THE BOARD OF

DIRECTORS AND THE

ADOPTION OF
QUALITY
MANAGEMENT
TOOLS
Evidence from the Italian local
public utilities
Fabio Monteduro,
Alessandro Hinna and
Roberto Ferrari
Fabio Monteduro
Interdepartmental Centre of Studies on Public
Administration (CISPA), University of Rome Tor
Vergata, Rome, Italy
E-mail: fabio.monteduro@uniroma2.it
Alessandro Hinna
Economy and Territory Department, University of
Rome Tor Vergata, Rome, Italy
E-mail: alessandro.hinna@uniroma2.it
Roberto Ferrari
Department of Economics and Business
LUISS University of Rome, Rome, Italy
E-mail: rferrari@luiss.it
Abstract
The article examines the role of the board of
directors in Local Public Utilities (LPUs). It
aims at verifying empirically if a correlation
exists between specic characteristics of the
board of directors and the adoption of
innovative arrangements addressing emer-
ging needs of users and citizens (i.e. quality).
By means of applying multivariate statistical
methods to a random sample of sixty Italian
LPUs, this study nds the relational capital of
the boards affecting the take up of quality-
oriented actions by LPUs. These results
support the resource-dependence theory,
neglected by mainstream literature.
Key words
Boards, governance, public utilities, quality
management, resource-dependence theory
Vol. 13 Issue 6 2011 803824
Public Management Review ISSN 1471-9037 print/ISSN 1471-9045 online
2011 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/14719037.2010.539109
INTRODUCTION
Territorial governance relates to the way in which territories are administered and
policies implemented, to the roles of the different tiers of government and the ways
they collaborate with each other and with actors outside the public sphere, as well as to
the underlying processes of negotiation and consensus-building (Peters and Pierre 1998;
Kettl 2000; Lynn et al. 2000; Stoker 2006).
Local public service provision is an area in which territorial governance issues are
manifested with enhanced evidence. Local public services are characterized by an
increasing reconguration of the provision structure and by the rethinking of the role
played by local governments inside the system. An evolution has taken place from a
traditional conguration in which local public services were managed by local
governments to a conguration in which there is a separation of the local government
role (which continues to be responsible for the satisfaction of public needs) from the
role of local public utilities (responsible for delivering the services).
In Italy, since the 1990s, public sector reform provided local governments with the
possibility to transform their local public utilities in joint stock companies. The aim was
to increase the autonomy of local public utilities from local governments and to stress
the managerial side of their activity. Nowadays, local public utilities are mainly joint
stock companies whose main shareholder is represented by the local government. In
particular, local governments entrust local public utilities with the responsibility to
provide public services and a contractual arrangement regulates their activity.
Therefore, the local public services system is based on several relationships taking
place between three main actor groups:
. Citizens and users: holders of a public need.
. Local governments: holders of a public function.
. Local public utilities: holders of the service provision function.
Territorial governance studies traditionally put the emphasis on the analysis of the
mechanisms and tools used to govern the relations between the aforementioned subjects
(citizens-users, local governments and local public utilities). A less investigated area is that
of the development of an effective corporate governance model functional to the
successful management of the relations between the local government and the local public
utilities. This aspect is nonetheless of high relevance especially when the management and
delivery of local services takes place through joint stock companies in which the local
government is the main (or the only) shareholder. In this case, one of the fundamental
mechanisms for managing the relationships between the shareholder (i.e. the local
government) and the management is a collegial governing body (board of directors), with
members appointed by the shareholders in proportion to the quotas held.
The article examines the role of the board of directors in local public utilities. In
particular, the article highlights those board characteristics that contribute and orient
804 Public Management Review
local public utilities towards innovative arrangements addressing emerging public needs
of users, citizens and other stakeholders.
Given the existing literature on the role of board in the private as well as in the
public sector domain, the article also aims at verifying empirically, whether a
correlation exists between the characteristics of the board of directors (in terms of size,
heterogeneity and relational capital) and the introduction of quality management
mechanisms and instruments, in local public utilities. It is worth specifying that the
adoption of such mechanisms and instruments has to be considered as a proxy for the
organizations commitment to better quality (effort) and not as a proxy for better
quality in itself (accomplishment). In fact, though advocated by the New Public
Management scholars, very contradictory results have been reached by means of the
importation of quality management tools from the private to the public sector
(vretveit 2005).
Multivariate statistical methods were applied to a random sample of sixty Italian local
public utilities.
LOCAL PUBLIC UTILITIES: PAST REFORMS AND FUTURE CHALLENGES
The rst wave of reforms of the Italian LPUs started in the 1990s with the aim of
cutting costs and reducing decits, in line with the requirements of the Maastricht
Treaty. Law n.142/1990 introduced a radical transformation of local authorities,
increasing their competencies and enhancing their institutional and organizational
autonomy (Bognetti and Robotti 2003).
Law n.142/1990 identied new alternatives for local service management such as
contracting out services, the creation of special enterprises owned by local
municipalities (with a distinct legal form and management autonomy), the establish-
ment of joint stock companies participated in by several public or private actors (Gachet
et al. 1997), in preference to direct management.
