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Board involvement in monitoring and strategy making: Antecedents and consequences

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Board involvement in monitoring and strategy making: Antecedents and consequences

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Board Involvement in Monitoring and
Strategy Making:
Antecedents and Consequences
by
Sally Baack
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
in Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Business Administration)
December 2000
Copyright 2000 Sally A. Baack
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UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNI VERSI TY PARK
LOS ANGELES, CALI FORNI A 900 0 7
This dissertation, written by
i
Committee, and approved by all its members,
has been presented to and accepted by The
Graduate School in partial fulfillment of re
quirements for the degree of
DOCTOR OF PHILOSOPHY
Dim of Graduate Studies
Date .I^cember. 18 ,u . 2 0 0 0.
DISSERTATION COMMITTEE
____
__________
5 ^ - V v /k ^ / ____ ^
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Acknowledgements
A dissertation is never the work o f just one person. This dissertation is no exception. I would
like to take this opportunity to extend my thanks, gratitude and acknowledgement to all of the
many, many wonderful people who have helped me along the way.
First, and foremost, I thank and honor my advisor and dissertation chair, Nandini Rajagopalan.
Nandini is a stellar role model o f a human being and an inspiring scholar. On a personal level she
is supportive, encouraging and challenging. She has patiently guided me through this process
with her intelligence and generosity. I thank you!
Thank you to my committee: Arvind Bhambri, Tom Cummings and Mitch Earleywine. I am very
fortunate to have three truly exceptional human beings on my committee to see me through.
Thank you to David Finegold at the Center for Effective Organizations at (JSC and to Kom Ferry
for your support of this dissertation research.
Thank you to my very loyal and supportive gaggle of long-time friends that I have drawn on for
strength, energy, patience, understanding and perspective. I am grateful to every one of you:
Kate Gundlach, Ingar Shu, Jamie Kuster, Susie Awad, Avital Elad, Tamar Davis, Joanna Oltman,
Brooke Snoberger and Ben Carroll.
Thank you to my fellow doctoral students and friends: Stephen Nason, Elise Prosser, Denny
Kemochan, Cecily Cooper, George Benson (!!), Ofer Meilich, Seok-Woo Kwon, Carter Lloyds,
Kim Jaussi, Murat Alpaslan, Susan Young, Kimberly Hopkins, Azfar Hussain and Anthea Zhang.
ii
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Thank you to the many individuals in the department who made my experience at USC more
enjoyable in both great and small ways: Carl Voigt, Sam Hariharan, Peter Kim, Arturs Kalnins,
Andy Molinsky, Kyle Mayer, Bill Davidson, Kathleen Reardon, Warren Bennis, Michael
Coombs, Bob Turrill, Laura Bristow, Martha Maimone, Yolanda Jones, Amir Rahnamay-Azar
and Aaron Widera.
I extend my thanks to my fellow Yogis at the Forrest Yoga Circle (Ana and Julian) and Yoga
Works (Erich and Maryam) with whom I shared my moving meditation in the wee hours of the
morning, nearly every day for the past years. Namaste.
Thank you to my fellow musicians in the Santa Monica Symphony- especially Adam, Carla,
Paula, Larry and Paul.
Thank you Nizar Ibrahim. Your constant encouragement and support got me through this. I am
eternally indebted to you for your priceless, steadfast love. I cherish your companionship.
Shoukran, Habibi.
Above all, I thank my family. Mom, Dad, Jim, Michelle, Kieran and Shannon. To thank you
properly would require me to write a second dissertation. Instead I will finish this work and
return home to be with you. This has truly been a family team-effort! We made it!
With admiration, respect, love and thanks, 1 dedicate this dissertation to my beloved family.
