What do they know? The effects of outside director acquisition experience on firm acquisition performance

This article contributes to the literature on board effectiveness by being perhaps the first to systematically examine how the nature of outside directors' prior experience, and resulting expertise, will influence the performance of a focal firm's strategic initiatives. Our theoretical model is grounded in the psychological literature on expertise and its role in group decision making effectiveness. We focus on outside director expertise in acquisition decision making, and its implications for the performance of the acquisitions of a focal firm. Our conceptual framework indicates that directors will develop expertise in making particular kinds of acquisition decisions (e.g., related or unrelated acquisitions or acquisitions in specific industries or product markets) through their past experiences at other firms with decisions about those specific types of acquisitions, and we predict that this experience and expertise will have positive effects on the performance of a focal firm's acquisitions. We extend our theoretical model to consider the conditions under which relevant director experience will prove most beneficial. Our model predicts that outside director acquisition expertise will deliver the greatest benefits when the focal firm's board is independent from management. We find empirical support for all of our hypotheses. In considering how and when director experience and resulting expertise may influence the performance of corporate acquisitions, our theory and results help to highlight a potential second main focus for research on the long‐standing question of what factors render boards of directors effective. Copyright © 2008 John Wiley & Sons, Ltd.     

The effect of board human capital on the performance of technical alliance investments

Despite boards of directors’ prominent involvement in strategic alliance (SA) decisions in practice and reports from news media, there is relatively little academic research exploring the board's value for a firm's technical SA investments involving a technical transfer or R&D, which are characterized by a high level of uncertainty, information asymmetry, and extreme complexity. Anchored in the resource dependence theory, this study aims to address this important issue by examining how board of directors contribute their human capital, in the form of relevant strategic experience, may mitigate the core challenges managers face when pursuing technical SAs and thereby influencing their outcomes. Our empirical results show that when outside directors hold more extensive alliance experience, they can better execute their consulting function and improve the firm's technical alliance performance. In addition, directors with experience specifically related to technical alliances also have a positive effect on performance. Last, we find that the impact of alliance experience on technical alliance performance is positively moderated by the size of directors’ prior affiliated companies and their share ownership in the focal firm.     

Why do some outside successions fare better than others? The role of outside CEOs' prior experience with board diversity

Research summary: We develop a theory to explain why new outside CEOs can better manage their relationship with the board if they previously served on boards that were more diverse than the focal board. We predict that a new outside CEO's prior experience with more diverse boards not only reduces the likelihood of post‐succession CEO turnover and director turnover, but also improves firm performance. Results from an analysis of 188 outside CEOs in a sample of Fortune 500 companies provide support for our theory. This study contributes to upper echelon theory and research by identifying outside CEOs' prior experience with board diversity as an important aspect of their background that influences a range of major organizational outcomes, including CEO turnover, director turnover, and firm performance. Managerial summary: It is challenging to be a new CEO who comes from outside of the organization. Our study examines why some new outside CEOs fare better than others. We suggest that a positive relationship with the board of directors is a key factor in a new outside CEO's success. A new outside CEO can better manage the relationship with the board if he or she has prior experience working with other demographically diverse boards. In contrast, when the focal board is more diverse than the other boards on which the new CEO previously served, the new CEO tends to struggle in managing his or her relationship with the board, experiencing a higher likelihood of turnover and delivering worse financial performance. Copyright © 2015 John Wiley & Sons, Ltd.     

How constraints and knowledge impact open innovation

Laursen and Salter (2006) examined the impact of a firm's search strategy for external knowledge on innovative performance. Based on organizational learning and open innovation literature, we extend the model hypothesizing that the search strategy itself is impacted by firm context. That is, both ‘constraints on the application of firm resources’ and the ‘abundance of external knowledge’ have a direct impact on innovative performance and a firm's search strategy in terms of breadth and depth. Based on a survey of Swiss‐based firms, we find that constraints decrease and external knowledge increases innovative performance. Although constraints lead to a broader but shallower search, external knowledge is associated with the breadth and the depth of the search in a U‐shaped relationship. Copyright © 2013 John Wiley & Sons, Ltd.     