A second phase of reform followed in the mid-1990s, innovating the rules governing
local public utility provision. This impacted both on the general level (the so-called
Bassanini Law 127/97) and on a sectoral level (i.e. Decree 422/1997 on public
transport, Decree 164/2000 on gas provision) with new regulations concerning the
privatization of local public utilities and the opportunity to transform municipal
enterprises in joint stock companies.
Finally, a third stage of reforms arrived with article 35 of the Financial Law 2002,
introducing the compulsory separation between the enterprises owning the plants and
the enterprises in charge of managing the utilities and delivering the services. The
former should be retained by the local authorities, while the latter must be run by joint
stock companies, selected through open public tenders (Bognetti and Robotti 2003).
The aim of the Financial Law 2002 was to start a liberalization process in the local
public utilities system through market competition. Therefore, the Italian legislator
Monteduro et al.: Board of directors and quality management tools 805
aimed at: (a) promoting competition through competitive bidding for service providers;
and (b) leaving in public hands some important service infrastructures, avoiding the
risk of a discriminated use for private interests. This legislation has created a renewed
environment in which local public utilities must perform. In comparison to the (recent)
past, they now face new challenges such as the risk of losing their franchise; a new
competitive arena which imposes strategies to reduce costs and to exploit economies of
scale, to expand their activities geographically and to production diversication, size
growth of the operating unit and so on. At the same time, they are requested to pursue
the satisfaction of the community needs, safeguarding citizens through instruments of
participation, information and evaluation of the services supplied (i.e. introduction of
quality management tools).
This scenario motivates the relevance of the governance of local public utilities
(especially those transformed in joint stock companies) as a topic of research. To the
rich scientic and managerial debate on the relevance of the governance of such
organizations corresponds a less developed discussion on their governing bodies, despite
the call from policy makers for a comprehensive theoretical and pragmatic framework
on governance models and the boards role in state-owned enterprises (OECD 2005).
The Italian LPUs sector is particularly suitable to analyse the board structure and
effects on organizations, since it went through transformations similar to other
European countries (liberalization and modication of the legal status), bringing out a
partially different set of objectives (imperative of efciency and effectiveness), functions
(more market-oriented, such as marketing functions) and capabilities (in terms of
seizing opportunities in the market and not only in the public sphere, for example) to
be pursued by board members regardless of the legal status and the degree of
liberalization of LPUs. In this sense, the Italian experience is symptomatic of a general
trend and, thus, worthy to be investigated in comparison to other European countries.
THEORETICAL BACKGROUND
Boards in the governance debate: Brief overview
There is a certain agreement on the fact that corporate governance issues are mainly
related with governing bodies (i.e. boards) roles (Fields 2007).
Considerable effort has been made on studying boards (of directors) in the business-
oriented research, presenting different theories as agency theory (Jensen and Meckling
1976; Fama 1980), stewardship theory (Donaldson and Davies 1991; Muth and
Donaldson 1998), resource-dependence theory (Pfeffer and Salancik 1978; Zahra and
Pearce 1989), managerial hegemony theory (Lorsch and MacIver 1989), stakeholder
theory (Freeman 1984; Donaldson and Preston 1995) and institutional theory (Meyer
and Rowan 1977), respectively correlated to various board roles like control, strategic
roles, linking, support, co-ordination, maintenance roles (Hung 1998). Even if
806 Public Management Review
differently addressed, at the heart of each model there is a specic relationship between
a theoretical approach and the boards role. In short, three key functions of boards have
been highlighted: (1) monitoring, which is related to the control over managers and the
monitoring of the rms performance in order to safeguard shareholders interests; (2)
strategy, related to the revision and evaluation of strategic decisions and the provision of
technical advice in order to improve the rms strategic plans; and (3) provision of
resources, which entails empowering key resources to favour the survival and success of
a company. If compared to the research on the board characteristics and their
relationships with corporate performance in the private sector, there are very few
empirical investigations on the same theme in public sector research (Hinna et al. 2010).
Notably, Cornforth (2003) primarily adapted business-oriented governance models to
dene an organic system of public governance framework, contemplating different
theoretical approaches (Cornforth 2003: 711). Shifting the focus of the investigation
from the board in the private context to the board in the public and non-prot sectors,
agency problems persist (Conforth and Edwards 1999; Cornforth 2003), because of the
existence of different forms and levels of delegation, among organizations (from groups
of citizens to politicians, from public authority to public-owned enterprise, etc.) and
among individuals (from citizen to politicians, from politicians to managers, etc.).
A particular evolution of the agency theory has gained attention in the public
governance debate. The public governance research on governing bodies (i.e. boards) is
based on the agency theory perspective when it stresses the need to nd ways to control
self-interested managers behaviour (Benz and Frey 2007).
Beside this mainstream literature, the importance of other theoretical perspectives is
relevant (Huse 2008); among which the resource-dependence theory (Pfeffer and
Salancik 1978; Zahra and Pearce 1989) has been frequently pointed out, explicitly or
implicitly. For example, the relevance of board characteristics, such as board members
knowledge and personal background in explaining organizational outcomes and
performance has gained particular attention among scholars (Hermalin and Weisbach
2003), both in the public (Cornforth 2003) and the private-oriented literature (Hillman
et al. 2000; Hillman and Dalziel 2003).