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Table of Contents
Acknowledgements................................................................................................................ i i
List of Tables........................................................................................................................ v
List of Figures.......................................................................................................................vi
Abstract................................................................................................................................. vii
Chapter 1. Introduction......................................................................................................... 1
Chapter 2. Literature Review..............................................................................................1 1
Chapter 3. Dissertation Framework and Research Questions..........................................26
Chapter 4. Methodology......................................................................................................56
Chapter 5. Empirical Findings............................................................................................ 69
Chapter 6. Discussion and Conclusions............................................................................ 98
References.............................................................................................................................116
Appendices........................................................................................................................... 124
Appendix I: Results of two-tailed test for Representativeness........................... 124
Appendix II: Results o f Factor Analyses.............................................................125
Appendix III: Alpha Reliability Coefficients for Survey M easures..................127
Appendix IV: Histograms for Survey Scales ......................................................129
Appendix V: Calculations for Environment M easures.......................................133
iv
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List of Tables
Table Page
Table 1: Descriptive Statistics 70
Table 2: Correlation Matrix 71
Table 3: Summary of Hypotheses Results: Antecedents of Board Involvement 73
Table 4: Summary of Hypotheses Results: Consequences of Board Involvement 74
Table 5: Results of OLS Regression Models:
(Antecedents of the Amount of Time Board spends on Monitoring Activities) 73
Table 6: Results of OLS Regression Models:
(Antecedents of the Amount of Time Board spends on Strategic Activities) 76
Table 7: Results of OLS Regression Models:
(Antecedents of Board Receiving Information from External Sources) 78
Table 8: Results of OLS Regression Models:
(Antecedents of Board Receiving Information from Internal Sources) 79
Table 9: Results of OLS Regression Models: (Antecedents of Board Expertise in Monitoring) 82
Table 10: Results of OLS Regression Models:
(Antecedents of Board Expertise in Strategic Decision Support) 83
Table 11: Results of OLS Regression Models: (Antecedents of Board Involvement) 83
Table 12: Results of OLS Regression Models: (Antecedents of Board Involvement) 86
Table 13: Results of OLS Regression Models: (Board Involvement Predicting Performance) 88
Table 14: Results of OLS Regression Models: (Supplemental Analysis) 90
Table 13: Results of OLS Regression Models: (Moderating Effects of Organization Size
on the relationship between Board Involvement and Firm Financial Performance) 91
Table 16: Results of OLS Regression Models: (Moderating Effects of Organization Age
on the relationship between Board Involvement and Firm Financial Performance) 92
Table 17: Results of OLS Regression Models: (Moderating Effects of Firm Diversification
on the relationship between Board Involvement and Firm Financial Performance) 94
Table 18: Results of OLS Regression Models: (Moderating Effects of Environment Munificence
on the relationship between Board Involvement and Firm Financial Performance) 93
Table 19: Results of OLS Regression Models: (Moderating Effects of Environment Dynamism
on the relationship between Board Involvement and Firm Financial Performance) 96
v
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List of Figures
Figure
Figure 1: Integrative Framework
Figure 2: Dissertation Model
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Abstract
Board Involvement in Monitoring and Strategy Making:
Antecedents and Consequences
This dissertation examines two broad research questions. First, it examines
relationships between key organizational and environmental antecedents and board
structural attributes (proportion of insiders, stock ownership, etc.) and the degree and
type of board involvement in the monitoring and strategic decision support functions of
the board. Second, it examines the relationship between board involvement and firm
financial performance, and the moderating effects of organizational and environmental
contingencies on this relationship. Key contingencies examined are organization size,
organization age, level of diversification, environmental dynamism and environmental
munificence. Board involvement is operationalized as a multi-dimensional construct
with three underlying dimensions: time, information and expertise. Specific research
hypotheses on the antecedents and consequences o f board involvement in monitoring and
strategy making are tested through archival and survey data from 2S6 Fortune 1000 firms.
