Outside directors with a Stake: The linchpin in improving governance

California Management Review

Volumn , Issue 4, 2000, Pages 108-127

  Hambrick, Donald C ^a   Jackson, Eric M ^a  

^a NONE

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EID: 0034398665     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.2307/41166056     Document Type: Review

References (48)

1. For in-depth discussions of board responsibilities, see Jay W. Lorsch, Pawns or Potentates: The Reality of America's Corporate Boards (Boston, MA: Harvard Business School Press, 1989); Ram Charan, Boards At Work: How Corporate Boards Create Competitive Advantage (San Francisco, CA: Jossey-Bass, 1998).
2. For in-depth discussions of board responsibilities, see Jay W. Lorsch, Pawns or Potentates: The Reality of America's Corporate Boards (Boston, MA: Harvard Business School Press, 1989); Ram Charan, Boards At Work: How Corporate Boards Create Competitive Advantage (San Francisco, CA: Jossey-Bass, 1998).
3. st Century Board (New York, NY: John Wiley, 1997).
4. st Century Board (New York, NY: John Wiley, 1997).
5. Lorsch [op. cit.] surveys directors' motives for service.
6. E.F. Fama and M.C. Jensen, "Separation of Ownership and Control," Journal of Law and Economics, 26 (1983): 301-325, 314.
7. These board reform initiatives are discussed in Ward, op. cit., and Lorsch, op. cit.
8. These board reform initiatives are discussed in Ward, op. cit., and Lorsch, op. cit.
9. See B.R. Baliga, R.C. Moyer, and R.S. Rao, "CBO Duality and Firm Performance: What's the Fuss?" Strategic Management Journal, 17 (1996): 41-53; S. Bhagat, and B. Black, "The Uncertain Relationship Between Board Composition and Firm Performance," The Business Lawyer, 54 (1999): 921-963. One study finds that the insider/outsider ratio is related with performance in a curvilinear way - that is, it is beneficial to have either a very small or very large proportion of insiders on the board. See J.A. Wagner III, J.L. Stimpert, and E.I. Fubara, "Board Composition of Organizational Performance: Two Studies of Insider/Outsider Effects," Journal of Management Studies, 35 (1998): 655-677.
10. See B.R. Baliga, R.C. Moyer, and R.S. Rao, "CBO Duality and Firm Performance: What's the Fuss?" Strategic Management Journal, 17 (1996): 41-53; S. Bhagat, and B. Black, "The Uncertain Relationship Between Board Composition and Firm Performance," The Business Lawyer, 54 (1999): 921-963. One study finds that the insider/outsider ratio is related with performance in a curvilinear way - that is, it is beneficial to have either a very small or very large proportion of insiders on the board. See J.A. Wagner III, J.L. Stimpert, and E.I. Fubara, "Board Composition of Organizational Performance: Two Studies of Insider/Outsider Effects," Journal of Management Studies, 35 (1998): 655-677.
11. See B.R. Baliga, R.C. Moyer, and R.S. Rao, "CBO Duality and Firm Performance: What's the Fuss?" Strategic Management Journal, 17 (1996): 41-53; S. Bhagat, and B. Black, "The Uncertain Relationship Between Board Composition and Firm Performance," The Business Lawyer, 54 (1999): 921-963. One study finds that the insider/outsider ratio is related with performance in a curvilinear way - that is, it is beneficial to have either a very small or very large proportion of insiders on the board. See J.A. Wagner III, J.L. Stimpert, and E.I. Fubara, "Board Composition of Organizational Performance: Two Studies of Insider/Outsider Effects," Journal of Management Studies, 35 (1998): 655-677.
12. Charan [op. cit.] and Sana Siwolop ["When Deadwood Doesn't Refer to the Table," New York Times, October 17, 1999, p. D1] highlights the drawbacks or, at least, ineffectiveness of some widely-espoused board "improvements."
13. Charan [op. cit.] and Sana Siwolop ["When Deadwood Doesn't Refer to the Table," New York Times, October 17, 1999, p. D1] highlights the drawbacks or, at least, ineffectiveness of some widely-espoused board "improvements."