The resource-dependence theory in the study of Local Public Utilities
LPUs are found, in particular, to be in a scenario characterized by high uncertainty,
deriving from two main causes: environmental complexity and competitive pressures.
During the 1990s, several changes affected the sector, at the international level and
mainly in Europe (Duncan and Bollard 1992; Willalonga 2000), in terms of complexity
of corporatization (change in the legal status) and privatization (change in the
ownership). On the other hand, the liberalization of public services (in Italy, Decree
422/1997 on public transport and Decree 164/2000, which adopted EU recommenda-
tions on gas provision, were particularly important, before the Financial Law 2002) has
Monteduro et al.: Board of directors and quality management tools 807
created new competition rules in the market for public services, where there was a
monopoly or oligopoly (Bognetti and Robotti 2003). Differences in sector-specic
legislation (directly implying more complexity for multi-utility LPUs) and geographical
heterogeneity persist, outlining a fragmented picture of LPUs. As a result, complexity
and uncertainty are expected to affect the way LPUs work, and especially at the board
level, which is, by denition, the most environmentally sensitive governing body.
In this context, even if traditionally neglected (with the only exceptions of works by
Cornforth and Edwards 1999 and Farrell 2005), or at least not systematically addressed,
the resource-dependence theory appears to offer some useful insights in understanding
the role of the board and the managerial implications for public management and
governance, since it seems to t particularly well in complex and uncertain
environments (Nienhuser 2008). In particular, it has been pointed out that increasing
uncertainty, complexity and environmental impact of competitive pressures, reduce the
predictive ability of the agency theory, while the resource-dependence theory is
consistent with the observations made.
In the resource-dependence theory, the board of directors is investigated as a
provider of resources (Boyd 1990; Hillman et al. 2000). Therefore, board members
should be selected on the basis of their expertise and relations. Resource-dependence
theory highlights the institutional function of the board structure, supporting the links
of the organization to its external environment and securing critical resources such as,
for instance, managerial expertise, prestige and legitimacy (Mintzberg 1983; Pearce and
Zahra 1992).
In this framework, a specic term used by resource-dependence theory is board
capital, through which scholars have discussed directors expertise, experience,
knowledge, reputation and skills.
HYPOTHESES
Adopting the resource-dependence theory approach, we would expect LPUs reacting to
the increasing complexity and uncertainty of the external environment, their reaction
varying according to some specic characteristics of their boards (size, skills or
relational capital of the board members, etc.). This, in turn, could affect some
organizational outcomes.
Therefore, in order to outline our hypotheses, we need to dene: (a) which board
characteristics have to be considered; (b) what conceptualizations of organizational
outcomes are suitable for the LPU sector.
With reference to the rst point, most of the empirical studies on boards have
employed (Huse 2008): board size (number of board members); board diversity (racial
and ethnic diversity, gender diversity, etc.); and board resources (such as knowledge,
skills, experience, relationships, routines and procedures that boards can employ to
create value).
808 Public Management Review
The second aspect is more complex (i.e. organizational outcomes). Empirical
studies on boards have generally investigated nancial performance as the main
organizational outcome. However, this approach has been inconclusive and highly
criticized (Hermalin and Weisbach 2003). In addition to studying the relationship
between board characteristics and rm performance, a number of studies have
examined how boards accomplish some of the responsibilities commonly assigned to
directors, through the adoption of specic actions in favour of shareholders/
stakeholders. This approach has several advantages compared to that based on
nancial performance. First, there are many factors affecting performance. Hence, the
approach based on the accomplishment of board responsibilities is potentially more
powerful because it is less prone to unobservable factors contaminating the statistical
relationship. Second, when examining particular tasks of directors, it is less likely that
the endogeneity of board composition will affect the results (Hermalin and Weisbach
2003).
In the public local utility sector, shareholders (local governments) and stakeholders
(users and citizens) expectations are very different. Therefore, responsibilities and
consequently the actions adopted for their fullment are different. We argue that, in
the LPU sector, the promotion of quality of services is a key responsibility of boards.
Moreover, we argue that the adoption of quality management tools is an important
action in order to full this responsibility, even though their adoption will not ensure
leading edge quality.
Concern about public sector quality and using quality methods in this sector emerged
in the late 1980s (Pollitt and Bouckaert 1995; Ferlie et al. 1996), highlighting three
main general principles (Young et al. 2001: 9367): (1) an explicit focus on satisfying
customers; (2) a commitment to quality improvement through continuous examination
of underlying work processes; (3) an emphasis on empowering employees in order to
identify opportunities that can improve quality. Quality initiatives have been promoted
by national or local government, by professions or independently by local managers as a
way to respond to the pressure on their services (vretveit 2005), even if their
translation from their birthplace into the public sector appears as a quite complex task
(Morgan and Murgatroyd 1994).
