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The Moderating Effect of CEO Power on the Board Composition–Firm Performance Relationship*
Author(s) -
Combs James G.,
Ketchen David J.,
Perryman Alexa A.,
Donahue Maura S.
Publication year - 2007
Publication title -
journal of management studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.398
H-Index - 184
eISSN - 1467-6486
pISSN - 0022-2380
DOI - 10.1111/j.1467-6486.2007.00708.x
Subject(s) - shareholder , accounting , business , power (physics) , composition (language) , agency (philosophy) , on board , principal–agent problem , event study , corporate governance , finance , sociology , paleontology , linguistics , philosophy , physics , social science , context (archaeology) , quantum mechanics , engineering , biology , aerospace engineering
Prior studies of the relationship between the composition of boards of directors and firm performance offer equivocal results. Drawing on agency and power circulation theories, we attempt to reduce this equivocality by asserting that CEO power moderates the relationship. Specifically, an outside director dominated board is needed to check a powerful CEO, but monitoring by other executives provides sufficient constraints on CEOs with low power. We used event study methodology to test the effects of the interaction between board composition and CEO power on stock market reaction to 73 unexpected CEO deaths. We found support for our theorizing among two of three sources of CEO power. Thus, although regulatory trends increasingly support outside director dominated boards, our findings indicate that this may not always benefit shareholders and that CEO power should be considered when constructing boards.