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Procedural Justice Theory and Board Processes

Procedural justice theory examines the decision-making process in exchange relation-ships in which one party has decision making authority over issues that concern the other party (Lind & Tyler, 1988). As such, this theory deals with situations analogous to an agent-principal relationship in which the principal delegates decision-making authority to the agent. In contrast to agency theory, which focuses on how the relationship is structured to ensure proper decision making, justice theory examines the decision-making process and its impact on the exchange relationship. Specifically, the theory addresses what constitutes fair decision procedures and the importance of procedural justice to the exchange relationship. Several characteristics of the formal procedures and aspects of the conduct of the decision maker are known to contribute to perceptions of procedural justice. One of the most critical procedural factors is voice, the opportunity to provide input into the decision or control the information used to make the decision. In addition, various aspects of the decision maker's information sharing are important, including showing consideration of others' input, giving timely feedback on the results of the decision, and providing adequate justification for the decision (Tyler & Bies, 1990; Korsgaard, Schweiger, & Sapienza, 1995; Sapienza & Korsgaard, 1996) .

Research and theory suggest that procedural justice is valued by individuals for two main reasons (Lind & Tyler, 1988). First, procedural justice provides assurance that an individual's self-interest is protected over the long run. Fair procedures and treatment serve as an important sign of the decision maker's benevolence, honesty and neutrality (Lind, 1997). This process may be critical in board relationships, given that board members have diverse and often conflicting interests. Research suggests that when a particular decision is not in an individual's best self-interest, just procedures ensure the individual that, over time, he or she will receive what is due from the exchange relationship. Second, procedural justice is thought to be important to individuals because it affirms their status and value to the relationship, group or organization. This view is based on the assumption that people come to value and derive their identity from memberships in groups. Being treated with fairness, dignity, and respect are important to maintaining status in the group. Thus, the theory suggests that the personal relationship among board members will influence the flow of information and the way decisions are made.

Procedural justice judgments are considered "pivotal cognitions" in that such judgments have a strong impact on attitudes and behaviors pertaining to the exchange relationship (Lind, 1997). Specifically, procedural justice promotes acceptance of and commitment to decisions (Korsgaard, et al., 1995). Further, people who are treated fairly are more likely to cooperate and comply with others (Giacalone & Greenberg, 1997; Kim & Mauborgne, 1991; Konovosky & Pugh, 1994) and are less apt to engage in anti-social or counter productive behavior, including theft and litigation. Further, procedural justice affects attitudes toward the exchange partner; specifically, procedural justice builds interpersonal trust. Research suggests that trust has a positive impact on cooperative behavior (McAllister, 1995; Deutsch, 1962).

This last consequence is perhaps most relevant to board member relations, for it suggests that, through its influence on trust, procedural justice can affect the level of cooperation among board members and consequently board efficiency. Trust involves an individual's attributions about another party's willingness and capability to perform certain actions important to the individual (Deutsch, 1962 Mayer, Davis, & Schoorman, 1995).

It reflects a willingness on the part of the trustor to be vulnerable to the actions of another party based on these attributions (Deutsch, 1962; Mayer, et al.,1995). Thus, because fair practices influence the level of trust, they are likely to affect the level of agency risks board members are willing to tolerate.

In sum, justice literature indicates that fair conduct in an exchange relationship creates trust, and research shows that individuals are more likely to comply and cooperate with those they trust (Lind, 1997). Conversely, when trust is low, individuals are likely to resort more readily to formally contracted obligations. Unmitigated agency risks may force outside board members into focusing narrowly on monitoring rather than on delivering other value-adding services. As such, they may be perceived as becoming overly involved in operational issues and other minutiae. This result undermines the potential gains to be realized from the effective separation of ownership and control. We will argue below that the procedural fairness of management behavior materially changes the impact of agency risks on board governance and as such has a significant impact on the efficiency and effectiveness of the board. Specifically, we examine below how agency risks and procedural fairness shape where the board will focus its discussions in board meetings, how strong or disruptive board conflict will be, and the extent to which the board will resort to fiat or "forcing" in arriving at strategic decisions.