Let them go? How losing employees to competitors can enhance firm status

Research summary : Because employees can provide a firm with human capital advantages over competitors, firms invest considerably in employee recruiting and retention. Departing from the retention imperative of strategic human capital management, we propose that certain employee departures can enhance a firm's competitiveness in the labor market. Specifically, increased rates of career‐advancing departures by a firm's employees can signal to potential future employees that the firm offers a prestigious employment experience that enhances external mobility opportunities. Characterizing advancement based on subsequent employers and positions, we analyze data on U.S. law firm hiring and industry surveys of perceived firm status between 2004 and 2013. We find that increased rates of employee departures lead to increases in a firm's prestige when these departures are for promotions with high‐status competitors. Managerial summary : Firms often emphasize employee retention. Employee departures, especially as a result of being hired away by competitors, are often viewed as threats to a firm's competitive advantage. We propose, however, that employee retention need not be an unconditional strategic imperative. We argue that certain employee departures can enhance a firm's competitiveness in the market for human capital by signaling to potential employees that the firm offers a prestigious employment experience, which can help them obtain attractive positions with other employers. Analyzing data on U.S. law firm hiring and industry surveys of firm associates between 2004 and 2013, we find that increased rates of employee departures lead to increases in a firm's prestige when these departures are for promotions with high‐status competitors. Copyright © 2016 John Wiley & Sons, Ltd.     

Knowledge worth having in ‘excess’: The value of tacit and firm‐specific human resource slack

Whether holding resources in excess of what is needed to sustain routine operations (i.e., having slack) increases or decreases firm performance is a question of ongoing interest to management scholars. We contribute to existing theory by arguing that human resource slack generally decreases a firm's performance but that holding excess numbers of employees who possess important tacit knowledge that is specific to firms may benefit the firm. We find that the value of these excess resources increases as firms face competitive pressures and decreases when firms' operational choices facilitate the standardization of workflows. We obtain initial empirical evidence for our predictions by testing them on a novel dataset comprising six years of data for 4,070 manufacturing plants in Mexico. Copyright © 2013 John Wiley & Sons, Ltd.     

Politically connected boards and top executive pay in Chinese listed firms

Drawing on social comparison theory, this study examines the relationship between politically connected boards and top executive pay. Moreover, given the socialist orientation of China, tests are also carried out to establish the relationship between politically connected directors and pay dispersion across the firm. We find a negative association between politically connected boards and top executive pay. We also find that politically connected boards are negatively associated with pay dispersion, i.e., the higher the number of political directors on the board the smaller the gap between top executive pay and average employee pay. Finally, our study shows that politically connected directors weaken the pay‐performance link. These findings have important theoretical, policy, and managerial implications. Copyright © 2014 John Wiley & Sons, Ltd.     

Who needs experts most? Board industry expertise and strategic change—a contingency perspective

Research summary: We analyze the effects of board industry expertise on corporate strategic change and the moderating role of institutional quality. We suggest that country‐level contingency factors mitigate the effect of experienced boards on strategy formation by providing alternative sources of information and control in strategic matters. We develop institutional quality as institutional information provision and institutional control provision to test our hypotheses on a sample of firms from MSCI Europe and the S&P 500. Our findings confirm that industry expertise is a salient driver of strategic change across countries. The strength of the effect, however, depends on the institutional quality. We submit that weak institutions require greater board industry expertise as an alternative channel of information and control. Management summary: This study provides new empirical evidence that experience in the firms' industries enables directors to increase strategic change. Our findings show that this effect is even stronger in countries with weak regulatory environments. We hereby provide guidance for multiple stakeholders. First, shareholders seeking a more active adjustment of their firms' strategies may want to compose boards that leverage such experienced directors. Second, directors can use their industry experience to control and to challenge managers better to move beyond the status quo. Third, managers lacking access to information on potential strategic change can use such experienced directors for strategic advice and as a source of information. Overall, we add to the understanding of the corporate board's role in shaping strategy and the influence of weak regulations. Copyright © 2016 John Wiley & Sons, Ltd.     

