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Trends in Corporate Governance Research on Board Leadership: Implications for Research and Practice
Abstract
This chapter provides a review of 127 published articles reporting on board leadership in corporate governance research. The articles are reviewed and presented with respect to the background of authors, the academic journals where studies are published, the main topics that is pursued, and the empirical contexts studied and methodologies used. Moreover, we identify trends in scholarly thinking on board leadership that has emerged and developed during the past decades. On the basis of these findings, we provide directions for further research on board leadership. Also, we make some reflections about possible research streams that may provide fertile ground for best practice recommendations.
... Furthermore, the extant research on board leadership usually leans towards exploring the antecedents for, and outcomes of, structural leadership characteristics, such as CEO-duality (Daily and Dalton, 1992b;Daily and Dalton, 1993;Yar Hamidi and Gabrielsson, 2012), without considering board processes and board chairpersons' actual behaviour and qualifications (Huse and Gabrielsson, 2012;Gabrielsson et al., 2007). This chapter thus adds to this body of knowledge in at least three ways. ...
We argue in this study that a resolution of the ambiguity and conflict surrounding executive compensation and corporate control practices requires a more unified perspective on top management compensation, ownership, and corporate governance. Drawing from agency and organizational research, the study develops and tests a contingency perspective on how organizations seek to ensure appropriate managerial behavior through a balancing of trade-offs between incentive, monitoring, and risk-bearing arrangements. We suggest that (1) the ability of firms to use executive compensation contracts to address managerial incentive problems is hampered by risk-bearing concerns that stem from the risk aversion of top managers, (2) this problem is particularly severe for riskier firms, and (3) firms seek to address this problem by structuring their boards of directors to ensure sufficient monitoring of managerial behavior, given the magnitude of the agency problem. This contingency perspective is then tested using a large sample of initial public offering firms. The findings and their implications for the debates about ownership and control and executive pay for performance are discussed.
This paper explores the nature and relationship of the positions of CEO and chair of the board of directors through two related analyses, one examining CEO and board chair turnover and the other examining consolidations and separations in these two positions, using transition-rate analysis, in a sample of 671 large American manufacturing firms for the period from 1978 to 1980. Both turnover and structural change in the top positions were found to depend on firm performance and industry structure; turnover also depended on firm size and the structure of the positions, and structural change also depended on board structure, controlling for retirements. The results highlight the power of the CEO, the tendency to consolidate the top positions under the CEO, and the greater accountability of the person in the combined position for firm performance. The paper concludes with some implications of the findings for understanding the CEO and board chair positions, with an emphasis on top-management power, makes recommendations for research on turnover, and provides suggestions for corporate behavior, based on the results of this study.
This study of 258 corporations provides an assessment of the impact of institu-tional investor stockholding on fair price adoption decisions. In addition, the influence of board composition, board leadership, and the interaction between these two governance attributes on such decisions is examined. The results of analyses suggest that only institutional stockholding plays a significant role.
This article synthesizes empirical researchfindings on the impact of boards of directors on corporate financial performance. An integrative model of board attributes and roles is presented, and research support on their links is discussed. The review identifies critical short-comings of past studies and concludes by offering an agenda for future studies in this promising area of empirical research.
Research examining the association of corporate governance structures and firm performance has relied almost exclusively on the large-scale firm. This may, however, be a limited forum for questions of this sort. Officers and boards of directors for the large-scale firm may lack the discretion—or the wherewithal—to effect changes In policy or outcomes. It Is In the smaller firm that such performance/governance linkages may be more easily observed. This study, then, focuses on a number of corporate governance structures and their relationships to firm performance for the smaller corporation. Ironically, the very organizations that the literature suggests might benefit most from independent governance structures are those that rely on them least.
Board activists continue to suggest--even demand--that CEO and chairperson positions be held separately. Such entreaties persist with no empirical affirmation that one structure is more "independent" compared to the other. A logistic repression provides no evidence of differences in independence between these structures across a host of dimensions.
