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CEO Outside Directorships and Firm Performance. Marta Geletkanycz Boston College Brian Boyd Arizona State University. Academy of Management Journal , forthcoming. Who Do You Want as Your MD?. The Medieval Medical Practitioner. Medical training (circa 1200) emphasized rhetoric and debate - PowerPoint PPT Presentation
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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