14. For extensive discussion of proposals to increase directors' shareholdings, see Charles M. Elson, "The Duty of Care, Compensation and Stock Ownership," University of Cincinnati Law Review, 54 (1995): 649-711; Ward, op. cit., Chapters 48, 49, 50.
15. For extensive discussion of proposals to increase directors' shareholdings, see Charles M. Elson, "The Duty of Care, Compensation and Stock Ownership," University of Cincinnati Law Review, 54 (1995): 649-711; Ward, op. cit., Chapters 48, 49, 50.
16. M.C. Jensen, "Eclipse of the Public Corporation," Harvard Business Review, 67/5 (1989): 61-75.
17. See Vogelstein, op. cit., pp. 207-208.
18. See Elson, op. cit., p. 691.
19. Nell Minow and Kit Bingham, "The Ideal Board," Corporate Board (July/August 1993), pp. 11-15.
20. Russell Reynolds Associates, Redefining Corporate Governance: 1995 U.S. Survey of Institutional Investors, 1995.
21. See Lorsch [op. cit.] and Ward [op. cit.] for discussions of director characteristics.
22. See Lorsch [op. cit.] and Ward [op. cit.] for discussions of director characteristics.
23. See Elson, op. cit.; R. Stobaugh, "Director Compensation: A Lever to Improve Corporate Governance," Director's Monthly (August 1993), pp. 1-4; David J. McLaughlin, "The Director's Stake In the Enterprise," Directors and Boards, 18/2 (Winter 1994): 53-59.
24. See Elson, op. cit.; R. Stobaugh, "Director Compensation: A Lever to Improve Corporate Governance," Director's Monthly (August 1993), pp. 1-4; David J. McLaughlin, "The Director's Stake In the Enterprise," Directors and Boards, 18/2 (Winter 1994): 53-59.
25. See Elson, op. cit.; R. Stobaugh, "Director Compensation: A Lever to Improve Corporate Governance," Director's Monthly (August 1993), pp. 1-4; David J. McLaughlin, "The Director's Stake In the Enterprise," Directors and Boards, 18/2 (Winter 1994): 53-59.
26. See Carey Bhagat and C.M. Elson, "Director Ownership, Corporate Performance, and Management Turnover, The Business Lawyer, 54 (1999): 885-919.
27. R.D. Kosnik, "Greenmail: A Study of Board Performance in Corporate Governance," Administrative Science Quarterly, 32 (1987): 163-185.
28. R.E. Hoskisson, R.A. Johnson and D.D. Moesel, "Corporate Divestiture Intensity in Restructuring Firms: Effects of Governance, Strategy, and Performance," Academy of Management Journal, 37 (1994): 1207-1251.
29. See Lorsch, op. cit.; Fama and Jensen, op. cit.
30. See Lorsch, op. cit.; Fama and Jensen, op. cit.
31. See J. W. Frederickson, D.C. Hambrick, and S. Baumrin, "A Model of CEO Dismissal," Academy of Management Review, 13 (1988): 255-270.
32. See Bhagat and Elson, op. cit.
33. See S. Finkelstein and D.C. Hambrick, "Chief Executive Compensation: A Study of the Intersection of Markets and Political Processes, Strategic Management Journal, 10 (1989): 121-134; R. A. Lambert, D.F. Larcker, and K. Weigelt, "The Structure of Organizational Incentives," Administrative Science Quarterly, 38 (1993): 438-461; John E. Core, Robert W. Holthausen, and David F. Larcker, "Corporate Governance, Chief Executive Officer Compensation, and Firm Performance," Journal of Financial Economics, 51 (1999): 371-406.
34. See S. Finkelstein and D.C. Hambrick, "Chief Executive Compensation: A Study of the Intersection of Markets and Political Processes, Strategic Management Journal, 10 (1989): 121-134; R. A. Lambert, D.F. Larcker, and K. Weigelt, "The Structure of Organizational Incentives," Administrative Science Quarterly, 38 (1993): 438-461; John E. Core, Robert W. Holthausen, and David F. Larcker, "Corporate Governance, Chief Executive Officer Compensation, and Firm Performance," Journal of Financial Economics, 51 (1999): 371-406.
35. See S. Finkelstein and D.C. Hambrick, "Chief Executive Compensation: A Study of the Intersection of Markets and Political Processes, Strategic Management Journal, 10 (1989): 121-134; R. A. Lambert, D.F. Larcker, and K. Weigelt, "The Structure of Organizational Incentives," Administrative Science Quarterly, 38 (1993): 438-461; John E. Core, Robert W. Holthausen, and David F. Larcker, "Corporate Governance, Chief Executive Officer Compensation, and Firm Performance," Journal of Financial Economics, 51 (1999): 371-406.