In summary, while the literature suggests that quality methods can be successful in
certain situations, following the recent changes of the public sector, the quality of the
processes and the quality of the services might be considered among the major
responsibilities of public managers towards users and citizens (Aucoin and Heintzman
2000). Therefore, the adoption of specic systems and mechanisms for managing and
improving the quality of processes and services may be considered a good proxy, if not
of the outcome (i.e. better quality), at least of the organization commitment on the
issue. In this framework, among the quality management tools and techniques which
have been promoted to increase organizational performance and to ensure organi-
zational survival, the Customer Satisfaction Management (CSM) and the ISO standards
(9000 and 14000 series) are the most popular.
1
Monteduro et al.: Board of directors and quality management tools 809
Taking into account the aforementioned considerations, the article focuses on three
aspects of board composition in order to understand to what extent they are related to
the adoption of quality management tools. These aspects are: size; relational capital;
and board diversity.
Size
Directors are called to sit on boards in order to enhance an organizations ability to raise
funds, or to increase its reputation through their personal reputation, or, in general, to
cope with threats and opportunities in the external environment (Pearce and Zahra 1992).
Board size is then related to the institutional function of the board, that is, the
absorptive capacity to obtain support from the external environment, through board
members. Consequently, by increasing the number of board members, the links between
the organization and its environment will be strengthened (Goodstein et al. 1994).
In the resource-dependence perspective, a greater number of board members is
expected to help the organization enrich the managerial practices and stimulate the
adoption of quality tools: given that these particular tools are not so common, the main
determinant in the decision of adoption could be identied in the suggestions, proposals
and indications that come from the board members. This way, a higher number of
board members implies a higher number of chances for the organization to be guided in
this direction.
H1: There is a positive relationship between board size and the adoption of quality management tools.
Relational capital
LPUs are open systems in terms of transactions with environments (Scott 2003) and
also they are interdependent with other organizations or other entities (governments,
third sector subjects, etc.), therefore their relations with the environment must be
examined in detail. Among intercorporate relational elements, interlocking directorates
are the most studied environmental strategy, since they bridge resources especially in
conditions of uncertainty (Lang and Lockhart 1990). With particular reference to
LPUs, it means that the nomination of directors who sit in other boards could trigger
the LPU to adopt, or adopt faster (ceteris paribus), quality tools. In this sense, external
linkages with other organizations, in the same sector, or area, or included in the same
competitive arena (provision of public services, for example), are expected to stimulate
the adoption of quality management tools.
H2: There is a positive relationship between board relational capital (in terms of interlocking directorates)
and the adoption of quality management tools.
810 Public Management Review
Diversity
In order to have a diversity of opinion, the base of a genuine debate and of a rational
decision-making process (which includes all the alternatives available), boards are
required to invest in the diversity of their composition (Goodstein et al. 1994). It means
that, with reference to gender, geographical area, professional background, personal
attitudes and so on, some heterogeneity is required, in order to add alternative points of
view about what an organization can do, both strategically and operationally (Zahra and
Pearce 1989).
Board diversity is particularly linked to uncertainty (number of critical resources to
focus on, or different sources of risk) and the concerning necessity to control the
environment, and its different elements; this external variety generates a trend to
replicating environmental composition within the board, and, nally, maintaining and
developing links with the external environment (Pfeffer 1972).
It is then reasonable to expect that the more diversity in the board, the more change
in the organization. In particular, we expect that even the adoption of quality tools can
be positively affected by the diversity and gender diversity in particular.
H3: There is a positive relationship between board (gender) diversity and the adoption of quality
management tools.
METHOD
Sample and data collection
The population of Italian LPUs under investigation in this study includes all
organizations created as joint-stock companies whose main (or exclusive) shareholder
is represented by the Local Government, either directly or indirectly and which are
engaged in the distribution of consumers services such as the provision of electricity,
gas, water, waste management, transportation and others. The article excludes
enterprises that have other managerial forms such as corporations different from joint-
stock companies, special enterprises, institutions, in-house units and so on. It also
excludes purely regulatory bodies and organizations engaged in non-business activities
such as social and community services, including health and education, research
organizations.
Based on the most recent data published by the association of Italian local public
enterprises (Confservizi 2008a, 2008b), our specic target population of LPUs consists
of 586 units in Italy (Table 1), with a clear prevalence of organizations totally owned by
local governments (LGs) (69.3 per cent of the entire population).
This population includes two types of organizations: (1) mono-business enterprises
that deliver only one type of service (electricity, gas, etc.), are usually smaller and
Monteduro et al.: Board of directors and quality management tools 811
present a lower level of managerial complexity; (2) multi-utility enterprises, usually
corporations (sometimes listed) and normally operating on wide territorial areas. As
Table 1 shows the mono-business utilities are the prevalent form (73.4 per cent of the
population).
With reference to the territorial distribution of our specic target population of LPUs,
a prevalence of organizations located in the north of Italy is registered (51.4 per cent),
reecting the different geographical levels of economic development in the country.
Looking at the type of services provided, activities are concentrated in ve key
sectors (see Table 1). A considerable part of the population (35.2 per cent of units) is
involved in the water industry, providing drinking water and wastewater services,
including sewage treatment, to households and industry.
