-time board members of UKcompanies, McNulty and Pettigrew (1999) establish that the part-time members are activeparticipants in the strategic formulation process. They demonstrate that there are threelevels of NEDs’ involvement, which they term as:

1. taking strategic decisions;

2. shaping strategic decisions; and

3. shaping the context, conduct and content of strategy.

The main contribution of the part-time board members, as well as the differences in thethree levels of involvement, refers to the nature of their influence on the formulation ofcorporate strategy. In “taking strategic decisions”, influence occurs at the end of thestrategic decision process, while in “shaping strategic decisions” and “shaping thecontent, conduct and content of strategy”, influence transpires at the early stage as well,with the latter elucidating a more in-depth influence. McNulty and Pettigrew (1999) andStiles (2001) found that strategic proposals prepared in accordance to the strategic visionand mission set by the board in the formulation phase are rarely rejected.

4. Methodology

The overall purpose of this study is to ascertain whether INEDs in Malaysian PLCs areinvolved in corporate strategy. After considering the aims of this study and how similarstudies were conducted before, a qualitative approach, consisting of a series of interviewswith board members, was chosen. This approach is also in line with the suggestion ofhaving a more qualitative type of studies in understanding how boards work (see, forexample Pettigrew, 1992; Tricker, 1994; Leblanc, 2004; Roberts et al., 2005). The samplingwas not done randomly, as it is not practical for this type of research design (Hill, 1995;McNulty and Pettigrew, 1999) because most access to board members is by way ofrecommendations and contacts. However, as with Stiles (2001), the sampling frame wasmade as large as possible and consists of board members of companies of the mainboard, as well as being Malaysian-owned. Structured interviews with the aid of an interviewschedule were used to collect data. Interviews were conducted with 27 directors of publiccompanies in Malaysia, over a period of 2 months. Nineteen of them were introducedthrough recommendations, while eight agreed to participate via solicitation letters written tothem. The directors responded from the combined experience of 358 years (simpleaverage of 13.3 years) as members on a total of 133 boards (86 current and 47 former).Twenty-three interviews were tape-recorded and transcribed, while notes were taken downfor the other four. The interviews lasted on the average of one and one-half hours (Table I).

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5. Strategic formulation

The literature has documented that outside directors are involved in the strategicformulation phase. Stiles (2001) states that their involvement ranges from directly workingwith management to develop corporate strategy to merely ratifying management’sproposals. A major study by McNulty and Pettigrew (1999) identifies that, in this phase, UKoutside directors’ involvement can be grouped into three categories, namely, takingstrategic decisions, shaping strategic decisions and shaping the context, conduct andcontent of strategy.

5.1 Define and shape strategic framework

Twenty-one (78 per cent) of the interviewees believed that the Malaysian INEDs definedand shaped the strategic framework of the corporate, together with the EDs on board.Those who did not agree said that the framework is set by the CEO, together with the EDsand other top management. Out of the six respondents who had disagreed, four were fromsmall companies while two came from medium- and large-sized companies, respectively.The findings, hence, are also supportive of the finding by McNulty and Pettigrew (1999).The INEDs’ involvement in setting the framework was mostly as a consequence of thechanges brought about in the overall thinking of the way companies are developingtheir strategic proposals, whereby they are no longer being dominated by insideexecutives. The interviewees indicated how more companies had recognised andappreciated the contribution that INEDs could make by involving them early on in theprocess. The interviews also disclosed that INEDs were constantly shaping the thinking

Table I Analysis showing background of directors who participated in the interview survey

Corporate Board position of interviewee (and title awarded) Experience in function as a directorNumber of

directorships

PLCs Directors Years Present PastC1 INED 15 4 1C2 CEO (Datuk) 35 1 1C3 CEO (Dato’) 30 3 5C4 INED 26 2 1C5 INED (Dato’ Seri) 12 9 –C6 INED (Tan Sri Datuk) 5 5 1C7 Independent Chairman (Tan Sri) 21 3 1C8 CEO (Dato’) 12 2 –C9 NED (Tan Sri) 12 2 1C10 INED (Dato’) 5 2 –C11 Executive Chairman (Dato’) 22 1 5C12 CEO 25 1 –C13 Independent Chairman (Dato’ Seri) 25 6 7C14 CEO 15 1 –C15 INED (Dato’) 16 4 3C16 CEO (Dato’) 12 6 3C17 ED 10 1 –C18 ED (Dato’) 9 1 –C19 CEO 19 1 4C20 NED 5 1 –C21 CEO 10 2 2C22 ED (Dato’) 7 1 1C23 ED 10 1 –C24 INED 11 2 3C25 INED 10 2 4C26 INED (Dato’) 5 6 –C27 INED (Dato’) 30 4 1Average 15.33 2.74 1.63

