Institutionalized Action and Corporate Governance: The Reliance on Rules of CEO Succession

Article excerpt

The centrality of both formal and informal rules in guiding organizational actions is an idea with a long history and theoretical tradition (e.g., Gouldner, 1954; Weber, 1978; Jackall, 1988; March and Olsen, 1989; Zhou, 1993). According to this view, rules of appropriate behavior infuse all areas of organizational activity and lead to regularity and structure in organizations. That rule-based action characterizes organizational decisions is an established conception in the organizational literature. That reliance on rules also characterizes major decisions of boards of directors, however, is less well accepted in the literature on corporate governance. Instead, most organizational and economic theorists have viewed corporate boards as guided by a logic of rationality and interests and have ignored how rules shape board decision making. Both agency theorists (Fama and Jensen, 1983) and resource dependence theorists (Pfeffer and Salancik, 1978) have highlighted the role of boards in controlling the activities and direction of the corporation to foster either shareholders' interests or organizational survival, respectively. The ability or inability of corporate boards to foster adaptation is discussed in terms of the efficiency and effectiveness of board control (Walsh and Seward, 1990; Jensen, 1993). The prevalence of rule-based action in board decision making remains relatively unexplored.

This paper explores the reliance on formal and informal rules in corporate governance. The principal idea is that corporate boards of directors are guided in their decisions by both historical precedents and formal rules that are not easily modified as board actions become institutionalized and norms of appropriate beliefs and behavior become established (Zucker, 1977; March and Olsen, 1989). Building on an institutional theory of action (March and Olsen, 1989), it presents a new explanation for inertia in corporate governance and shows that CEO succession is a routinized process, conditioned by formal and informal rules. The rules and routines of executive succession and selection embody the board's role in what Weber (1978) called the "routinization of charisma" as the power and authority of the founding chief executive becomes depersonalized and is invested in the formal position rather than in the individual occupant.

This paper contributes both to the theoretical literatures on corporate governance and organizational rules and to the empirical research on CEO succession and selection. The theory focuses on the consequences of rules in structuring organizational action and decision making, while the empirical research examines the reliance on formal and informal rules and routines of insider versus outsider CEO succession in U.S. industrial corporations from 1960 to 1990. Unlike much previous work on the selection of insiders versus outsiders that examines CEO selection conditional on succession having occurred (Boeker and Goodstein, 1993; Cannella and Lubatkin, 1993), this study examines CEO succession and selection as interdependent. An emphasis on how the reliance on rules of CEO succession persists despite changes in the firm's performance and other moderating influences distinguishes this paper from adaptationist perspectives on corporate governance, which imply that executive succession is unlikely to be routinized.

THEORY

An institutional theory of action (March and Olsen, 1989; March, 1994) highlights how rules enable and constrain organizational decisions and those of its boards of directors. This theory is part of a broader institutionalist perspective in contemporary social and organization theory (Scott, 1995). Three aspects of the theory are important in explaining corporate governance. First, it proposes a rule-based theory of action and decision making, in which organizational decisions are enacted through the application of appropriate rules (March, 1994). It distinguishes this rule-based theory of action from theories of bounded rationality or interest-based approaches to rule following. …