The second sector in term of relevance (28.8 per cent of the units) is waste
management that encompasses the collection, transport, processing, recycling or
disposal and monitoring of waste materials.
Table 1: The sample
Sample Population
Ownership n % N %
LGs total ownership 43 71.7 406 69.3
Presence of private shareholders 17 28.3 180 30.7
Total 60 100 586 100
Geographical location n % N %
Northern Italy 35 58.3 317 54.1
Central Italy 16 26.7 180 30.7
Southern Italy 9 15.0 89 15.2
Total 60 100 586 100
Diversication n % N %
Mono-business 39 65 430 73.4
Multi-utility 21 35 156 26.6
Total 60 100 586 100
Type of services provided n
a
%
a
N
b
%
b
Electricity 10 16.7 66 11.3
Gas 18 30.0 128 21.8
Water 22 36.7 206 35.2
Waste management 18 30.0 169 28.8
Transport 17 28.3 145 24.7
Others
c
10 16.7 118 20.1
Notes:
a
The sum of frequencies is greater than the sample size due to the presence of multi-utility companies.
b
The sum of frequencies is greater than the population size due to the presence of multi-utility companies.
c
Pharmacies, funeral services, housing, touristic and cultural services, etc.
812 Public Management Review
Local transport follows with 24.7 per cent of the units. Companies active in
this eld run road and rail transportation services in urban as well as in extra
urban areas.
The supply of gas for residential and commercial uses is the fourth eld of activity,
involving 21.8 per cent of the units.
The electricity sector involves only 11.3 per cent of the units. Electric utilities
are companies that engage in the generation, transmission and distribution of electricity
for sale.
Finally some units of our target population (20.1 per cent) provide other services
such as pharmacies, funeral services, housing, touristic and cultural services and so on.
It is worth noting that the companies that have adopted the multi-utility strategy
(26.6 per cent) provide two or more types of services (typically, electricity, gas and
water services are provided in an integrated way).
A sample of sixty organizations was selected from our specic target population of
LPUs. We used a probability sampling method and, in particular, a simple random
sampling without replacement. Simple randomization technique was done using a
computer program (SPSS 15.0 for Windows)
As can be observed from Table 1, the sample mirrors quite well the
investigated population of Italian LPUs, showing the same characteristics in terms
of ownership, geographical location, diversication strategy, type of services
provided.
Data were obtained from various sources. First, a relevant source of data is the
sectoral statistics published by the Association of Italian local public enterprises
(Confservizi 2008a, 2008b). Through this source it was possible to obtain important
data on the ownership structure, the geographical location, the type of services
delivered and some economic and nancial indicators.
A second source of data is the Italian Register of Enterprises held by the Chambers of
Commerce. All LPUs created as joint-stock companies have to be enrolled in the
aforementioned Register of Enterprises. Through the consultation of this database it was
possible to gather data on board members (number and gender) as well as the number
of enterprises in which they were members of the board at the time of analysis
(interlocking directorates).
A third source of information is represented by the websites of all the LPUs
included in the sample. Through this source, information on the adoption of quality
management tools was gathered. When this information was not available or not
adequately reported on the website (thirty-three cases), structured telephone
interviews were carried out. A predetermined set of questions was asked, collecting
information on the adoption or not of each of the quality management tools previously
identied. An open-ended discussion with the respondents followed in order to gather
insights on the process through which the specic tool was introduced. Telephone
interviews were addressed to the public relations managers (for all the thirty-three
cases) and separately to the CEOs (only in fourteen of the thirty-three cases). The two
Monteduro et al.: Board of directors and quality management tools 813
categories of respondents showed a high level of agreement in their responses (about
90 per cent).
The analysis was carried out from January 2009 to February 2009.
Variables
Dependent variables
The adoption of quality management tools was measured by three variables:
1 The adoption of ISO 9000 standards (ISO 9000).
2 The adoption of ISO 14000 standards (ISO 14000).
3 The adoption of Customer Satisfaction Management tools (CUSTOMER).
All the above-listed dependent variables were calculated as dichotomous variables with
the value of 1 indicating the adoption of the quality tool and the value of 0 indicating no
adoption.
We preferred specifying three different variables one for each tool in order to
avoid putting different tools into the same basket (although being all quality
management tools, they are not sufciently similar to be considered interchangeable).
We also preferred adopting a dichotomous level of measurement, not distinguishing the
sample units in ordinal groups related to the greater or lower number of tools adopted.
Independent variables
Considering the research aims and the state-of-art of the analysed literature, three
independent variables have been identied:
. Board size (BSIZE). We determined the total number of directors listed as active
members on the board of directors.
. Board gender diversity (BDIVERSITY). We developed a measure of board diversity
that reects the percentage of women on the total number of board members.
. Interlocking directorates (INTERLOCK). An interlocking directorate occurs when a
person afliated with one organization sits on the board of directors of another
organization. Interlocking directorates is employed here as a measure of the rela-
tional capital of board members. We calculated the total number of other
organizations in which each board member had taken part during his/her mandate.
