Come Aboard! Exploring the Effects of Directorships in the Executive Labor Market

Abstract

In this study, we examine the following question: What do executives gain from serving on boards? We propose that board service benefits non-CEO-level executives in the executive labor market by acting as a certification mechanism and by providing access to unique knowledge, skills, and connections. We argue that non-CEO executives who gain directorships will be more likely to be promoted to CEO both inside and outside their home firm, will be more likely to be promoted internally, and will receive higher pay from their home firms. To test our ideas, we employ propensity score matching to construct a longitudinal sample of 2,104 top executives of large, publicly traded companies in the United States over the period 1996 to 2012. The results provide consistent support for our theory.

The Effects of Cohesion and Structural Position on the Top Management Team Boundary Spanning–Firm Performance Relationship

“…Outside directorships are external social network ties that connect top executives to boards outside their organization through service on these boards (Geletkanycz & Hambrick, 1997; Haunschild, 1993). Directorships are positions open to and held by multiple types of executives, including CEOs and non-CEO TMT members (e.g., Boivie et al, 2016; Boivie et al, 2012; Boyd, Haynes, & Zona, 2011; Geletkanycz & Boyd, 2011).…”

“…Although we expect TMT cohesion to moderate the TMT boundary spanning–firm performance relationship generally, in part because it mitigates the challenges of outside directorships put forth by the agency perspective, evidence suggests that these challenges of opportunism are likely to be particularly applicable to non-CEO TMT members. For example, Boivie and colleagues (2016) have shown that outside directorships provide a signal that a non-CEO TMT member is a viable CEO successor and worthy of promotion either internally or externally. They argue that outside directorships are thus attractive to non-CEO TMT members because of these increased benefits in the executive labor market, despite the extra demands on their time and attention.…”

“…Therefore, we suggest that cohesion is likely to be especially important when non-CEO TMT members are engaged in boundary spanning. Because non-CEO TMT members gain increased benefits in the executive labor market from outside directorships, including the credibility to be viable CEO successors (Boivie et al, 2016), these boundary spanning relationships may set up a situation in which top managers’ interests are not necessarily aligned with those of the CEO (Jensen & Zajac, 2004), nor with one another as they engage in political struggles for power (Ocasio, 1994). As such, cohesion within the TMT may be especially integral in focusing non-CEO TMT members on utilizing these outside board relationships to support one another and their focal firm as opposed to furthering their own careers within or outside the focal firm.…”

“…We also consider these effects as dependent upon the structural position that each TMT member holds (i.e., the CEO vs. non-CEO TMT positions). Prior research has revealed that disaggregating these positions is important when examining strategic decisions (Jensen & Zajac, 2004), and because outside directorships offer unique opportunities for non-CEO TMT members in particular (e.g., Boivie, Graffin, Oliver, & Withers, 2016; Boivie, Graffin, & Pollock, 2012), the effects of TMT cohesion on the boundary spanning–firm performance relationship may be contingent on the structural positions of those who hold these outside directorships.…”

Shareholder Empowerment and Board of Directors Effectiveness*

“…Given its key role in the model, it is worthwhile to consider the nature of the personal benefits DL have in mind in the context of what motivates directors. Directors receive direct compensation and other benefits from serving on boards (Adams et al 2010;Boivie et al 2016;Mace 1986;Perry and Peyer 2005;Useem and Karabel 1986). Direct compensation is comprised of both equity and cash.…”