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More recently, Finniest and Humpback (1995) in their discussion of strategic leadership noted some 15 studies relevant to the issue of performance effects and board composition. Neither of these reviews provided evidence of systematic relationships; rather, both concluded that the extant research produced mixed results. As we have identified 54 relevant empirical studies of board composition/financial reference and 31 studies of board leadership/financial performance, we are able to provide a meta-analytic review of this work.
Where there are a sufficient number of studies, most observers would be more comfortable with conclusions drawn from a meta-analytic review compared to a narrative approach (e. G. , Hunter and Schmidt, 1 990), as meta-analysis provides the ability to account for sampling error, reliability, and range restriction in the data from the studies on which the analysis relies. The control of these artifacts can be critical. Often, narrative reviews indicate that the evidence s conflicting; there are studies which demonstrate 0 1998 John Wiley & Sons, Ltd. Costive relationships between the variables of interest, negative relationships, and no statistically significant relationships at all. Hunter and Schmidt (1990:29) have demonstrated that such microfilming results in the literature” may be entirely artifacts. ‘ In other words, there is no actual population relationship at all. Moreover, meta-analytical approaches rely on confidence intervals rather than statistical significance tests?? a major difference: ‘The typical use of significance tests leads to terrible errors n review studies’ (Hunter and Schmidt, 1990: 31).
The following sections develop rationale for the anticipated direction of these relationships. It is onto blew that board reform activists have strongly argued for boards comprised predominantly, if not exclusively, of independent directors and the formal separation of the CEO and board chairperson positions (e. G. , Bantering, 1993; Black, 1 992; Cox, 1 993; Rock, 1991). While many academics have embraced this same position, we provide some rationale for an alternative perspective (see Donaldson, 1 995, for an overview of the current academic debate).
Board composition There is near consensus in the conceptual literature that effective boards will be comprised of greater proportions of outside directors (Lora’s and Machine, 1989; Microchip, 1983; Sahara and Pearce, 1989). The corporate community is even more outspoken on this issue. Among practitioners, especially institutional investors and shareholder activists, it is not unusual to find advocates for boards which are comprised exclusively of outside directors. A preference for outsider-dominated boards is largely grounded in agency theory.
Agency theory is built on the managerial notion that separation f ownership and control, as is characteristic of the modern corporation, potentially leads to cholinesterase actions by those in control??managers (see Eisenhower, 1 989, and Jensen and Neckline, 1976, for an overview of agency theory). Agency theory is a control-based theory in that managers, by virtue of their firm-specific knowledge and managerial expertise, are believed to gain an advantage over firm owners who are largely removed from the operational aspects of the firm (Microchip, 1988).
As managers gain control in the firm, they may be able to pursue actions Strata. MGM. J. , Volvo. 19, 269-290 (1998) Meta-analytic Reviews of Boards which benefit themselves, but not firm owners. The potential for this conflict of interest??or battle for control??necessitates monitoring mechanisms designed to protect shareholders as owners of the firm (e. G. , Fame and Jensen, 1983; Jensen and Neckline, 1976; Williamson, 1985). One of the primary duties of the board of directors is to serve this monitoring function (Fleischer, Hazard, and Clipper, 1988; Wald, 1985).
According to agency theory, then, effective boards will be comprised of outside directors. These management directors are believed to revive superior performance benefits to the firm as a result of their independence from firm management (that not all management directors are necessarily independent of firm management will be addressed in a subsequent section?? Specific oversimplifications of board composition). Some empirical support has been found for this position. Enamel and Watson (1 993), for example, found outside directors were positively associated with profitability among a sample of U. K. Firms.
In an examination of 266 U. S. Corporations, Passenger and Butler (1985) found that firms with more outside board members realized Geiger return on equity. Several other researchers have also noted a positive relationship between outside director representation and firm performance (Pearce and Sahara, 1992; Rosenstein and Wyatt, 1 990; Schlesinger, Wood, and Testators, 1989). An alternative perspective would suggest a reliance on a preponderance of inside directors. Stewardship theory argues that managers are inherently trustworthy and not prone to misappropriate corporate resources (Donaldson, 1990; Donaldson and Davis, 1991, 1994).
AS suggested by Donaldson and Davis (1994: 159) ‘stewardship theory argues that managers are good stewards f the corporation and diligently work to attain high levels of corporate profit and shareholder returns. ‘ The basis for this position is also grounded in control. Quite opposite to agency theory, however, stewardship theory would suggest that control be centralized in the hands of firm managers (see Davis, Corpsman, and Donaldson, 1 997, for an excellent review of the points of convergence and divergence between agency theory and stewardship theory).
Others, too, have noted the potential benefits CLC 1998 John Wiley & sons, Ltd. 271 of inside directors (e. G. , Passenger and Hosking’s, 1990; Passenger, Skink, and Turk, 1991; Boyd, 994; Hill and Snell, 1 988; Hosking’s et al. , 1994). Passenger and Hosking’s (1990) have suggested that the superiority of the amount and quality of inside directors’ information may lead to more effective evaluation of top managers. Others have noted a positive relationship between inside directors and corporate R&D spending (Passenger et al. 1991; Hill and Snell, 1988), the nature and extent of diversification (Hill and Snell, 1988), and CEO compensation (Boyd, Consistent with stewardship theory, some researchers have found that inside directors were associated with higher firm performance. In an examination of Fortune 500 corporations, Keener (1987) found a positive and significant relationship between the proportion of inside directors and returns to investors. Also, Vane’s early work (1964, 1 978) reported a positive association between inside directors and firm performance.