- This paper describes the process of inducting theory using case studies from specifying the research questions to reaching closure. Some features of the process, such as problem definition and construct validation, are similar to hypothesis-testing research. Others, such as within-case analysis and replication logic, are unique to the inductive, case-oriented process. Overall, the process described here is highly iterative and tightly linked to data. This research approach is especially appropriate in new topic areas. The resultant theory is often novel, testable, and empirically valid. Finally, framebreaking insights, the tests of good theory (e.g., parsimony, logical coherence), and convincing grounding in the evidence are the key criteria for evaluating this type of research.
Careful review of extant research addressing the relationships between board composition, board leadership structure, and firm financial performance demonstrates little consistency in results. In general, neither board composition nor board leadership structure has been consistently linked to firm financial performance. In response to these findings, we provide meta-analyses of 54 empirical studies of board composition (159 samples, n=40,160) and 31 empirical studies of board leadership structure (69 samples, n=12,915) and their relationships to firm financial performance. These-and moderator analyses relying on firm size, the nature of the financial performance indicator and various operationalizations of board composition-provide little evidence of systematic governance structure/financial performance relationships. (C) 1998 John Wiley & Sons, Ltd.
What's the rationale for dividing the roles of chairman and CEO? Studies show that, usually, doing so has no effect on the company's performance.
In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
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Corporate entrepreneurship is important for organizational survival, profitability, growth, and renewal. Data from 127 Fortune 500 companies show that executive stock ownership and long-term institutional ownership are positively associated with such entrepreneurship. Conversely, short-term institutional ownership is negatively associated with it, as is a high ratio of outside directors on a company's board. Outside directors' stock ownership somewhat mitigates the latter negative association. Outsiders, including stock owners, might lead companies away from internal product development, the traditional route to corporate entrepreneurship. Finally, an industry's technological opportunities moderate the associations observed between corporate governance and ownership variables and corporate entrepreneurship.
CEOs who jointly serve as board chairs have been the focus of considerable controversy of late. Powerful organizational constituents including the California Public Employees Retirement System (CalPERS) and the New York City Pension Fund have targeted firms that rely on the joint structure. These shareholder groups prefer a non-executive director serving as board chair. Governance activists have made similar recommendations, most notably in the Cadbury Report, a governance reform document written in the United Kingdom. The central concern of reform activists is that joint service as CEO and board chair erodes the corporate system of checks and balances and compromises independence between directors and firm officers. Not surprisingly, CEOs rarely share this concern. More than 80 percent of large firm CEOs also serve as board chair. They believe the joint leadership structure provides a unified focus and communicates strong leadership to the external community. Accordingly, we pose the question: Does board leadership structure matter? Specifically, we focus on the extent to which chairs who jointly serve as CEO are more, or less, independent than their separate counterparts. Our analysis leads us to conclude while there may, at times, be compelling reasons for formally separating the CEO and board chair positions (e.g., financial distress; weak board of directors), to do so as a matter of policy for the purpose of institutionalizing independence between the board of directors and firm management is likely to be a misdirected effort.
This study examines CEO influence in the board of director selection process and the theoretical mechanism by which CEO influence is presumed to affect subsequent board decision making on CEO compensation. We address both of these issues by linking political and social psychological perspectives on organizational governance. We propose that powerful CEOs seek to appoint new board members who are demographically similar, and therefore more sympathetic, to them. Using a longitudinal research design and data on 413 Fortune/Forbes 500 companies from 1986 to 1991, we examine whether increased demographic similarity affects board decision making with respect to CEO compensation contracts. The results show that (1) when incumbent CEOs are more powerful than their boards of directors, new directors are likely to be demographically similar to the firm's CEO; (2) when boards are more powerful than their CEOs, new directors resemble the existing board; and (3) greater demographic similarity between the CEO and the board is likely to result in more generous CEO compensation contracts. We discuss the implications of the strong effect of demographic similarity for corporate control issues.
When a firm's chief executive officer is also the chairperson of its board, directors have opposing objectives. According to organization theory, such CEO duality establishes strong, unambiguous leadership. But according to agency theory, duality promotes CEO entrenchment by reducing board monitoring effectiveness. We developed a contingency framework to resolve these perspectives. Sampling three industries to enhance generalizability, we found that board vigilance was positively associated with CEO duality. Duality was less common, however, when CEOs had high informal power and when firm performance was high.