Note: Definition: CEO – chief executive officer; ED – executive director; INED – independent non-executive director; NED –non-executive director

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of executives in strategically managing the business. A CEO with a medium-sizedcorporate remarked:

When coming up with the vision and mission of the corporate, I can if I want to, to simply do itamong ourselves because I can bulldoze through our people. However, I prefer to test it with theINEDs and I use them as a sounding block. If they think that it is not good, they would explainwhy it is so. Their feedback is vital for the corporate because if they don’t understand it or don’tthink it is good, then my customers will also think the same way.

The INEDs are involved early on by participating in pre-annual plans and dialogues, whichinclude brainstorming sessions with senior management. Some of them could be membersof special committees dedicated to strategy such as strategic planning or risk committees,tasked with developing the corporate’s strategic direction. The interviews revealed that,either in the full board or in committees, INEDs would be the ones directing the tone ofdiscussion and debate and, from these discussions, management would pick up the finerpoints and refine them accordingly prior to making a proposal. Normally, after the strategicframework is shaped, it does not change very much and the INEDs are likely to be verymuch involved in maintaining the direction set, which would be in line with current businessconcepts and practices. At the very least, INEDs exerted their influence by promptingquestions on the strategic direction of the corporate. A CEO of a small corporate remarked:

Indirectly they do it in a very positive way through asking a lot of questions. Along the waymanagement may have committed to such a point of their thinking that these questions are veryvaluable in terms of the way we are heading.

Due to the Asian crisis and the emphasis given to corporate governance, companies arenow following a more focused strategy and related types of expansion rather thandiversification and unrelated methods, with the main objective being to enhanceshareholders’ value. The interviews disclosed that the INEDs ensure the strategy is rightand is related to the corporate’s core business. This finding is very consistent with Pye(2001), who finds that the three areas of strategic focus, shareholder value and corporategovernance are the main concerns of UK organisations in the aftermath of corporatescandals and the consequent effort of improving the governance of organisations throughthe introduction of various committees over there.

5.2 Directly help management to formulate strategy

Similar to the findings of McNulty and Pettigrew (1999), the interviewees agreed that INEDsrarely either initiate or directly help management to formulate the substantive content ofstrategy. The reasons behind this are that it is the responsibility of management to formulatestrategy and, because the INEDs are not with the companies all the time, the boardcollectively decides to delegate this authority to the CEO and management. A CEO of amedium-sized corporate stated the importance of delegating responsibility to the rightperson when he said:

It is critical for the board to not only help out in strategy but to pick the right CEO to do the job.In turn the job of the board to me is half done if they can get the right person to run theorganization.

The interview reports only two instances whereby INEDs had participated rigorously in theformulation of corporate strategy. One of the companies is large while the other is small,and examination of their annual reports showed that the companies were not profitable.This finding supported the finding of McNulty and Pettigrew (1999), who report in theirstudy that two of the INEDs in their sample were involved in firms experiencing crisis andpoor performance. An INED with the large corporate recalled:

In our business, cement uses a lot of limestone which we get from a quarry. Going forward wehave to start to plan for a new quarry for the next five or ten years. Because I have the

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experience in that particular field I sat down with the MD and helped him to plan on how it shouldbe done step by step.

The interviews disclosed that the strategic proposal is normally formulated during budgetperiods and is usually performed by a management committee headed by the CEO. For alarge corporate with various subsidiaries, members of the management committee wouldnormally consist of all the CEOs of the related companies.

