Academic journal article Administrative Science Quarterly

Defections from the Inner Circle: Social Exchange, Reciprocity, and the Diffusion of Board Independence in U.S. Corporations

Academic journal article Administrative Science Quarterly

Defections from the Inner Circle: Social Exchange, Reciprocity, and the Diffusion of Board Independence in U.S. Corporations

Article excerpt

With few exceptions, organizational researchers and corporate governance experts have historically viewed corporate boards of directors as "rubber stamps" for management initiatives (Herman, 1981) or as "tools" of top management (Pfeffer, 1972: 219). From this viewpoint, boards are populated either by (1) inside directors who can ill afford to criticize their superiors or themselves, (2) uninformed outsiders who are unable to evaluate top management, or (3) more knowledgeable outside directors who are CEOs themselves and whose empathy for their fellow chief executive officers may diminish their willingness to monitor them actively. Interlocking directorships among top managers have also traditionally been viewed as contributing to a cohesive "inner circle" of organizational elites accountable only to themselves (Useem, 1984). From this traditional perspective, overlapping board memberships provide a communication network for managerial elites that helps to preserve their corporate power (Useem, 1984; Davis, 1991; Mizruchi, 1996).

More recently, however, the business press has used numerous vivid cases to illustrate a dramatic shift toward increased board activism and control over top management (e.g., Fortune, 1993; Business Week, 1994). This apparent change among large corporations is not easily reconcilable with the depiction of corporate boards as a passive group representing a cohesive inner circle of corporate leaders, since it suggests that boards are increasingly likely to act independently of top management's preferences. Recent attempts to explain the causes of this change toward increased board monitoring, or internal corporate control (Walsh and Seward, 1990), have usually referred to external forces, notably increased activism by large, institutional investors (Fortune, 1993; Davis and Thompson, 1994). Several recent empirical studies suggest, however, that the magnitude of institutional investor ownership does not necessarily increase the willingness of boards to challenge management (e.g., Daily, 1996; Kim and Ocasio, 1995; Sundaramurthy, 1996; Westphal and Zajac, 1997). While institutional investors may be able to exert their will on specific issues where they have voting power, it is not clear whether and how they can overcome longstanding social relationships and norms of mutual support that are assumed to exist between managers and directors.

The present study proposes a more comprehensive explanation of the rise in board independence that takes into account the social exchange relationships among corporate leaders, bringing into question the cohesiveness of the inner circle. While we do not deny that macro-social forces such as institutional shareholder activism may have played a role in sparking greater board independence from management in large U.S. corporations, we suggest that the diffusion of board independence may have resulted from micro-mechanisms relating to social and psychological dynamics within the inner circle of corporate leaders.

Outside directors who are themselves CEOs of other large corporations may play a pivotal role in determining whether a board has a passive or an active orientation (Lorsch and MacIver, 1989: 18), and they may thus have a more complex role in corporate governance than previously assumed in the literature. Specifically, we propose that although CEO-directors may typically support fellow CEOs by impeding increased board control over management, CEO-directors experiencing increased board control in their own corporations may also experience a reversal in their perceived basis for social exchange with other top managers. This change in the norms of reciprocity underlying generalized exchange could then lead CEO-directors to "defect" from the network of corporate leaders. This study shows how these specific instances of "defection" from a previously mutually supportive network have diffused across organizations and over time, and how this has created the current situation of increased board independence in large U. …

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