This study shows how social psychological and sociopolitical factors can create divergence in the preferences of an incumbent CEO and existing board regarding the desired characteristics of a new CEO, and how relative CEO/board power can predict whose preferences are realized. Using extensive longitudinal data, we found that more powerful boards are more likely to change CEO characteristics in the direction of their own demographic profile. Outside successors are also typically demographically different from their CEO predecessors but demographically similar to the boards.
Empirical research has typically rested on the assumption that board independence from management enhances board effectiveness in administering firms. The present study shows how and when a lack of social independence can increase board involvement and firm performance by raising the frequency of advice and counsel interactions between CEOs and outside directors. Hypotheses were tested with original survey data from 243 CEOs and 564 outside directors on behavioral processes and dynamics in management-board relationships.
This research examines how the board of directors affects the relationship between Research and Development (R&D) investment and firm performance. The study, conducted on a sample of French companies listed on Euronext Paris, shows that the relationship between R&D investment and firm performance is significantly positive. However, this relationship varies significantly with the characteristics of the board of directors. Specifically, the results show that board independence, chief executive officer and chairman duality and the number of board meetings have a positive effect on the R&D investment-firm performance relationship, whereas board size affects this relationship negatively.
This study examines the determinants of corporate board structure in selected sub-Saharan Africa. We specifically investigate which firm-level characteristics exhibit any link whatsoever with board size, board composition and board leadership structure in Ghana, Nigeria, Kenya and South Africa. We also ascertain whether alternative governance mechanisms such as institutional shareholders and debt holders serve as substitutes in addressing the agency conflicts in firms. The findings of the study indicate that institutional ownership is an alternative governance mechanism for board size for a majority of the countries under study. The findings of this study also indicate that firm size is the only variable that significantly and positively explains board size for all the four countries under study and the other firm-level characteristics, though significant in some cases in explaining the board structure, take on different signs from country to country and for different board characteristics.
This study examined the impact of organizational performance, the composition of the board of directors, and the age of the CEO on the appointment of an internal or external successor in 240 firms to CEOs who left between 1978 and 1984. Poor performance, as measured by abnormal security returns, and a smaller proportion of internal members on the board of directors were associated with an external successor when the departing CEO was younger than traditional retirement age. No significant relationships were found for departing CEOs who had reached retirement age. The results are discussed in the context of leadership exercised by chief executive officers and boards of directors.
Strategic management researchers often note the inability of many phenomena to consistently explain organizational performance. Using a two-study format, we examine the possibility that sampling practices may contribute to this inability. We chronicle sampling practices within 437 studies investigating the determinants of organizational performance published between 1980 and 1999 in the Academy of Management Journal, Administrative Science Quarterly, Journal of Management, Organization Science, and Strategic Management Journal. Our results reveal that fewer than one in five studies rely on a random sample and that researchers offer little a priori acknowledgement of sample limitations. Although the first study suggests that sampling issues have been problematic, it cannot offer direct evidence. Thus, in the second study, we examine the effect of sample selection on empirical results by testing one popular relationship from the strategy literature (chief executive officer duality and performance) using four different samples. Whereas a stratified random sample offers some evidence of a positive relationship, a purposive sample detects a negative relationship and an available sample and simple random sample detect no relationship. Taken together, the studies suggest that sampling practices must improve if strategic management is to approach its objective of explaining performance. Accordingly, several exemplar studies are described and recommendations are offered to guide future sampling practices.
Using a sample of 192 Standard & Poor's 500 firms, we examine the impact of corporate governance and ownership context on a particular instance of board entrenchment: adoption of classified board provisions. Interestingly, while increased outsider representation measured simply as a proportion of outsiders does not affect the rate of adoption, reliance on a more fine grained measure, which includes other affiliations of outsiders, results in a marginally significant influence. Moreover, it appears that reliance on a simple proportional measure is likely to distort the effects of other variables. Finally, institutional stock ownership is found to be the most significant factor associated with decreased rate of adoption.
