Deciding Who Will Rule: Examining the Influence of Outside Noncore Directors on Executive Entrenchment

Abstract

W e examine the contingencies that sway independent noncore directors of S&P 500 firms to heed the norms of the corporate elite or the disciplining forces of the efficient directorial labor market in the context of executive entrenchment. We find support for the corporate elite perspective as the number of independent noncore directors is positively associated with an entrenchment index score. However, the positive association is moderated by contextual factors that influence whether these directors reflect the expectations of the corporate elite or the efficient directorial labor market. Specifically, this study shows that the association becomes more positive when these directors are highly embedded in the corporate elite network or have shorter board tenure but less positive when independent chief executive officer directors' equity ownership is high. We also found a crossover interaction effect where the association is negative (positive) when firm performance is low (high). These results shed light on an underexplored group of independent directors that play an increasing role in the effective governance of publicly listed firms.

Board social capital and excess CEO returns

“…Specifically, we propose that the reliance on board social capital places boards under different and sometimes competing normative pressures upheld by directors who want to maintain the social capital residing in external and internal social networks. While prior research suggests that internalized norms influence director behavior (Kang and Kroll, ; Westphal and Khanna, ), we suggest that ongoing social relationships have more than just a marginal effect on directors. This is because even independent and reputable directors may comply with normative pressures that are not in the best interests of shareholders.…”

“…We further suggest that powerful CEOs and institutional investors either facilitate or constrain the normative pressures existing in social networks (Coleman, ; Kang and Kroll, ; Markoczy et al ., ). This is because powerful CEOs and institutional investors have the appropriate incentives to alter these normative pressures existing in the social network to their advantage.…”

“…First, membership in boards that are centrally located in board interlocks results in social recognition and respect for directors, which is an important form of social capital attracting high status directors wanting to maintain their status (Johnson et al ., ) as well as low status directors aspiring to become part of the elite (Kang and Kroll, ). Centrally located boards provide this respect because the number of directorships reflects individual status and elite membership (Finkelstein, ; Mace, ).…”

“…For two reasons, we suggest that agency theory arguments in favor of financial alignment as an independent governance mechanism may disregard the reality that directors are embedded in social networks that expose directors to normative pressures (Coleman, ; Granovetter, ). First, directors are embedded in an external board interlock network, exposing directors to the normative pressures of the corporate elite (Kang and Kroll, ). Second, directors are also embedded in internal board networks, placing them under the normative pressures to monitor the CEO (Forbes and Milliken, ).…”

Horizontal and Vertical Firm Networks, Corporate Performance and Product Market Competition

“…Firm networks via multiple directorships may also indicate strong and close social ties among the management elite rather than a targeted development of structural links between firms (Kang and Kroll 2013, Hillman et al 2010, Hwang and Kim 2009, Mizruchi 1996, Useem 1984.…”