The Focus of Board Discussion

As noted above, one of the issues addressed in the interview data the focus of board discussions; specifically, the amount of attention devoted in board meetings to the review of past performance versus planning and decision making. Respondents' report of the time devoted during board meetings to the review of past performance ranged considerably: some indicated that the meeting focused primarily on performance review, but others indicated that as little as 10% of meeting time was devoted to review. While the review and interpretation of past performance is a critical aspect of board oversight and is necessary for planning and decision making, excessive attention on past performance may inhibit effective decision making. Indeed, more than one respondent indicated that, given the finite amount of time boards meet, discussion of past performance conflicted with planning and decision making.

From the perspective of agency theory, review of past performance in the board meetings relates to monitoring activities. As such, variations in the amount of time devoted to review may thus reflect variations in agency risk. Specifically, indications that performance is below projections may serve to trigger concerns of management incompetence or opportunism (Walsh & Seward, 1990). As a result, board members will seek to make sense of past performance, a task made more difficult by information asymmetry. That is, to the extent that that they lack insight or direct information, board members will spend time questioning management about past results and interpreting data in order to arrive at an understanding of the causes underlying performance difficulties. Thus, when performance is at issue, discussion of past performance may dominate board meetings if information asymmetry exists.

Proposition 1: When performance is below projections, the greater the information asymmetry, the greater the focus on review and interpreting past performance.

Three possible causes for performance problems exist: management opportunism, management competence, or some exterior cause (Walsh & Seward, 1990). More broadly, then, board members engage in an attribution process to determine the extent to which management is responsible for performance problems. Interpersonal trust may provide powerful evidence against management culpability for poor performance. Recall that trust involves the expectations of another party's willingness and capability to perform certain important actions (Mayer, et al., 1995). To the extent that board members trust management, opportunism and competence should be viewed as less plausible explanations of poor performance. Because trust should serve to narrow the range of plausible explanations, board members should be able to focus or limit the information search in interpreting performance problems. In this way trust is efficient; it enables board members to quickly process information on past performance and devote additional attention to planning and decision making.

This argument is based on the assumption that board members are correct in placing their trust management. Because trust is a probablilistic belief developed in uncertain situation (Deutsch, 1962), individuals sometimes err in this belief. Further, individual differences in propensity to trust (Mayer et al., 1962) and in an individuals' ability to create impressions of honesty and trustworthiness may increase the likelihood of misplaced trust. However, interpersonal trust is not a unconditional faith in others, but a calculated risk (Deutsch, 1962) derived from direct experience. Further, trust is not a stable characteristic; the degree of fair treatment can change levels of trust even in established relationships (Korsgaard, et al., 1995).

Because procedural justice has a strong impact on trust, entrepreneurs are likely to win the trust of their board members when they engage in fair decision-making behaviors. The theory suggests that when entrepreneurial managers solicit and consider the input of outside board members, provide adequate justification and timely feedback on past decisions, they are more likely to be trusted. Soliciting and considering input shows that the entrepreneur has given balanced consideration to outside interests; explaining the rationale for and outcomes of decision making demonstrates lack of bias and thoughtful decision making. In other words, fair conduct shows the decision maker to be capable of making sound judgments that balance the interests of management and outside ownership. Further, the theory suggests that such behavior indicates to the board that the entrepreneur is concerned with providing good, accurate information to the board rather than putting on a "dog and pony show," as it was called by some interviewees. Our own research supported these views by showing that investors' trust in and commitment to the decisions of entrepreneurs increased as a function of the timeliness of feedback provided (Sapienza & Korsgaard, 1996). In summary, through its impact on trust, entrepreneurs' fair conduct in decision making should serve to check outside board members' propensity to spend more effort monitoring decisions through focusing board discussions on past performance. If management has created an expectation that what they present is open, honest, and unbiased, board members are less apt to question the integrity and meaning of data when things go poorly.

Proposition 2: Fair decision-making procedures will serve to diminish the extent to which, when performance is below projections, information asymmetry will result in a focus on review and interpreting past performance.

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