Control variables
The control variables have been identied on the basis of the existing literature on the
board of directors (Goodstein et al. 1994), with reference to public management
814 Public Management Review
(Laegreid et al. 2007) and the utility industry (Fumagalli et al. 2007). These variables
have been operationalized by making the following choices:
. Organizational size (ORGSIZE). The present study employs as a measure of
organization size the total number of salaried employees (Agarwal 1979).
. Ownership (OWNERSHIP). We controlled for LPU ownership. A dummy variable
was included with the value of 0 indicating LG total ownership, and the value of
1 indicating the presence of private investors in the ownership structure.
. Diversication (MULTIUTILITY). Diversication could play an important role.
The LPUs that have chosen the multi-utility model are usually bigger, operate
on a larger scale and have greater strategic and operational complexity levels.
This may condition either the dimension or the composition of the board or
the actions and performance of the organization. Therefore we controlled for
diversication strategy based on the multi-utility model. A dummy variable
was included with the value of 0 indicating no multi-utility diversication,
and the value of 1 indicating the adoption of a multi-utility diversication
strategy.
. Geographical location (GEOLOC). We referred to the geographical location of the
LPU, distinguishing three territorial areas: northern, central and southern Italy.
It is worth recalling that in Italy these territorial areas are very different in terms
of socio-economic development. Therefore we controlled for geographical
location including a dummy variable with the value of 1 indicating the LPU is
located in southern Italy and the value of 0 indicating an alternative location.
. Financial performance (ROI). Following Hutchinson and Gul (2004) we used return
on investment (ROI) to measure LPUs nancial performance.
. Area of activity (ELECTRICITY, GAS, WATER, WASTE, TRANSPORT, OTHERS). The
LPU area of activity and the subsequent regulatory framework might inuence
the adoption of quality certications and the composition of the board
membership. Therefore we controlled for the area of activity including six
dummy variables with the value of 1/0 indicating respectively the activity/
inactivity of the LPU in each of the six sectors identied (i.e. electricity, gas,
water, waste management, transportation and others).
Table 2 synthesizes the main characteristics of the variables used in the analysis.
Data analysis
In order to test our hypotheses we carried out a multivariate analysis by mean of the
binary logistic regression technique. This choice depends on our use of three
dichotomous dependent variables and a series of control variables and the nature of the
independent variables (Anderson 1984).
Monteduro et al.: Board of directors and quality management tools 815
Table 2: Main characteristics of the variables used in the analysis
Variables Label
Type of
variable Year Source
Dependent The adoption of ISO
9000 certication
ISO 9000 Dichotomous 2009 LPUs websites Survey
The adoption of ISO
14000 certication
ISO 14000 Dichotomous 2009 LPUs websites Survey
The adoption of
Customer
Satisfaction
Management
tools
CUSTOMER Dichotomous 2009 LPUs websites Survey
Independent Board size BSIZE Continuous 2009 Italian Register of Enterprises
Chambers of Commerce
Board gender
diversity
BDIVERSITY Continuous 2009 Italian Register of Enterprises
Chambers of Commerce
Interlocking
directorates
INTERLOCK Continuous 2009 Italian Register of Enterprises
Chambers of Commerce
Control Organizational
size
ORGSIZE Continuous 2008 Association of Italian local
public enterprises
(Confservizi 2008a)
Ownership OWNERSHIP Dichotomous 2008 Association of Italian local
public enterprises
(Confservizi 2008a)
Diversication MULTIUTILITY Dichotomous 2008 Association of Italian local
public enterprises
(Confservizi 2008a)
Geographical
location
GEOLOC Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
Financial
performance
ROI Continuous 2008 Association of Italian local
public enterprises
(Confservizi 2008b)
Area of activity ELECTRICITY Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
GAS Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
(continued)
816 Public Management Review
RESULTS
Appendix 1 presents the descriptive statistics bivariate correlations.
It is worth pointing out that the adoption of quality tools is not widespread in the
Italian LPUs. The ISO 9000 standards are the most used tools (twenty-four
organizations; 40 per cent), followed by the ISO 14000 standards (seventeen
organizations; 28 per cent), while Customer Satisfaction was found to be the least-used
practice (fourteen organizations; 23 per cent). Looking at the pooled use of the quality
tools, only in a small part of the sample (three organizations; 5 per cent of the total) is
there a combined use of all the quality tools. Instead, in a large part of the sample
(twenty-eight organizations; 47 per cent) not one of the quality tools is used. Seventeen
organizations (28 per cent) use two tools (twelve organizations use ISO 9000 and ISO
14000; ve organizations use ISO 9000 and Customer Satisfaction). Finally, twelve
organizations (20 per cent) use only one tool (four organizations use only ISO 9000;
two only ISO 14000 and six only Customer Satisfaction).
A multivariate analysis was carried out by means of the binary logistic regression
model. In this way it was possible to understand the effects of selected board
characteristics (independent variables) on the adoption of quality management tools
(dependent variables), keeping the action of the other variables under control.