36. See P. Mallette and K. L. Fowler, "Effects of Board Composition and Stock Ownership on the Adoption of Poison Pills," Academy of Management Journal, 35 (1992): 1010-1035.
37. M.L. Hayward and D.C. Hambrick, "Explaining the Premiums Paid for Large Acquisitions: Evidence of CEO Hubris," Administrative Science Quarterly, 42 (1997): 103-127.
38. Lorsch, op. cit.
39. Lorsch, op. cit., p. 177.
40. We examined a wide array of board characteristics, including several that governance reformists have set their sights on. What is remarkable is how many of these characteristics exhibited no significant differences between Stars and Laggards. The Appendix reports several of these patterns of similarity, starting with an indication that sizes did not differ. We also see that Stars and Laggards did not differ significantly in basic indicators thought to reflect director freshness and vigor. Their director tenures did not differ; nor did director ages; and nor did the (relatively small) percentage of directors over age 70. The striking similarity of these characteristics in Stars and Laggards may be due to widely accepted norms about director ages and tenures, and possibly even due to widespread term or age limits in the sampled companies (which are not reported in the proxies). On the face of it, though, director age, tenure, and continuity appear not to be prime places to look for board improvements. We also examined several characteristics which are often thought to indicate the board's independence from management, and again no significant differences existed. Star companies did not have a greater percentage of outsiders on their boards; nor did they have more "independent" outsiders (outsiders who are not in law firms, consulting firms, or commercial banks); they were no more likely to have a separate chairman and CEO; and they were no more likely to have nominating committees that consisted only of outsiders. (Actually, in 1992 and 1996, the Laggards were significantly more likely to have nominating committees consisting only of outsiders. These committees were probably created as partial remedies for the Laggards' poor performance). Obviously, the lack of any differences between Stars and Laggards on these several dimensions does not mean they can be ignored in designing effective governance. For instance, to return to the days when outsiders comprised less than half of many boards would certainly seem to be a mistake. But the results from the Project Evergreen sample indicate that some widely espoused governance policies are not, in themselves, "make-or-break" factors in generating sustained corporate performance.
41. See S.E. Jackson, "Consequences of Group Composition For the Interpersonal Dynamics of Strategic Issues Processing," Advances in Strategic Management (Greenwich, CT: JAI Press), pp. 345-382.
42. See Ward [ op. cit., Chapters 48, 49, 50] for extensive discussion of proposals to increase directors' shareholdings.
43. th Annual Board of Directors Study, 1998.
44. Ward, op. cit., p. 281.
45. The size of the matching fund could depend on the size of the company, its financial health, or other factors. It might be reasonable to set the fund as a multiple (say five times) of the annual retainer.
46. Our matching fund approach also overcomes some problems with typical stock/option programs for directors, including the temptations to "reload" underwater options and to adjust stock/option programs to take advantage of the company's near-term prospects. For a review of such problems, see C.M. Daily, S.T. Certo, and D.R. Dalton, "Pay Directors In Stock? No." Across the Board (November/December 1999).
47. G.F. Davis, "Corporate Boards in Times of Turbulent Changes," in D.C. Hambrick, D.A. Nadler, and M.L. Tushman, eds., Navigating Change: How CEOs, Top Teams, and Boards Steer Transformation (Boston, MA: Harvard Business School Press, 1998), pp. 278-290.
48. J. Pound, "The Promise of the Governed Corporation," Harvard Business Review, 73/2 (March/April 1995): 89-98, 92.