Multiple regression analyses provide support for several hypothesized effects. In
summary, high outsider representation on the board was significantly related to the
frequency with which the board will receive information from external sources, the
board’s monitoring expertise, and the board’s overall involvement. High insider
representation, however, was significantly related to less time on strategic decision
support activities, reduced frequency o f the board receiving information from internal
sources, lower board strategic decision support expertise, and lower overall board
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involvement. In addition, the greater the organization size, the more time the board
spends on monitoring activities, the more frequently the board will receive information
from internal sources, the greater its expertise in monitoring, the greater its expertise in
strategic decision support, and the greater the overall involvement of the board. Greater
levels of environmental dynamism were also significantly related to more overall board
involvement. This dissertation makes important theoretical and methodological
contributions to the area o f corporate boards. Specifically, it develops a multi
dimensional board involvement construct that directly measures the behaviors through
which board members fulfill their roles. Further, it tests a multi-theoretic model of the
organizational, environmental and board attribute antecedents to board involvement.
Overall, it contributes to a stronger empirical understanding of the antecedents and
consequences of board involvement.
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Chanter I
Introduction
Boards o f directors have received much attention from both business scholars and
practitioners in recent decades. They play a central role in the strategic management
processes of modem firms. It is important to understand how they fit in with, and
contribute to, the broader corporate governance and strategic management fields.
Corporate governance is essentially concerned with identifying ways to ensure that
strategic decisions are made effectively (Davis, et al, 1997). Some have viewed it as a
relationship among stakeholders that is used to determine and control the strategic
direction and performance of organizations (Mitchell, et al, 1997). Others have thought
of corporate governance as a means used in corporations to establish order between
parties (a firm’s owners and its top-level managers) whose interests may be in conflict
(Williamson, 1996). In present-day corporations, a central objective of corporate
governance is to ensure that the interests of top-level managers are aligned with
shareholders’ interests. Corporate governance involves oversight in areas where owners,
managers, and members of boards of directors may have conflicts o f interest (Hitt, et al,
1999). These areas include the election o f directors, general supervision of CEO pay and
more focused supervision of director pay, and the corporation’s overall structure and
strategic decisions (Fama & Jensen, 1983).
Effective governance o f organizations today is of interest to shareholders,
business practitioners, the general business press, and academic scholars. A primary
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reason for this interest has been the perception that corporate governance mechanisms
have failed to adequately monitor and control top-level managers’ strategic decisions
(Ward, 1997). This perspective has recently brought attention to, and a call for
reexamination of, corporate governance mechanisms, resulting in changes that range
from insignificant to dramatic, especially with respect to efforts intended to improve the
performance of boards of directors (Judge & Zeithaml, 1992; Worthy & Neuschel, 1984).
This renewed focus and interest has occurred for a second reason, as well. Research
conducted in this area has demonstrated that a well-functioning corporate governance and
control system can result in a competitive advantage for a firm (Kroll, et al, 1997).
Moreover, research has suggested that the role of the board of directors is quickly
becoming a major strategic force in U.S. firms (Westphal & Zajac, 1997). This
highlights the importance of the board of directors, not only for corporate governance,
but also for effective strategic management of corporations today.
Research Questions
Research on boards of directors has resulted in a multitude o f theoretical and
empirical studies in recent years. Fundamental changes in the global economy - driven
by the dual forces o f technology and globalization - have resulted in increased pressure
on boards in many ways, due in part, to the transparency of effective decision-making in
this rapidly changing environment. These changes have been translated into real
pressures for boards that did not exist a few decades ago. Shareholders are calling for
boards to be held accountable, and boards, in turn, are calling for top management to be
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held accountable for their decisions. Understanding the role o f the board in the strategic
decision-making o f the firm is important, because the success or failure of the firm often
rests on the quality and effectiveness of the decisions that the board helps to formulate or
evaluate. Based on this central role that boards of directors play in the strategic
orientation of the firm, academic researchers have produced a large body of work aimed
at understanding boards.