Table 3 presents the results of the logistic regression analyses. We specied three
models (Models 1, 2 and 3) focusing respectively on the adoption of ISO 9000, ISO
14000 and Customer Satisfaction as dependent variables and including all the
independent and control variables. The Chi-square value is always signicant (at the
0.001 level for Models 1 and 2; at the level 0.05 for Model 3), indicating that logistic
Table 2: (Continued)
Variables Label
Type of
variable Year Source
WATER Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
WASTE Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
TRANSPORT Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
OTHERS Dichotomous 2009 Association of Italian local
public enterprises
(Confservizi 2008a)
Monteduro et al.: Board of directors and quality management tools 817
regressions are very meaningful according to the dependent variable in relation to each
specied independent variable. The Cox and Snell R
2
is 0.503 for Model 1, 0.487 for
Model 2 and 0.362 for Model 3, which means that about 50 per cent, 49 per cent and
36 per cent of the variation in the dependent variable is explained respectively by
Models 1, 2 and 3. Thus, the results show that all models t the data well, although the
third model performs worse than the rst two.
H1 predicted that LPUs with a larger board size would be more likely to use quality
management tools. The ndings in Table 3 are not compatible with this hypothesis:
board size is positively and signicantly related only to the likelihood of ISO 9000
adoption, but this is not true for the other two dependent variables (ISO 14000 and
Customer Satisfaction).
Table 3: Results of the logistic regression analysis
Variables
MODEL 1 Logistic
regression analysis
predicting the use of
ISO 9000
MODEL 2 Logistic
regression analysis
predicting the use of
ISO 14000
MODEL 3 Logistic
regression analysis
predicting the use of
customer satisfaction
b SE b SE b SE
BSIZE 1.421* .599 .257 .413 7.073 .285
BDIVERSITY 7.586 6.056 72.575 7.171 71.058 3.612
INTERLOCK .161* .078 .208* .101 .150* .062
ORGSIZE .007 .004 .013* .006 .000 .001
OWNERSHIP 7.690 1.341 .951 1.348 7.027 1.020
MULTIUTILITY 7.001 1.575 71.619 1.921 37.912 10444.905
GEOLOC 72.290 1.731 2.038 1.989 .718 1.167
ROI 7.020 .063 .048 .125 7.056 .063
ELECTRICITY 1.238 2.016 4.785 2.931 37.182 9082.467
GAS 7.009 1.520 72.608 2.018 719.562 5222.453
WATER 7.050 1.032 2.584 1.699 719.099 5222.453
WASTE 71.397 1.263 73.748 2.145 719.180 5222.453
TRANSPORT 3.324* 1.626 4.715* 2.308 719.037 5222.453
OTHERS 73.671 1.985 73.588 2.069 717.697 5222.453
CONSTANT 77.439* 3.661 711.717* 5.173 71.832 9082.467
X
2
41.932*** 40.017*** 26.989*
Log-likelihood 38.829 31.512 38.204
Cox and Snell R
2
.503 .487 .362
Nagelkerke R
2
.680 .699 .547
Notes:
***Correlation is signicant at the 0.001 level (two-tailed); **Correlation is signicant at the 0.01 level (two-tailed); *Correlation
is signicant at the 0.05 level (two-tailed).
818 Public Management Review
On the contrary, the results provided in Table 3 strongly support H2: board
relational capital (in terms of interlocking directorates) is positively and signicantly
(p 50.05) related to the likelihood of the adoption of all quality management tools
considered.
H3 predicted that LPUs with more women on the board would be more likely to use
quality management tools. H3 is not supported by the results in Table 3.
Summing up, when controlling for such variables as organizational size, LPU
ownership, diversication strategy, geographical location, LPU nancial performance
and area of activity (i.e. type of services provided), there is a positive and signicant
relationship between the adoption of quality management tools and board relational
capital (in terms of interlocking directorates).
DISCUSSION AND CONCLUSIONS
From a brief overview of the corporate governance literature, we have highlighted that
the agency theory has been the starting point for most research on boards and
governance in the past two decades (Hillman and Dalziel 2003; Gabrielsson and Huse
2004), because it offers a comprehensive denition of board attributes, starting from
the hypothesis that potential conicts of interest arise from the separation of ownership
and control in organizations (Fama 1980).
Regarding the board size, agency theory suggests that large boards can be less
effective than small boards (Jensen 1993). Referring to the composition of the board,
the agency theory stresses the importance of independence as a fundamental condition
of board effectiveness, supporting the hypothesis of a negative relationship between
board relational capital (see interlocking directorates) and board effectiveness. Our
ndings do not seem to t the mainstream literature, supporting instead the adoption of
the resource-dependence perspective as the theoretical framework for understanding
how the boards affect the adoption of some innovative quality management tools. We
tested three hypotheses based on resource-dependence theory and we found support for
one of them: our data highlight a positive relationship between board relational capital
(in terms of interlocking directorates) and the adoption of quality management tools in
LPUs. Instead, board size and board gender diversity were not found to be useful
explanatory variables.
A possible explanation of this empirical evidence is related to the particular role that
interlocking directorates play in promoting and diffusing innovation by exploiting
managerial experience. In fact resource-dependence scholars have argued that
interlocking directorates serve as mechanisms for the diffusion of managerial
innovations (Rogers 1983). The underlying reasoning is that, if one organization
develops a promising new approach for instance to quality the interlocking directors
of that organization will have access to information about the new approach and will
take it back to their organizations. More generally, resource-dependence theorists have
Monteduro et al.: Board of directors and quality management tools 819
suggested that interlocking directorates play an important role in disseminating
information across organizations (Burt 1980).