5.3 Advice management in making proposals

Results of the interviews revealed that 44 per cent of directors interviewed believe thatmanagement do, in certain circumstances, consult the INEDs in the formulation ofproposals. For the most part, management is made up of professional and expert peoplewho are likely to be in the know with regards to trends, the processes involved and therequired technological development. Therefore, management might seek INEDs’ advicemostly regarding issues related to corporate governance. INEDs would be able to addvalue to the whole process by looking at the control aspects that companies need to havein place to strengthen them against any risks associated with the venture. INEDs may alsobe consulted on issues that do not occur often or in areas where INEDs have had previousexperience such as mergers and acquisitions. It is also thought that occasionally seekingthe advice of INEDs would be construed as a proper way to manage a board. A CEO witha medium-sized corporate remarked:

If the executives are not reactive but are proactive instead, the board as a whole would be ina more comfortable position. The INEDs like it if the executives would tell them things like thisis what we would like to be “playing” now and we would like to get your opinion about it. If theyare not proactive, the board will wonder if there is something wrong somewhere.

However, the interviewees, especially CEOs, stressed the importance of differentiatingbetween the acts of giving advice and giving out orders. The CEOs interviewed made surethat the INEDs do not cross the line in advising corporate personnel when a strategicproposal is being prepared. They believe that INEDs should be brought up to the boardlevel to make comments on any matter that, in their opinion, is not done in a proper way,rather than to try to initiate change immediately. A CEO with a large corporate remarked:

I always tell them that when they are consulted for advise, they would only give advice and notto direct. There is the possibility that their expertise may be outdated, we never know for sure,and that is why I need to remind them often. These include certain things that may be obviousand required only simple amendments, because there could be legal implications involved asa result of making even small adjustments to a process.

The interviews also disclosed that it is entirely the initiative of the EDs to seek advice whenmaking the strategic proposals and the INEDs do not commit themselves until theproposals are brought to the board for review. It appeared that, through their involvementin shaping the strategic framework of the corporate, INEDs would expect that the EDs andmanagement would then be able to formulate any strategic proposals within the context ofthe agreed framework. This also led to minimum involvement of the INEDs in the actualproposal formulation process, during which their advice is rarely sought by the executives.If the need for advice arises, it is geared more towards getting their views on whether theproposal is consistent with their recommendations.

5.4 Approve, refer or reject strategic proposals

Results from the interviews predominantly point to INEDs’ role in reviewing strategicproposals that are brought to the board. All of the interviewees, including those who haddisagreed with their INEDs’ participation in the early stages of formulation, believe thatINEDs’ participation in the review process is important.

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Before the review process, the proposals will be circulated to all the directors at least a weekbefore it is tabled to go before the board. In some companies, prior to circulation, the proposalswill go through special committees who will vet the viability of the plans. If the committeesdisagree with some of the points contained in the proposals, they usually give their point of viewand comments during the full board review. During the circulation period, the INEDs areexpected to scrutinise the proposals and are given the opportunity to contact the executives toclarify issues that might raise doubt. However, apart from clarifications, they refrain frommaking any decisions pertaining to the proposals until the board meeting, where everycomment will be properly minuted. After the circulation period, the management presentsthe plan to the board. The board, in turn, deliberates on every angle of the strategy and alsochallenges the management on some of the assumptions made and the targets set.Questions that are raised depend on the completeness of the strategic proposals, wherebyfaster decisions will be reached if the proposals are complete. Consistent with McNulty andPettigrew (1999), INEDs again appear to influence the content and context of the strategyat the reviewing phase, when they make comparisons to the strategic framework of thecorporate that has been set earlier. A CEO of a small corporate described the reviewprocess when he said:

The INEDs will look at it, digest it, evaluate it, and then would come out with the questions.Usually they will relate their questioning to the company’s vision and mission and from theirexperience, they would be able to decide whether it is a good thing or not.

Hence, having been presented with a strategic proposal and having made their commentsand observations known, the board would decide to either approve or reject the proposal.The board may also refer it for amendments and would advise management to resubmit itafter incorporating the board’s comments and suggestions. The decision to proceed withone of the three options is made on the spot, as the board members had ample time toreview the proposal because details concerning it were circulated well in advance. Theinterviews revealed that not every strategy that was brought to the board was acceptedright away, and some strategic proposals were referred back to management foramendments before being accepted. All of the interviewees expressed that they hadexperienced a time when proposals had been referred back to management formodifications, with the only difference being the frequency of it happening. An INED witha large corporate remarked:

Normally when modifications are completed and it was brought back for review, the proposalwill be accepted. We don’t normally reject any proposals, but when circumstances arise, wemay defer it to a later date, by which time the proposal may not be as worthwhile a venture aswhen it was first brought up to us by management.

