CEO Outside Directorships CEO Outside Directorships and Firm Performanceand Firm Performance

Marta GeletkanyczBoston College

Brian BoydArizona State University

Academy of Management Journal, forthcoming

Who Do You Who Do You Want as Your Want as Your

MD?MD?

Who Do You Who Do You Want as Your Want as Your

MD?MD?

The Medieval Medical PractitionerThe Medieval Medical Practitioner

Medical training (circa 1200) emphasized rhetoric and debate

Writings of the Greeks held to be be infallible -- e.g., “De Materia Medica” used as medical text for 1,500 years

Believed in airborne invisible objects which could cause disease -- but called spirits, not germs

Bloodletting the treatment of choice

Governance Governance Interest Interest

is Worldwideis Worldwide

Governance guidelines exist on a wide variety of stock exchanges: From Austria, to Malaysia, to Pakistan

Borsa Italiana (2006): ‘good governance is an effective instrument to increase value and to protect the investments of their shareholders’.

Governance ratings done by ISS and others on firms in many nations

Governance was listed as a key issue at fall 2010 Dubai debt conference

Medieval or Modern Practice?Medieval or Modern Practice?

Comments from ‘best practice’ advocates:Comments from ‘best practice’ advocates: “If contradictory research did exist,

such standards would never have been developed.”

“Good governance goes beyond studies”, Deputy Director of ISS

No one “seriously expected the Dey committee to recommend fundamental changes” -- committee member

My Focus on Governance My Focus on Governance ResearchResearch

Many ‘good governance’ guidelines inconsistent with empirical evidence- Outsiders (SMJ 1994, 2005)- Duality (SMJ, 1995)- Overall commentary on codes (EBJ, 2000)

Boundary conditions for theories- SMJ 1995, JMS in press

Methodological emphasis to tease out nuanced effects- Construct measurement (discretion, board control, CEO

human capital)- Contingency modeling

Long TermCompensation

CEOCompensation

CashCompensation

External Ties

Performance

Size

1.0

0.47 [5.2]

0.46 [9.9]

Discretion

1.0

Total Ties

Size

Betweenness

Profit

Closeness

Degree

Fortune Ties

Human Capital

Board Power

0.84[20.9]

0.09 [1.9]

0.01 [0.1]

-0.12 [2.9]

0.20 [5.3]

0.65[13.8]

0.88[24.8]

0.20[4.1]

0.95[54.0]

0.97[37.1]

0.07 [1.8]

2001 SMJ with Geletkanycz & 2001 SMJ with Geletkanycz & Finkelstein on Finkelstein on

CEO outside board tiesCEO outside board ties

While boards value While boards value CEO external ties, CEO external ties,

markets react markets react negatively.negatively.

While boards value While boards value CEO external ties, CEO external ties,

markets react markets react negatively.negatively.

Growing Opposition to Growing Opposition to CEO Outside Board TiesCEO Outside Board Ties

1991: Business Week describes limits on outside seats as a ‘treatment to cure CEO disease’

1996: NACD recommends curbs on outside ties

1997-98: Business Roundtable and Council of Institutional Investors recommend curbs

2005: Percent of large firms with limits on their own CEOs is 51%, up from 11% ten years prior

2009: Mean number of CEO outside board seats drops to 0.7, down from 1.9 in 1990

Agency Perspective on Agency Perspective on CEO Outside Board TiesCEO Outside Board Ties

Outside seats a distraction from primary responsibilities

CEO benefits in the form of monetary gain and improved standing vis-a-vis social capital

CEOs with external board seats may be better able to thwart monitoring by the board, due to higher status

Networks Perspective on CEO Networks Perspective on CEO Outside Board TiesOutside Board Ties

CEO ties function in a similar manner as board ties – e.g., access to information, resources, etc.

Status of CEO ties facilitates access to a broader range of exchange partners

Ties are socially complex and difficult to replicate, giving them the characteristics of a strategic resource

Outside boards are a lower risk setting to assess new strategies and tactics

A Mid-Range View:A Mid-Range View:Situational BenefitsSituational Benefits

H1: CEO ties positively related to firm performance (embeddedness view)

H2: CEO ties negatively related to firm performance (agency view)

H3: CEO ties are more beneficial in low versus high growth settings

H4: CEO ties are more beneficial in low concentration settings

H5: CEO ties are more beneficial in less diversified firms

Sample CharacteristicsSample Characteristics 460 firms from the 1987 Fortune 1000 listing CEOs maintained, on average, one directorate

link to another Fortune firm, and less than two outside board seats overall.

One third of CEOs had no outside directorships at all.

Five percent of CEOs had four or more outside directorships

Sample is consistent with findings reported in other studies (Booth & Deli, 1996, Davis, 1996).

Prior

Performance

CEO Human

Capital

FirmSize

Total Directorships

Fortune Directorships

Average Size

Average Profitability

Subsequent

Performance

ROA

ROS

CEO

Directorships

1.0

.98 (25.0)

.84 (20.2)

.21 (4.0)

.32 (2.6)

1.0-.10 (2.2)

.35 (8.1)

.06 (1.3)

.09 (2.0)

Moderators

Industry

Growth

Industry

Concentration

Diversification

Results for H3Results for H3 Path coefficient for CEO ties to performance was

significantly higher in the low growth setting

Results for H4Results for H4 Path coefficient for CEO ties to performance was

significantly higher in the low concentration setting

Results for H5Results for H5 Path coefficient for CEO ties to performance was

significantly higher in the low diversification setting

Implications for Theory/PracticeImplications for Theory/Practice Empirically, little evidence of negative effects

of CEO ties on subsequent firm performance Firms benefit most when CEOs forge outside

ties in low growth and fragmented market structures – i.e., in challenging markets

Less diversified firms benefit more due to greater CEO involvement for single versus portfolio organizations

A Strategic View of A Strategic View of Governance PracticeGovernance Practice

Reform efforts which have limited empirical and theoretical support should be re-assessed

Topic emphasis should be shifted – e.g., more attention on the attributes of directors versus simplistic (outsider/NED) distinctions

Broader recognition of the role of bundles of governance structures, and their implications for firm performance

What’s Next?What’s Next?Methods sideMethods side Content analysis of contingency modeling in 30

years of SMJ articles Early-stage project on citation analysis of

contingency studiesTheory sideTheory side Multi-theoretic study of determinants of

within-group ties among business group members

Contingency study of the interaction of CEO power and governance on performance among S&P 500 firms