The objective of this article is to provide ideas to help corporate boards function effectively, focusing on the inner workings of boards as well as the human side of governance. We spent a year making direct observations of TINE Group's corporate boardroom. Our observations showed the importance to boardroom dynamics of board leadership, individual personalities, group values, and a process-oriented decision-making culture. Our main conclusion is that a process-oriented culture may be crucial for a board's contribution to strategic decision-making, since it makes it possible for the board to shape and embed the content, context, and conduct of strategy. Included in the process-oriented boardroom culture are cohesiveness, openness and generosity, preparedness and involvement, creativity, and criticality. The value of the study is the development of practical ideas as a way of helping boards become important assets for value creation.
There have been increasing calls for greater outside directors to be more aware and informed about the firm S decisions and decision-making process. If outsiders are more informed, it is presumed that they will work more closely with the CEO, and as a result, positively influence firm performance. This research examined individual outside directors’ awareness of one prominent aspect of the CEO’S activity, namely the CEO’S strategic decision style. We found that the outside director3 awareness of the CEOS decision style was positively related to financial profitability and negatively related to financial risk after controlling for industry, organizational size, profit orientation, board leadership, and proportion of insiders. In addition, we found that the CEOS tenure was negatively related to outsider awareness, but this relationship was stronger in non-profit organizations and situations where the CEO did not chair the board. Implications of the findings for future research and application are discussed.
This study examines the influence of the social network of board interlocks on strategic alliance formation. Our theoretical framework suggests how board interlock ties to other firms can increase or decrease the likelihood of alliance formation, depending on the content of relationships between CEOs (chief executive officers) and outside directors. Results suggest that CEO-board relationships characterized by independent board control reduce the likelihood of alliance formation by prompting distrust between corporate leaders, while CEO-board cooperation in strategic decision making appears to promote alliance formation by enhancing trust. The findings also show how the effects of direct interlock ties are amplified further by third-party network ties.
Recent corporate scandals have put company boards in the spotlight. Legislation, codes of conduct, and guidelines have been developed to improve corporate governance. But while many prescriptions for improving corporate governance focus on the structure of boards, Dr. Richard Leblanc's research suggests that there is no direct causal relationship between board structure and corporate performance. Indeed, many recent failed corporations had exemplary board structure. Richard Leblanc discusses how to assess board effectiveness and improve it.
With the dramatic rise in the number of corporate bankruptcies since the Bankruptcy Reform Act of 1978, it is increasingly important to understand those factors which are associated with a Chapter 11 reorganization filing. Of particular interest is the association between firms' strategic leadership and successfully emerging from a bankruptcy reorganization. This study examines the association between bankrupt firms' board composition and board leadership structure and four outcomes of the bankruptcy reorganization process. While controlling for firm size, financial indicators, outside ownership interests, and CEO tenure, stepwise multiple discriminant function analysis indicates predictive power for board composition, but not board leadership structure.
The purpose of this paper is to draw together the many different facets of corporate governance that have been examined in the extensive literature in both strategic management and finance. In particular, we are interested in the relationship between the typical agency theory constructs of monitoring, incentives and ownership structure, with financial performance. First, we catalog this large body of work to see where there are still unanswered questions. We find that previous work has generally focused on examining subsets of governance mechanisms, typically studying one or two governance variables in any one study. Our view is that the most critical issue still to examine, is the ability of firms to choose among a number of different governance mechanisms in order to create the appropriate structure for that firm, given the environment in which it operates. We identify a sample of firms and examine CEO compensation, CEO tenure, board composition, leadership structure and ownership structure and their contribution to both market performance, Market Value Added, and risk-adjusted accounting performance, Economic Value Added. In addition, we control for ownership by block-holders, industry performance, and firm size. We examine these measures both individually and as interactions. Our results indicate that while some of the traditional agency variables do impact performance, both individually and as interactions, industry performance is a strong and significant driver of performance for our sample of firms. We conclude that, while there is evidence to support that firms may use governance packages to deal with agency issues, further research could provide important evidence on these issues by focusing on examining a more refined, industry-level context.
