The Moderating Effect of CEO Power on the Board Composition–Firm Performance Relationship*

Abstract

Prior studies of the relationship between the composition of boards of directors and firm performance offer equivocal results. Drawing on agency and power circulation theories, we attempt to reduce this equivocality by asserting that CEO power moderates the relationship. Specifically, an outside director dominated board is needed to check a powerful CEO, but monitoring by other executives provides sufficient constraints on CEOs with low power. We used event study methodology to test the effects of the interaction between board composition and CEO power on stock market reaction to 73 unexpected CEO deaths. We found support for our theorizing among two of three sources of CEO power. Thus, although regulatory trends increasingly support outside director dominated boards, our findings indicate that this may not always benefit shareholders and that CEO power should be considered when constructing boards.

Effect of Board Diversity on Corporate Governance Structure and Operating Performance: Evidence from the UK Listed Firms

“…Dependent resource theorists support large board size and they argue that large board will expose firms to great business connections and critical resources (Dalton, Daily, Ellstrand & John 1999). In addition, large board is likely to have members with diverse background, experiences and who possess great collection of information which may add value to the performance of the firm (Arosa et al 2010;Dalton et al 1999;Combs et al 2007). From agency theory perspective, Jensen (1994) declared that large board is less effective than small board.…”

“…For instance, the 11 of 14 board members of Enron were outside directors and more than 50% of WorldCom's board were also outside directors (Rashid 2010). Combs et al (2007) declared that in practice outside directors largely depended on the executive and their independence is weakened because they are subjected to manipulation of the executive. Despite these shortcomings, scholars have suggested that board composition with outsiders is comparatively better than board without outsiders in protecting the interest of the shareholders and boost firms performance (Combs et al 2007;Jensen & Meckling 1976).…”

“…The empirical findings on how best the corporate governance mechanisms are to be structured to enhance corporate performance and serve the interest of shareholders using diverse theoretical views remain inconclusive (Combs, Ketchen, Perryman & Donahue 2007;Daily, McDougall, Covin & Dalton 2002). Combs et al (2007) suggested that one possible reason for the ambiguous empirical results on the link between corporate governance structures and performance might be that some contingent factors moderate the relationship.…”

“…The empirical findings on how best the corporate governance mechanisms are to be structured to enhance corporate performance and serve the interest of shareholders using diverse theoretical views remain inconclusive (Combs, Ketchen, Perryman & Donahue 2007;Daily, McDougall, Covin & Dalton 2002). Combs et al (2007) suggested that one possible reason for the ambiguous empirical results on the link between corporate governance structures and performance might be that some contingent factors moderate the relationship. Added to this, Arosa, Iturrade and Maseda (2010), Jackling and Johl (2009) and Nicholson and Kiel (2007) declared that no single theory can adequately explain the complexity of corporate governance structure and that integrating multiple theories provide better understanding of dynamism of corporate governance.…”

El ambiente laboral y su incidencia en el desempeño de las organizaciones: estudio en las mejores empresas para trabajar en Colombia

“…En los 90´s: Denison (1990) y Porras y Collins (1994), y en el siglo XXI: Hitt, Ireland y Hoskinsson (2004), Daft (2005) y Combs et al (2007) entre otros, vienen afirmando que la diferencia entre organizaciones exitosas y no exitosas estriba en el compromiso de la gerencia en el manejo de una serie de "variables suaves", que se han agrupado en la expresión de cultura, ambiente o clima laboral u organizacional, que sirven para dinamizar las condiciones de trabajo tanto internas como externas y que a su vez inciden directamente y de manera contundente en los resultados empresariales.…”