Independent directors' dissent on boards: Evidence from listed companies in China

Research summary: Although opinion conformity is believed to be commonly used by corporate elites to invoke reciprocity, it is hard to study in the context of corporate boards since boards are typically “black boxes.” Focusing on publicly traded companies in China, where disclosure of dissent is mandated, we show that dissent is associated with a breakdown of the social exchange relationship within boards. Specifically, dissent is more likely to occur when the board chair who appointed the independent director has left the board, or when the board “game” is reaching its last round, defined as a 60‐day window before departure of the board chair or the director herself. Our findings lend considerable support to conceptualization of boards as a social exchange device. Managerial summary: With a novel dataset from China we ask the question of whether the social norm of reciprocity compromises independent directors' decisions. Our results lend considerable support to the hypothesis that independent directors would generally defer to top management as they feel indebted for being offered a director position and in exchange independent directors provide support. We identified two instances in which independent directors are more likely to dissent due to a breakdown of social exchange relationships: (1) when the board chair who appointed the independent director has left the board, and (2) when the board “game” was reaching its last round, that is, either the board chair or the director herself is leaving the board. © 2015 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd.     

Settling up in CEO compensation: The impact of divestiture intensity and contextual factors in refocusing firms

We examine the relationship between strategic change and CEO compensation by studying how a firm's refocusing program influences CEO compensation after completing the change. We contribute to the ‘settling up’ literature by arguing that strategic change is often uncertain for both the CEO and the board of directors responsible for executive compensation. As such the firm is likely to settle up with the CEO by paying for compensation risk and effort undertaken during refocusing after the extent and impact of strategic change are better known. We find that refocusing intensity is positively related to post‐refocusing CEO total compensation, suggesting that ‘settling up’ through post hoc compensation is an important factor in strategic change. We also find that prior firm performance, governance structure and industry dynamism are important moderators of this relationship. © 2013 John Wiley & Sons, Ltd.     

Resource ambidexterity through alliance portfolios and firm performance

Research summary : Partner resources can be an important alternative to internal firm resources for attaining dual and seemingly incompatible strategic objectives. We extend arguments about managing conflicting objectives typically made at the firm level to the level of a firm's alliance portfolio. Specifically, will a balance between revenue enhancement and cost reduction attained collectively through partner resources accessed via a firm's various alliances be similarly beneficial for firm performance? Additionally, how do strategic attributes of alliance portfolio configuration, specifically alliance portfolio size and partner resource scope, condition the balance‐performance relationship? Based on data from the global airline industry, we find support for the balance‐performance relationship, though such balance is less beneficial for firms in the case of access to a broader resource scope per partner . Managerial summary : Increasing revenue and reducing costs simultaneously can potentially enhance firm competitiveness. We highlight that an alliance strategy can be an important alternative to internal resources for attaining such dual strategic objectives, particularly when partner resources accessed through alliances are treated collectively as portfolios. We examine the importance of balancing product‐market extending and efficiency‐improving partner resources in the global airline industry as well as the impact of two alternate strategies for accessing resources through alliances: fewer partners with more resources per partner or more partners with fewer resources per partner. We find that resource balance at the portfolio level helps airlines improve performance. Our results also suggest that managers should be cautious of accessing too many resources through just a few partners . Copyright © 2015 John Wiley & Sons, Ltd.     

Shareholder influence over director nomination via proxy access: Implications for agency conflict and stakeholder value

Corporate governance research indicates that corporate boards of directors may be overly beholden to management, which can be detrimental to firm value creation. Drawing upon agency theory and the governance law literature, we examine the effects of a new SEC rule designed to lessen managerial power by increasing large, long-term shareholders' influence in the director nomination process. We predict and find support for a positive overall market reaction to the rule's announcement as well as a greater reaction for firms with characteristics that suggest compromised board independence or greater CEO control. Moreover, we examine the implications of greater shareholder voice for another key stakeholder group, firm bondholders, and find evidence that it is also value increasing. We conclude by discussing important implications for theory and practice. Copyright © 2012 John Wiley & Sons, Ltd.     

Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets

Many governments seek to impose gender equality on boards, but the consequences of doing so are not clear and could harm firms and economies. We shed light on this topic by conceptualizing the relationships as firm‐ and board‐specific and embedded within specific contexts. The theory is developed with reference to emerging markets, and tested on Malaysian firms. We find that female directors create value for some firms and decrease it for others. The impact varies across different performance indicators, firms' ownership, and boards' structure. The findings call for nuanced responses in relation to women's nominations from both governments and firms. Copyright © 2014 John Wiley & Sons, Ltd.     

Revisiting the firm,industry, and country effects on profitability under recessionary and expansion periods: A multilevel analysis

Research summary: Despite voluminous past research, the relevance of firm, industry, and country effects on profitability, particularly under adverse contexts, is still unclear. We reconcile institutional theory with the resource‐based view and industrial organization economics to investigate the effects of economic adversity, such as the 2008 global economic crisis. Using a three‐level random coefficient model, we examine 15,008 firms across 10 emerging and 10 developed countries for the 2005–2011 period. We find that firm effects become stronger under adversity, whereas industry effects become weaker, as well as country main and interaction effects, particularly among the emerging economies. These findings confirm our assumptions that the firm's own fate is, to a great extent, self‐determined; a reality that is even more pronounced during periods of extreme economic hardship. Managerial summary: In this research, we examine how generalized economic adversity affects the balance across the firm‐, industry‐, and country‐specific factors determining firm profitability. We specifically examine 15,008 firms from 10 emerging and 10 developed countries during the 2005–2011 period to investigate the effects of the 2008 global economic crisis on firm performance. We find that in such adverse conditions, the role of the industry and the country are reduced and the firm's own resources and capabilities become more pertinent for firm performance. This phenomenon is more pronounced across emerging markets. We conclude that the firm's own fate is, to a great extent, self‐determined, a reality that is markedly more evident during periods of extreme economic hardship. Copyright © 2015 John Wiley & Sons, Ltd.     

Undervaluation of directors in the board hierarchy: Impact on turnover of directors (and CEOs) in newly public firms

Research summary: We examine the consequences of the formalization of the board leadership structure at IPO for board‐level turnover. We introduce the concept of director undervaluation. It indicates the degree to which a director’s qualifications based on normatively accepted criteria for board leadership are not duly reflected in his/her appointments to the board chair and committee chair positions. We find that the higher the average undervaluation of directors on the board (“board undervaluation”), the greater the turnover levels of undervalued directors. This effect is stronger when board interaction frequency is higher. We contribute to the behavioral perspective on corporate governance by introducing justice‐based legitimacy as a key normative institution, and by providing a novel predictor of aggregate turnover of directors (as well as the firm’s CEO). Managerial summary: Why do outside directors exit the board? We offer a novel answer to this question in the context of newly public firms. We suggest that when directors are passed over for the board chair and committee chair positions despite having higher qualifications than their peers, they have been “undervalued,” and a negative board climate is likely to develop. We find that the higher the average undervaluation of directors on the board, the higher the turnover levels of these undervalued directors. More frequent board meetings exacerbate these turnover levels. Further, these turnover effects are not restricted to undervalued directors—even the CEO is more likely to exit. This study demonstrates the critical importance of developing a legitimate and fair board leadership structure.     

Lighting the way or stealing the shine? An examination of the duality in star scientists' effects on firm innovative performance

Do star employees enhance or constrain the innovative performance of an organization? Using data from 456 biotechnology firms between 1973 and 2003, we highlight the duality of the effects that stars have on firm performance. We show that while stars positively affect firms' productivity, their presence constrains the emergence of other innovative leaders in an organization. We find that firm productivity and innovative leadership among non‐stars in a firm are greatest when a star has broad expertise and collaborates frequently. We offer cross‐disciplinary insights into the role of human capital as a source of competitive advantage, suggesting that the value of human capital in a firm is contingent on the mutual dependence inherent in high‐status employees' relationships with other individuals in a firm. Copyright © 2014 John Wiley & Sons, Ltd.     

Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal

Research summary: Investing a firm's resources in corporate social responsibility (CSR) initiatives remains a contentious issue. While research suggests firm financial performance is the primary driver of CEO dismissal, we propose that CSR will provide important additional context when interpreting a firm's financial performance. Consistent with this prediction, our results suggest that past CSR decisions amplify the negative relationship between financial performance and CEO dismissal. Specifically, we find that greater prior investments in CSR appear to expose CEOs of firms with poor financial performance to a greater risk of dismissal. In contrast, greater past investments in CSR appear to help shield CEOs of firms with good financial performance from dismissal. These findings provide novel insight into how CEOs' career outcomes may be affected by earlier CSR decisions. Managerial summary: In this study, we examined a potential personal consequence for CEOs related to corporate social responsibility (CSR). We explored the role prior investments in CSR play when a board evaluates the firm's financial performance and considers whether or not to fire the CEO. Our results suggest that while financial performance sets the overall tone of a CEO's evaluation, CSR amplifies that baseline evaluation. Specifically, our results suggest that greater past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when financial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when financial performance is good. Thus, striving to deliver profits in a socially responsible manner may have both positive and negative personal consequences. Copyright © 2017 John Wiley & Sons, Ltd.     

Board representation in international joint ventures

Research summary : Relatively little attention has been paid to boards in international joint ventures (IJVs), and the composition of these boards in particular. We examine the determinants of foreign partners' representation on IJV boards in order to advance our knowledge of this facet of IJV governance. We argue that a foreign partner's representation on the IJV board is related to its equity contribution. However, we hypothesize that this relationship is moderated by IJV and host country characteristics that affect the importance of the internal and external roles IJV boards serve. These results provide insights into the conditions under which a partner might wish to secure greater board representation for its level of equity, or utilize less board representation than might be suggested by its equity level alone. Managerial summary : The functioning and composition of corporate boards have long been seen as critical to managers and shareholders alike. In contrast, the boards of IJVs have been relatively neglected. We advance our knowledge of this important facet of IJV governance. Specifically, we highlight the importance of two roles (i.e., an internal and external role) that IJV boards and directors fulfill. We find that the importance of these internal and external roles of boards determines whether a foreign partner might wish to secure greater board representation for its level of equity, or utilize less board representation than might be suggested by its equity level alone. Our results provide novel insights that can help managers structure their IJV boards. Copyright © 2016 John Wiley & Sons, Ltd.     

CEO Age and Outside Directors: A Hazard Analysis

This paper examines the relationship between CEO tenure, CEO age, the firm's industry group, the proportion of directors from outside the firm, and the cost of firing the CEO. A Cox proportional hazard model of CEO survival is used to study the length of the CEO's stay at the firm. We find that, contrary to previous studies, a greater proportion of outsiders has a positive effect on CEO tenure. The significance of this result is however sensitive to the inclusion of age and performance variables. We test for the effects of heterogeneity of industry, and find that firms in homogeneous industries exhibit lower durations. As the cost of firing the CEO rises, tenure also rises.     

Reassessing board member allegiance: CEO replacement following financial misconduct

Research summary: We examine how board members' reactions following financial misconduct differ from those following other adverse organizational events, such as poor performance. We hypothesize that inside directors and directors appointed by the CEO may be particularly concerned about their reputation following deceptive financial practices. We demonstrate that directors more closely affiliated with the CEO are more likely to reduce their support for the CEO following financial misconduct, increasing the likelihood of CEO replacement. Enactment of the Sarbanes‐Oxley Act similarly alters governance dynamics by creating a greater expectation for sound corporate governance. We demonstrate our findings in U.S. public firms that restated their financial earnings during a 12‐year period before and after the passage of Sarbanes‐Oxley. Managerial summary: Given past concerns about lack of oversight by boards of directors leading to firm financial misconduct, we examine how the relationship between directors and CEOs may be altered in the face of such misconduct. We argue that directors most closely tied to the CEO (inside board members and board members appointed by the CEO), typically the most supportive of the CEO, may become most concerned about their own reputation following financial misconduct. We find that CEOs receive less support from these directors, a finding in contrast to past studies demonstrating that such board members tend to shield CEOs following poor performance. These findings are accentuated following the passage of the Sarbanes‐Oxley Act, which places greater responsibility on the CEO for the accuracy of financial reports. Copyright © 2015 John Wiley & Sons, Ltd.