In the event that INEDs were involved early in the process of strategic planning, thechances of the proposal being sent back for amendments are lessened. A CEO with amedium-sized corporate said:

There were times where the board feels that the strategy is not necessarily right and we askedmanagement to look into it. However, it is not that often it happened because some of the boardmembers were involved in the planning stage. Thus, we may have discussed about some of theissues before hand and when it comes to the board hopefully a lot of these issues will have beenresolved.

There were various reasons given by interviewees on the need to refer the proposals. Someof those cited include unclear and inconsistent details, especially relating to risks,insufficient benchmarking and, most notably, estimation regarding budgeting figures ofcosts, revenues and profitability. Proposals that were accepted in the first instance, orthose accepted after further amendments, adhere to the strategic framework of acorporate’s long-term plans set by the board. Consequently, as McNulty and Pettigrew(1999) and Stiles (2001) found, strategic proposals that were prepared according to the

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vision and mission set by the board are rarely rejected. Hence, results from the interviewsproduced only two instances when strategic proposals were rejected outright. In bothsituations, the rejected proposals concerned asset acquisitions overseas, whereby therespective country’s risk was the major determining factor. The interviews disclosed thatmanagement put in lots of its expertise, time and effort in ensuring that proposals that gofor board reviews are up to the standard expected by the board. An ED with a smallcorporate remarked:

It is very rare for proposals to be rejected because the management perform their roleprofessionally. We make sure whatever proposal is viable and good for the corporate. Otherwisewhy would you need to spend time to prepare the paper and go through all of the supportinginformation, and then when we table it to the board, the board suddenly said no.

Nevertheless, the findings also show that they do more than just rubber stamp executives’action. Proposals are rarely rejected because most of the time they are either referred formodifications prior to actual acceptance or their preparation in terms of the context andcontent has been influenced by the INEDs to the extent that they have been thoroughlyarticulated upon and are in line with the corporate’s strategic framework. The findings alsocorroborate the model of a part-time board member’s involvement in strategy establishedby McNulty and Pettigrew (1999), which was based on the UK scenario, and prove that itmay also be relevant to the Malaysian context.

6. Strategic implementation

Responses from the interview survey produced similar results to the literature, such asStiles (2001) and Judge and Zeithaml (1992). All of the interviewees agreed that INEDs areonly involved in the formulation and evaluation phases, while only two of the intervieweeshad experience of being directly involved in the implementation process. One of them, anINED with a large corporate, shared his experience in implementing a strategy thecorporate had chosen when he said:

There was a case where we got involved in a tendering exercise involving a Bumiputra vendorprogram to supply notebooks and multimedia equipments to all schools in Malaysia. The boardset up a sub committee where I was the Chair and we did the implementation. We went throughall the tenders, from selecting the vendors to the hardware suppliers, and in that respect weeven went to visit the sites where they would send the computer equipments to make sure thatthey were being done properly.

The interviews did reveal, though, that despite not being involved in the actualimplementation of the plan, INEDs were in fact keeping a close tab on the proceedingand progress of the strategy. Hence, the interview survey provides an important finding,in that, although it is true that INEDs rarely participate directly in the implementationphase, they could still qualify as being involved in it by virtue of monitoring thedevelopment of the chosen strategy. The INEDs are able to track the current state of theimplementation through the means of progress reports submitted by the managementprior to the quarterly board of directors’ meetings or, in certain circumstances, beforespecial board meetings when urgent attention is required. The INEDs would be able toassess how much the corporate has achieved and identify the various problems thatcould have cropped up.

The audit committee would normally be called upon to review and verify the authenticity ofthese reports before they are brought to the full board. Some of the information in thesereports would be submitted to the stock exchange as part of the quarterly reportingrequirement and, hence, the onus is upon the board to go through the reports asmeticulously as possible. The INEDs would not only be looking at the progress in terms ofdollars and cents but also at the overall objectives that have been determined prior toexecution. Depending on the state of affairs of the implementation program, the EDs andother management invited for the progress review sessions may be subjected to some

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tough questioning from the INEDs. There were instances given where the corporate had tomodify some, if not all, of the initial strategy after difficulties were identified after it had beenimplemented. The interviews disclosed that, although a plan is approved, it is not rigid. Itcan be changed in response to the environment or the economic outlook. The intervieweesbelieve that a plan reflects the judgment of the management team at that particular time,backed up by the board’s acceptance of the plan. If it did not work out as intended, theboard and management would at least have the satisfaction of knowing that they hadthought it out to the best of their abilities at the initial stage and had made modifications totake into consideration changing scenarios. The decisions to make these changes,however, must only be made after carefully taking into consideration all matters of concern.An INED with a large corporate remarked:

There are times when we have the mid term review where we have to adjust the figures orreconsider some of our aims and objectives. You must be prepared to do it. However, when youmake these changes, you must make sure that you are keeping the cost in line. Don’t ever losesight of the cost. What is the point of altering it, when there is no income at the end of it all?

