External COO/presidents as expert directors: A new look at the service role of boards

Abstract

Much of the scholarship on boards of directors has examined either the control (i.e., monitoring) role or the resource dependence role that boards fill. Relatively little has examined the service role, wherein directors provide advice and guidance to management. This study builds on recent work exploring director expertise by asking how operational expertise on boards impacts firm performance. We find that having external COO/presidents on a board of directors positively impacts firm performance when the firm's operational efficiency is declining, but negatively impacts performance when the firm's operational efficiency is improving. We also find that other types of external executives serving as directors exhibit the opposite relationship, suggesting that the value of director expertise is context‐dependent. We discuss the implications of these findings for director selection. Copyright © 2013 John Wiley & Sons, Ltd.

CEO overconfidence and CSR decoupling

“…In this study, we show that firms may reduce symbolic CSR internally by establishing effective board monitoring. Moreover, although we confirm the importance of agency theory mechanisms such as outside director ownership, we find that board capital such as the CSR expertise of outside directors is an important element of constraining and advising overconfident CEOs (Haynes & Hillman, 2010;Hillman & Dalziel, 2003;Joseph et al, 2014;Krause et al, 2013). Recent board research emphasizes that motivated but inexperienced directors will often defer to the CEO and more experienced insiders (Hillman & Dalziel, 2003;Joseph et al, 2014).…”

“…Experienced outside directors provide valuable expertise to the firm and their CEOs (Haynes & Hillman, 2010;Hillman & Dalziel, 2003;Krause, Semadeni, & Cannella, 2013). For instance, prior experience as a director may be a source of competitive advantage (Khanna, Jones, & Boivie, 2014) and allow directors to behave in appropriate ways (Westphal & Milton, 2000).…”

“…Outside director ownership may also affect the CEO's discretion in the CSR domain (Atkinson & Galaskiewicz, 1988). Outside directors' primary roles on the board are independent monitors, advisors, and resource providers (Daily et al, 2003;Krause et al, 2013), but they often lack the motivation to fulfill these roles effectively (Dalton, Daily, Ellstrand, & Johnson, 1998). Directors may have conflicts of interests-such as loyalties to the CEO who appointed them or balancing the demands from different stakeholders (Dalton, Daily, Johnson, & Ellstrand, 1999;Hillman & Dalziel, 2003).…”

Board monitoring of the chief financial officer: A review and research agenda

“…CEO duality, which enhances CEO power toward the board (Krause, Semadeni, & Cannella, ), can impact the selection or dismissal of a CFO as the second‐in‐command. Agency theory suggests that CEOs who also hold the chairmanship of the board may become too powerful and influence board monitoring to implement their own will (Finkelstein & D'Aveni, ; Krause, Semadeni, & Cannella, ).…”

“…It is crucial for boards to identify and select experienced CFOs who possess knowledge regarding the firm's capital structure, payout, and capital allocation decisions (Graham & Harvey, 2001 CEO duality, which enhances CEO power toward the board (Krause, Semadeni, & Cannella, 2013), can impact the selection or dismissal of a CFO as the second-in-command. Agency theory suggests that CEOs who also hold the chairmanship of the board may become too powerful and influence board monitoring to implement their own will (Finkelstein & D'Aveni, 1994;Krause, Semadeni, & Cannella, 2014 In addition, it is important to consider directors' social capital, as it enables directors to access knowledge and information through social linkages (Nahapiet & Ghoshal, 1998;Sundaramurthy, Pukthuanthong, & Kor, 2014).…”