Westphal 1998

How CEOs Adapt to Increases in Structural Board Independence from Management

* Abstract

Boards of directors -> organizational outcomes.

+ the behavior of chief executive officers (CEOs)

1) Archival data on corporate strategy, CEO compensation, board structure, and demographics, 

2) Data from an original survey of both CEOs and outside directors from 221 large- and medium-sized U.S. corporations

1) The increase of the board's independence from management) -> Higher levels of CEO ingratiation and persuasion behavior toward board members

2) Such influence behaviors, in turn, serve to offset the effect of increased structural board independence on corporate strategy and CEO compensation policy.

Implications

CEO-board power and effectiveness 

Literature on power and influence

* Introduction

Issue as Structure of BOD

Institutional investors and other stake-holders have strongly criticized corporate boards of directors (BOD)

for failing to meet their perceived legal responsibility to monitor and control management decision making on behalf of shareholders (Wall Street Journal, 1995a, 1995b, 1996). # stake-holders tp shareholders?

Common ideas on the change

Changes in board structure thought to increase the board's ability to exercise control

Increasing the presence of outside or non-employee directors on the board, 

Allocating board leadership to someone other than the chief executive officer (CEO),

Increasing demographic diversity on the board,

Selecting directors who lack social or other ties to the CEO 

(Council of Institutional Investors, 1989; Economist, 1994)

Increases in the number of outsiders and changes in board leadership structure, appear to have spread somewhat among large companies in recent years (Kesner and Johnson, 1990; Heidrick & Struggles, 1995; Korn/Ferry, 1995).

Descriptive surveys suggest that more companies are considering changes in board structure that are assumed to increase the board's power to protect shareholder interests (Korn/Ferry, 1995).

Researches on the board structure

Research on boards has also focused largely on 

Issues of board structure and control over management behavior and strategic decision making.

Whether specific changes in board structure can influence specific outcomes, such as CEO compensation or corporate diversification, that have implications for shareholders' interests (e.g., Kesner, Victor, and Lamont, 1986; Hermalin and Weisbach, 1991; Westphal and Zajac, 1994).

Agency theory and a structuralist view of power and control

Boards that are structurally more independent from management are better able to control management decision making on behalf of shareholders (Fama and Jensen, 1983)

Boards composed largely of inside directors are considered less likely than those with many outside directors to override management decisions that threaten shareholders' interests because such directors are subordinate to and therefore dependent on the CEO

Structural board independence increases the board's overall power in its relationship with the CEO

<- Simply equated structural independence with board power (e.g., Zahra and Pearce, 1989)

A -> B

How CEOs exploit structural bases of power to maintain ultimate control over the board.

CEOs may use their leadership position on the board to dictate the agenda of board meetings and otherwise minimize dissent (Lorsch and Maclver, 1989). 

Walsh and Seward (1990) discussed various mechanisms by which CEOs might exploit their structural position to avoid or bias board monitoring, including concealing negative information from the board, symbolically conforming to institutionally correct procedures, and mandating passivity among directors by "advising" them that challenges to managerial preferences are inappropriate (Mace, 1971: 80).

B -> A

How structurally independent boards might limit top managers' ability to rely on such practices to maintain control

Abrahamson and Park (1994) provided some evidence that structurally independent boards limit the concealment of negative outcomes in letters to shareholders

Westphal and Zajac (1994) found that structural board independence reduced the adoption of "symbolic" incentive plans that appeared to align management's and shareholders' interests without actually putting the CEO pay more at risk. 

Board independence is also thought to limit the CEO's ability to mandate passivity among directors and force renegade directors to resign (Lorsch and MacIver, 1989).

Puzzle

Research investigating the relation- ship between board structure and the board's overall power to protect shareholders' interests has reported weak or negative relationships with

firm performance (e.g., Hermalin and Weisbach, 1991; Baliga, Moyer, and Rao, 1996)

the adoption of takeover defenses (Davis, 1991; Buchholtz and Ribbens, 1994)

the commission of illegal acts (Kesner, Victor, and Lamont, 1986)

the use of long- term incentive plans (Westphal and Zajac, 1994)

corporate diversification (Hill and Snell, 1988; Baysinger and Hoskisson, 1990).

Little consensus that increased board independence necessarily improves corporate performance (Walsh and Seward, 1990: 433).

Why greater structural board independence may not necessarily enhance the board's overall power in its relationship with the CEO.

How CEOs may adapt to the loss of structural sources of power. 

Greater structural board independence may prompt the CEO to use interpersonal influence tactics that significantly blunt or offset the effect of structural independence on the board's overall power to protect shareholders.

Structure and interpersonal influence behavior can provide alternative sources of power, such that individuals may rely on certain interpersonal influence tactics such as ingratiation in the absence of structural sources of power (cf. Porter, Allen, and Angle, 1981).

CEOs may not respond passively to the threat of losing ultimate control over management decision making (Brehm and Brehm, 1981).

Little investigation into the behavioral processes that mediate relationships between board structure and effectiveness, such as the inter- actions that occur between top managers and board members in formal or informal meetings

How interpersonal influence processes in CEO-board relation- ships can offset the effects of structural board independence on important organizational outcomes such as corporate di- versification and CEO compensation