This paper examines the role of leadership structure and board composition in the context of poison pill adoptions. We distinguish, for the first time, independent, separated leadership structures from non-independent, separated leadership structures. Our results suggest that there is an important interaction effect between board composition and the independence of the board Chairman, and that while there is a critical monitoring role for outside directors, inside directors also provide a critical informational role in board decision-making.
This study investigates empirically the relationship between three major corporate governance attributes (family shareholding, non-executive directors and independent chairman) and the existence of audit committees across a sample of 397 publicly traded firms in Hong Kong. The results show that at a medium level of family shareholding (between 5% and 25%), the convergence-of-interest effect is dominant and the existence of audit committees decreases. At a high level of family shareholding (more than 25%), the entrenchment effect is dominant and as a result, the existence of audit committees increases. In addition, we show that the response of investors to audit committee existence is not dependent upon family shareholding when there is an independent chairman. The findings of our study also suggest that there is a positive association between the proportion of independent non-executive directors on the corporate board and audit committee existence. In addition, the results show that the positive association between independent non-executive directors is stronger for firms with an independent chairman. Implications of these findings for regulators are discussed.
The primary objective of this study is to test a theoretical framework relating four major corporate governance attributes with the extent of voluntary disclosure provided by listed firms in Hong Kong. These corporate governance attributes are the proportion of independent directors to total number of directors on the board, the existence of a voluntary audit committee, the existence of dominant personalities (CEO/Chairman duality), and the percentage of family members on the board. Using a weighted relative disclosure index for measuring voluntary disclosure, the results indicate that the existence of an audit committee is significantly and positively related to the extent of voluntary disclosure, while the percentage of family members on the board is negatively related to the extent of voluntary disclosure. The study provides empirical evidence to policy makers and regulators in East Asia for implementing the two new board governance requirements on audit committee and family control.
This paper empirically examines the relationship between the extent of voluntary disclosure and levels of family ownership and board independence including the influence of an independent chairman. Using hand-collected data on voluntary disclosure for a sample of 273 listed firms in Hong Kong for the year 2002, the results show that at moderate to low levels of family shareholding (25% or less), the convergence of interest effect is dominant and the extent of voluntary disclosure is relatively low. At higher levels of family shareholding (more than 25%), the entrenchment effect dominates and is associated with higher voluntary disclosure. In addition, the results show that the appointment of an independent chairman is positively associated with the level of voluntary disclosure. Most importantly, the appointment of an independent chairman appears to mitigate the influence of family ownership on voluntary disclosures, and holds for firms with a non-independent chairman. While the extent to which independent non-executive directors are appointed to the board is positively associated with voluntary disclosure, the role of such directors is mitigated by the role of chairman.
‘Making tomorrow's’ company out of today's’ sums up the basic role of every chairman and board. The role and characteristics of the chairman are set out, with sections on culture, politics and people and the organization, and the priorities for action. Evidence is cited from interviews with 15 chairmen and their experience and views have been distilled into a thesis on the role of the public company chairman at present and in the future.
This study examines the associations between the characteristics of boards of directors of initial public offering (IPO) firms and the availability of growth opportunities and level of inside share ownership of these firms. Three characteristics of boards of directors are examined: board size, proportion of outside directors, and the separation of the CEO and chairperson's roles (dual leadership). The impact of firm size on board characteristics is controlled for in the empirical tests. Based on a sample of 110 New Zealand firms that made initial public offerings of equity securities over the period 1983 to 1987, this study finds that firms that have lower inside share ownership tend to employ larger boards. In addition, the proportion of outside directors is positively related to the extent of growth opportunities available to a firm and negatively related to inside share ownership. Finally, firms with relatively more growth opportunities are likely to have dual leadership. Although some contrary results are found, the findings from this study provide some support for arguments that firms with greater agency problems, attributable to low inside share ownership and significant growth opportunities, are likely to choose boards of directors that are more effective at mitigating these problems.