Additionally, there is a stream of research which has found no relationship beјen board composition and firm performance (Chianti, McMahon, and Sahara, 1985; Daily and Dalton, 1992, 1993; Keener, Victor, and Lament, 1986; Schmidt, 1975; Sahara and Stanton, 1988). This overview demonstrates that there is little consistency in the research findings or board composition and financial performance. It also illustrates the importance of considering multiple theoretical perspectives in explaining this complex relationship. Board leadership structure Both agency and stewardship theories are also applicable to board leadership structure.
As with board composition, there is strong sentiment among board reform advocates, most notably public pension funds and shareholder activist groups, that the CEO should not serve simultaneously as chairperson of the board (Committee on the Financial Aspects of Corporate Governance, 1992; Levy, Bibb; see also Dobbins, 1991). Here, too, many in the academic community have also embraced this position (e. G. , Keener and Johnson, 1990; Lora’s and Machine, 1989; Richer and Dalton, 1991). The preference for the separate board leadership structure is largely grounded in agency Strata.
MGM. Volvo. 1 9, 269??290 (1998) 272 theory concerns regarding the potential for management domination of the board. As noted by Finniest and Divine (1 994: 1 079) ‘according to agency theory, duality [joint structure] promotes CEO entrenchment by reducing board monitoring effectiveness. ‘ Consistent with agency theory predictions, Richer and Dalton (1991 ) mound that firms with the separate board leadership structure outperformed those firms with the joint structure when relying on return on equity, return on investment, and profit margin.
Nevertheless, the impact of the joint structure on firm performance has not been unequivocally established. Notably, practicing managers rarely adopt the view that separate is the superior structure (see Dobbins, 1 995, for an interesting discussion of this point with regard to General Motors’ corporate governance structure; see also, Simpson and Blustering, 1995, for the recent Wall Street Journal coverage of these events). While it is true that major corporations have split the CEO and board chairperson roles (e. G. , American Express, Smart, Morrison Knudsen, TWA, Westinghouse), Louis V. Serener of IBM and Lawrence A.
Bossily of Allied Signal insisted on having both the CEO and board chairperson titles prior to accepting their positions. According to Dobbins (1995), some executives view the separation of these roles only as an emergency measure, a temporary condition for troubled companies. It is notable, for example, that both American Express and Smart have recombined the CEO and board chairperson positions. Leslie Levy, President of the Institute for Research on Boards of Directors, agrees with this point, noting that ‘Most separate chairmen are named during times of stress for the corporation, and with a limited tenure’ (Levy, AAA: 10).
It may also be notable that General Motors, having adopted a separate structure, has recently returned to the more common joint structure: On January 1, 1996, John F. Smith, in addition to his role as CEO of General Motors, assumed the responsibilities of chairperson of the board. These managers’ views are consistent with stewardship theory. Advocates of this theory suggest that the joint structure revises unified firm leadership and removes any internal or external ambiguity regarding who is responsible for firm processes and outcomes (e. G. Anderson and Anthony, 1986; Donaldson, 1 990; Finniest and Divine, 1994; Lipton and Lora’s, 1993). Stewardship theory suggests that, as a result of unified leadership, the joint structure will facilitate superior firm performance. Consistent with this view, Donaldson and Davis (1991) found that firms relying on the joint structure achieved higher shareholder returns, as measured by return on equity, than those employing the separate structure. We would also note that there is a stream of search which has noted no directional impact of board leadership structure on firm financial performance (e. . , Berg and Smith, 1 978; Daily and Dalton, 1 992, 1 993; Richer and Dalton, 1989). While there is a relatively small body of research empirically examining board leadership structure (recent work includes, for example, gang et al. , 1996; Beauty and jack, 1994; Boyd, 1995; Daily and Dalton, AAA; Finniest and Divine, 1994; Cocoas, 1994; Pi and Time, 1993), neither the joint, nor separate, board leadership structure has been strongly supported as enhancing firm financial performance.
These endings, too, support the need to consider multiple theoretical explanations for the relationship between board leadership structure and firm performance. MODERATORS FOR THE MAINTENANCES A review of the extant literature for both board composition and board leadership structure indicates a number of potential moderating influences on these meta-analyses. For board composition, we have identified three such moderating variables??size of the firm, nature of the performance indicators (accounting vs.. Arrest-based), and four primary oversimplifications of ‘board composition’??inside director proportion, outside erector proportion, 1 affiliated director proportion, independent/interdependent director proportion. For the meta-analysis of board leadership structure, we will also consider both firm size and the nature of the performance indicator. For this set Because various researchers have defined ‘outside directors’ differently, the first ratio (inside directors) is not the complement of the second (outside directors).
The ‘affiliated’ and ‘independent/interdependent’ categories also are not complements of the ‘outside director’ classification (see Daily and Dalton, AAA, for a discussion). Of analyses, the nature of the board composition assure is clearly not an issue. Size of the firm An obvious assumption implicit in board composition/leadership structure/performance relationships is that the choice of the various governance options could be associated with changes in organizational strategy and firm performance. It has been argued that firm size could be an important factor in such an assumption.
While the following specifically focused on the choice of inside or outside CEO successors, the sentiment underscores the importance of firm size: ‘This assumption may be questionable, particularly in large organizations. The here number of persons involved, the complexity of the organization, and the variety of vested interests both inside and outside the company represent potential constraints to successful change strategies’ (Dalton and Keener, 1 983: 736). It may be, then, that the scale and complexity of the large firm would cloud any relationship between board composition and structure and performance.