In certain circumstances, INEDs do more than merely read progress reports and entertainEDs in question and answer sessions. There have been occasions where INEDs have gonedown to the ground to see for themselves the progress of the current strategy. An ED witha small corporate stated:

They do visit our work site on certain occasions. We cannot demand too much of their time butthey have to fulfil a certain job scope, which include those visits. They would ensure that all ourwork is of high standard of quality to complement the ISO 2000 certificate that we received nottoo long ago. They need to monitor that we adhere to safety procedures and that our processsystems are working properly.

The interviews disclosed that it is essential for INEDs to evaluate strategy implementation,as it helps bring balance between the management’s pursuit of short-term results and thedelivery of long-term growth. By sharing their wisdom and experiences, the INEDs hugelycontribute to the strategic implementation process.

7. Strategic evaluation

Many of the interviewees refer to this phase as “post mortem” to indicate the closing upprocess of strategy that has been chosen and implemented. The evaluation is carried outin the board meeting and it is conducted based on papers submitted by management. Inthe literature, Judge and Zeithaml (1992) and Stiles (2001) note that, in the strategicevaluation phase, boards either probe management’s evaluations of resource allocation orsimply accept the evaluation provided by top management. The interviews disclosed thatthe extent of boards’ inquiry depends on the results of the implementation, which adds anadditional dimension to those developed in the literature. In the event of a failure, the board,especially the INEDs, come up with probing and thorough enquiries to ascertain factorsrelating to the company’s inability to achieve its intended targets. When it succeeds, fewerquestions are asked, as the facts inadvertently speak for themselves. Questions are stillposed, but they are not as probing as they would be if it fails, which would seem that theboards would simply accept the evaluation. Hence, the success or failure of thesestrategies would appear to be the moderating factor in the intensity of boards’ questioningrather than an acceptance at face value that they are being co-opted by management anddo not probe management evaluation.

Similar to progress reports, the audit committee assesses the validity of the management’sevaluation prior to their distribution to board members, which is usually well ahead of the fullboard meeting for the directors to digest the contents and to come up with commentsduring the meeting. Another moderating factor to Judge and Zeithmal (1992) and Stiles’(2001) observation of board passivity in strategic evaluation is that the final evaluationreport normally represents the culmination of all the progress reports that the directors

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previously received. The progress reports alert the directors to any milestone or problemsthat a particular project has either achieved or encountered, respectively. When there areproblems, there is an effort made to overcome them and to ensure the project is completed.Because most of the issues are brought to the attention of the INEDs through the progressreports, the evaluation process may appear to be less than heated and may be used as anavenue to look into how efficiently the problems have been dealt with, as well as to learnfrom past mistakes. INEDs are able to focus on those issues raised from progress reportsrather than analyse every aspect of the completed strategy. An INED provided an examplewhere the corporate as a whole could learn from their experience as a precursor to futurestrategic endeavour. He remarked:

We had one project overseas. Initially it looked to be profitable, supposed to give us at least an8 per cent return. However it was the first time that we had gone there and we were not clearexactly what the situation was on the ground. By the time the project was completed the 8 percent disappeared, the reason being that they had to payoff some people, and this payment wasnot computed in the initial price of the contract. This is some of the things that could turn out tobe risky, if the proper information is not gathered that could lead to improper valuation ofprojects.

The interviewees revealed that the process of properly closing up a strategy or project thathas been completed is of utmost importance. Hence, the evaluation process is not onlydetermined by whether the corporate has got its money back or made a profit on top of that.It is usually driven by management topics such as corporate reputation, financial, legal andhuman resources, with the legal closure deemed the most vital and financial aspects theleast. Documents pertaining to each project were not only properly but serially locked awayas a precaution in case they may need to be reopened for the sake of evidence in thefuture. A CEO with a large corporate perfectly summarised the general opinion on this issuewhen he said:

To me financial matters are quite simple and normally I do not worry on this very much. Normally,when we had attempted similar projects for let’s say a couple of years, we would be able to tellour range of profits and returns. It is still fine if the end result deviates a little. Above all, the legalclosure to me is the most important. We can find money anywhere, but legally I am subjectedto somebody coming along and putting a letter on my desk. If we do not close a case properly,it could turn out to be a time bomb.

