Academic journal article Journal of Management and Organization

Board Competence and the Top Management Team's External Ties for Performance

Academic journal article Journal of Management and Organization

Board Competence and the Top Management Team's External Ties for Performance

Article excerpt

Abstract

This study explains the inconsistent findings of previous research on board management by examining the direct and interaction effects of board independence and the top management team's external ties on firm performance. The results obtained using a multiyear sample of firms indicate that outsider-rich boards improved firm performance when they worked with top managers imported from outside the focal industry. On the other hand, a high proportion of outsiders on the board and top managers imported from the focal industry were not a desirable combination for firm performance. The findings imply that researchers and practitioners should pay more attention to identifying the conditions under which board competence aligns with top management.

Keywords: boards of directors, board competence, top management team's external ties

Following the economic model of man, which treats human beings as rational actors seeking to maximize their utility, agency theorists have argue that, given the separation of ownership and management in most modern corporations, managers will maximize their utility at the expense of shareholders (Jensen & Meckling, 1976). Thus, agency theorists have suggested that the primary duty of a board is to monitor managerial opportunism and ensure that top managers perform their managerial duties in the best interests of shareholders (Dalton, Daily, Ellstrand, & Johnson, 1998). Independent boards are widely believed to reduce agency costs and thus improve firm performance. However, previous studies have not provided consistent evidence for this belief (Dalton et al., 1998; Langevoort, 2001).

For undoubtedly complex reasons, some studies have indicated a need for focusing on interaction processes between top management and boards for a better understanding of these inconsistent findings of previous research (Daily, Dalton, & Cannella, 2003; Nicholson & Newton, 2010; Wu, 2008). Kor (2006) argued that the joint exploration of direct and interaction effects of top management and boards should receive more attention from researchers and practitioners. Others have suggested that evaluating board competence may enable researchers to better explain these inconsistencies. Board members often lack competence in keeping the management honest, which is one of their most important roles (Stiles & Taylor, 2002; Wu, 2008). However, despite this perceived importance of board effectiveness to the desired and valued outcomes of firms, few studies have empirically examined the competence of boards in terms of their monitoring role (Nadler, 2004).

From a multi-theoretical perspective, this paper theorizes about and tests the effects of: (1) external ties of the top management team (TMT); (2) independent boards; (3) dynamic interactions between the TMT's external ties and the competence of independent boards on firm performance. Upper-echelon theory emphasizes the attributes of senior managers as a team because strategic outcomes often result from dynamic processes in which managers interact, consult, and debate with one another (Kor, 2006). In this regard, the present study focuses on the TMT, not individual senior executives. The TMT is a team of managers responsible for selecting and implementing the firm's strategies. Specifically, previous studies have defined the TMT as a group of individuals with the title of vice president and above, such as CEOs, presidents, senior vice presidents, vice presidents, and CFOs (e.g., Carpenter & Fredrickson, 2001; Finkelstein & Hambrick, 1996; Goll, Sambharya, & Tucci, 2001).

THEORY AND HYPOTHESES

TMT's external ties and firm performance

Previous studies have provided considerable empirical support for the view that organizational outcomes reflect the characteristics of top managers (Bantel & Jackson, 1989; Michel & Hambrick, 1992; Wiersema & Bantel, 1992) and social processes within the TMT (Eisenhardt & Schoonhoven, 1990). …

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