Academic journal article Academy of Strategic Management Journal

Board Power, CEO Appointments and CEO Duality

Academic journal article Academy of Strategic Management Journal

Board Power, CEO Appointments and CEO Duality

Article excerpt

ABSTRACT

Decades of research on corporate boards of directors resulting in diverse and often inconsistent findings have not dampened scholarly interest in the topic. Instead, researchers are attempting to more effectively model the board-firm relationship. One such modeling approach considers the power of the board in relation to top management. Drawing on upper echelons thinking (Hambrick & Mason, 1984) and the concept of managerial power (Finkelstein, 1992), this conceptual study develops the notion of board power in relation to CEO duality. Based on a framework composed of structural, ownership, expertise, and prestige power of the board, the study develops several propositions predicting the impact of board characteristics on a key aspect of managerial power - the appointment of the CEO to the position of board chair. This work contributes to scholarly understanding of the role of agency theory in explaining corporate governance phenomena by extending upper echelons thinking to the study of boards.

INTRODUCTION

Corporate boards of directors have been the focus of several decades of research prompting calls by organizational researchers (e.g., Dalton, Daily, Ellstrand, & Johnson, 1998; Finkelstein & Hambrick, 1996) for multitheoretic approaches and development of constructs that more effectively model this relationship. Among constructs recently capturing the attention of governance researchers is that of the power of the board of directors. A board's ability, or capacity, to monitor top management is dependent on its power to effect and enforce its will. Hence, examination of the nature of board power and its antecedents and outcomes is essential to our understanding of the governance function of boards, particularly with respect to firm strategic outcomes (Finkelstein and Hambrick, 1996; Hillman and Dalziel, 2003).

A strategic outcome of interest to governance researchers is CEO duality, in which the CEO serves also as the board chair. In spite of both theoretical and practical admonitions to separate the CEO and board chair positions, roughly 80% of U.S. firms continue the practice of appointing one person to both positions (Faleye, 2007; Worrell, Nemec, & Davidson, 1997). Neither are organizational researchers in solid agreement that separation of the two roles is always desirable adopting instead a contingency perspective that under certain conditions CEO duality may be a preferred arrangement and under other conditions separation may be more effective (Faleye, 2007; Finkelstein & D'Aveni, 1994). For example, Finkelstein and D'Aveni (1994) reported that powerful boards were less likely to favor duality when performance was poor but that vigilant boards were associated with CEO duality when performance was high. Hence, the question of CEO duality is practically and theoretically important, and examining its antecedents and outcomes may lead to greater practical and scholarly understanding of the nature of the board's monitoring capacity and the impact of board monitoring on firm outcomes. Furthermore, understanding antecedents of the appointment of the CEO as board chair sheds light on the nature of board power.

This study examines the impact of board power on the likelihood that a newly appointed CEO is also eventually appointed chair. Specifically, the study conceptualizes board characteristics in terms of board power. Using a framework of managerial power composed of structural, ownership, expertise, and prestige power (Finkelstein, 1992) and extending upper echelons thinking to the study of boards of directors, board power is framed within the context of firm critical contingencies to predict dual leadership by a newly appointed CEO.

CEO DUALITY AND BOARD POWER

CEO Duality

Because of the potential potency of CEO duality as a corporate control mechanism, its consequences have been the focus of considerable empirical investigation (See Daily and Dalton (1997) for a narrative analysis of empirical examination of the relationship between CEO duality and firm financial performance. …

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