In many circumstances, companies implemented a wholesome approach in strategicevaluation by providing INEDs with extra information over and above the company’sown performance. This extra information includes industry information to gauge wherethe corporate stands vis-a-vis industry indicators, clients’ survey to assess theiracceptance and satisfaction with the end products and, in some instances, reports fromregulatory agencies. The interviews disclosed that the provision of extra informationmay indicate that management wants to be seen to be as transparent as possible in itseffort to manage a cordial relationship with the board. Finally, the interviews disclosedthat the INEDs, in their evaluation of strategies, should also take into consideration theexternal environment facing the companies, which is constantly changing with newopportunities and challenges. They were expected to not only limit themselves to eventshappening domestically but also to evaluate the strategy in the light of scenarioshappening around the world.

8. Conclusion

Findings of the study show that, despite indication of interplay of power and influencebetween the executives and non-executives, the interviews disclosed that INEDs areimportant participants in the strategic arena, most notably in corporate strategy rather thanbusiness or operational. This result conforms to previous literature on the complementaryassociation between the INEDs and the executives such as Baysinger and Hoskisson(1990), Baysinger et al. (1991) and Goodstein et al. (1994). INEDs’ ability to participate in

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various capacities largely boils down to their expertise and knowledge, which is sharedwith management on board either in formal board meetings or in informal gatherings. Theinterviews disclosed that INEDs are mostly involved in the formulation and evaluationphases of strategy, a finding that supports Stiles (2001). However, the interviews did revealthat although INEDs were not directly involved in the implementation phase, it does notmean that they totally ignored it. Management would keep the INEDs updated through theprogress reports and meetings. The periodic provision of these reports would appear tohave implications on the evaluation phase. Since the reports would have highlightedproblems or milestones of the strategy and efforts taken to eradicate the problems, theevaluation phase would depend on the success or failure of the strategy before the boarddecides on the types of evaluation to be had. As such INEDs seemingly acceptingmanagement evaluation without much probing as suggested by some literature may notnecessarily be due to being co-opted by management. It could be either due to the fact thatthe details have been brought to their attention earlier through the progress reports andmeetings or the strategy has been successful in achieving the company’s aim, which maythen result in less than an intense sort of evaluation. It may also relate to INEDs even earlierparticipation in strategy which is in the formulation phase. The interview surveys disclosedthat INEDs in Malaysia may influence the formulation of strategy in various stages of thisphase. This is another interesting finding, as it lends strong support to the findings ofMcNulty and Pettigrew (1999) who had diagnosed part-time board members’ influence instrategic formulation into three levels: taking strategic decisions, shaping strategicdecisions and shaping the content, context and conduct of strategy. Consequently due totheir participation in the earlier phase, strategic proposals would have been preparedthoroughly and in line with the company’s strategic framework, and together with themonitoring of progress, it may cause the evaluation phase to be merely procedural. Anotherinteresting finding relates to the audit committee. Besides the formation of specialcommittees dedicated to strategies, the audit committee has been shown to begin exertingsome level of involvement in the strategic area, especially in monitoring of progress and the“post-mortem” of final outcome.

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Further reading

Hampel Committee (1998), “Final report January”, available at: www.ecgi.org/codes/documents/hampel_index.htm (31 August 2006).

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About the author

Hairul Azlan Annuar is a Lecturer in the Department of Accounting, the International IslamicUniversity Malaysia (IIUM), whereby he is teaching undergraduate courses in corporategovernance and management accounting as well as Managerial Accounting at the Masterslevel. Prior to becoming an academic, he practiced corporate accounting at IBM (Malaysia)and later ventured into trade financing at Ericsson (Malaysia). He received his BA (Hons)degree in Accounting and Finance from the University of East London and his MBA withspecialization in Islamic Banking and Finance from IIUM. He has just recently beenawarded with a PhD from Cardiff University UK. His research interest lies in the area ofcorporate governance. Hairul Azlan Annuar can be contacted at: hazalan@iium.edu.my

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