The role of interlocking directorates in terms of promoting managerial innovation (in
our case, the adoption of quality management tools) is even more tangible for LPUs.
There are two reasons for this claim.
On the one hand, similarly to other public organizations, LPUs usually lack
managerial expertise (Halligan 2003). Interlocking directorates could be a means of
lling this managerial gap. In fact, if LPUs directors also sit on boards of other
organizations (especially in private rms), they could gain some useful knowledge about
business practices. Therefore, the adoption of quality management tools by LPUs could
depend, at least in part, on the role of interlocking directors in transferring innovative
practices adopted by interlock organizations.
On the other hand, LPUs operate in an environment characterized by high levels of
complexity and uncertainty. The new legislative context highlights that LPUs social and
economical expected results may be efciently achieved through close interactions
between them and their task environment, with a high level of co-ordination and
integration. As a result, they need to nd ways of managing this dependence and
ensuring they get the resources and information they need. From this perspective the
board is seen as one of the means for reducing uncertainty by creating links with the
external environment by exploiting knowledge.
Some limitations of our study should be highlighted as well. First, although having
taken into account a large set of variables (such as organizational size, LPU ownership,
diversication strategy, geographical location, LPU nancial performance and area of
activity), it may be possible to have left aside other external variables that affect the
relationship. Further research and studies are needed to corroborate and conrm our
results.
Moreover, our research is focused on the Italian context, while it would be
interesting to have cross-country analysis.
To date, the article represents one of the few empirical studies on boards in the
public governance literature and we hope it represents a starting point for a wider
debate. Further examination should be carried out in order to understand better what
role and responsibilities boards have in the public sector. Moreover, further research
should be carried out with the purpose of understanding if other theoretical frameworks
(different from those usually employed in the corporate governance literature such as
the agency theory) could be applied to the study of public sector boards.
The arguments provided highlight the opportunity to launch an in-depth investigation
on the role of board of directors in the governance of public organizations. To this
purpose, the results of our investigation suggest that the agency theory, traditionally
adopted by the governance literature, is able to catch only a part of the complex role
that boards may (or might) play in the new governance arrangements of public
organizations. In fact, our ndings support the relevance of the resource-dependence
theory to understand the institutional function of the board structure, supporting the
820 Public Management Review
organization links to its external environment, ensuring critical resources, building
external relations and aiding in the formulation of strategy or other important decisions
concerning both users and general stakeholders needs.
In this framework, new lines of research emerged concerning board members key
attributes for boards effectiveness. While the agency perspective highlights the
importance of board independence as a fundamental condition related to the ability of
the board to monitor and control the activities of management in accordance with the
interests of shareholders; the resource-dependence perspective evidences the relevance
of the board members competences to provide resources and to support the
organization in pursuing its social and economic goals.
Summing up, supporting the adoption of the resource-dependence theory as the
analytical frame for studying boards in public governance, the article stimulates various
future research directions on personal traits and characteristics of board members
needed to build effective boards for public organizations.
NOTE
1 ISO 9000 is a series of international standards dealing with quality systems that can be used for external
quality assurance purposes. ISO 9000 provides organizations with a series of guidelines on how to establish
systems for managing quality products or services. ISO 9000 requires organizations to document practices that
affect the quality of their products or services. Organizations are then expected to follow these procedures to
gain and maintain certication.
ISO 14000 is a new standard for environmental management systems that is applicable to any organization.
ISO 14000 is similar to ISO 9000 and both can be implemented side by side. In order for an organization to be
awarded an ISO 14000 certicate they must be externally audited by an audit body that has been accredited by
an accreditation body.
Customer Satisfaction Management encompasses a wide number of methods and tools for measuring user
perceptions of service and for developing a user focus. Surveys, focus groups and complaints analysis are the
most frequent tools (vretveit 2005: 547).
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W
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R
0
1
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3
7
.
4
8
6
.
0
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7
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9
5
7
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7
.
1
1
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0
8
1
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5
9
.
3
8
4
*
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7
.
0
2
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7
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6
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0
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2
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7
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1
5
.
W
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1
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3
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4
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2
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.
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7
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1
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6
4
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9
8
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.
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P
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T
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1
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2
8
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4
5
4
7
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3
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7
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0
9
0
7
.
0
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6
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1
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4
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.
0
0
2
.
2
7
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*
.
0
1
5
7
.
2
2
9
.
0
4
7
7
.
1
5
6
7
.
0
8
3
7
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2
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7
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3
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7
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3
3
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1
7
.
O
T
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S
0
1
.
1
7
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3
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6
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0
9
1
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1
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7
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8
3
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3
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N
o
t
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s
:
N

6
0
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*
*
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s
i
g
n
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c
a
n
t
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;
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t
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;
*
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5
(
t
w
o
-
t
a
i
l
e
d
)
.
824 Public Management Review
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