As far as the broad domain of board research is concerned, prior work has looked
at a wide array of topics that range from governance patterns in bankruptcy
reorganizations (Daily, 1996) to internationalization and firm governance (Sanders &
Carpenter, 1998). Corresponding theories and underlying perspectives have highlighted
the following functions o f the board: legal responsibilities (Buchan, 1981; Vance, 1983),
monitoring/control (Byrd & Hickman, 1992), strategic decision support (Judge &
Zeithaml, 1992; Johnson, et al, 1993), resource acquisition (Pfeffer, 1972; Boyd, 1990),
and symbolic support (Westphal & Zajac, 1998) of the organization. Recent work
indicates that the addition of social-psychological theories may play a role in future work,
although they have not yet been widely applied (Westphal & Zajac, 199S).
The majority of prior research, however, and the work that is most and directly
relevant to strategic management, has focused on board attributes as the central construct
in understanding board performance and outcomes. Board attributes include
demographic and structural variables such as age, size, percentage of outsiders, etc. The
majority of prior work has focused on the antecedents and consequences of variations in
board structural attributes. Two research questions have dominated this line of inquiry (i)
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what explains variations in board structural attributes and (ii) wbat are the effects of
varying board structural attributes on various organizational phenomena such as CEO
compensation, CEO succession, anti-takeover measures, and even, overall financial
performance (Finkelstein & Hambrick, 1996; Johnson, Daily & Ellstrand, 1996). Both of
these research questions are largely consistent with a view of the board as essentially
performing two critical functions: monitoring/control, and strategic decision support.
However, with rare exceptions, prior research has not directly examined whether and how
boards actually perform these functions. The lack of attention paid to the process aspects
o f board functioning may be a key reason why prior research is riddled with
contradictions and unanswered questions (this observation is consistent with the
conclusions reached in two other reviews of the literature; Zahra & Pearce, 1989;
Johnson, Daily, Ellstrand, 1996).
The assumption that certain board characteristics are valid proxies for the
existence o f certain board processes remains largely untested. This omission in the board
literature is surprising, given that board attributes have been the most frequently
examined construct in board research (Dalton, et al, 1998). Moreover, as prior research
demonstrates, relying on board attributes as proxies for board roles and processes has
resulted in contradictory findings, making interpretation of existing findings difficult, at
best. A key limitation, then, of prior research, is that after much recent empirical work on
boards, we still do not have a solid understanding o f the importance and consequences of
key board attributes, and we don’t have studies that directly measure board processes or
the underlying mechanisms for fulfilling board functions.
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This dissertation attempts to fill this significant gap in the board of directors
literature by developing a more fully-specified theoretical framework of boards of
directors; identifying actual behaviors and actions that boards engage in to perform their
key roles and functions, in order to develop multi-item measures of underlying board
processes; and directly testing the relationships between the most-frequently tested board
attributes and board involvement, to determine whether board attributes do, in fact,
directly impact financial performance of the firm, as well as testing key environmental
and organization factors that may moderate this relationship. Specifically, the objectives
of this study are to investigate the following two research questions:
1. Are there systematic relationships between key organizational and
environmental antecedents and board structural attributes (such as proportion
of insiders, stock ownership, etc.) and the degree and type of involvement of
the board in the monitoring and strategic decision support functions of the
organization?
2. Is the relationship between board involvement and firm financial performance
moderated by critical contextual contingencies, such that the relationship is
significant under certain environment and organizational conditions and not
significant under others?
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Summary of Findings
The hypotheses in this dissertation tested two sets of relationships. The first set of
hypotheses identified organizational, environmental and board attribute antecedents to
board involvement. The second set of hypotheses predicted that board involvement will
affect firm financial performance and identified potential organizational and
environmental moderators of this relationship. To summarize, outside directors were
significantly and positively related to board involvement in terms of use of external
information, contribution to monitoring expertise, and overall board involvement. Inside
directors were significantly and negatively related to time the board spent on activities
related to strategic decision-support activities, use of internal information, expertise in
strategic decision-support, and overall involvement. Organization size was the key
organizational antecedent to board involvement, and environmental dynamism was a
critical environmental predictor of board involvement. The results regarding the
relationship between board involvement and firm performance suggest that firm
performance may act as an antecedent to board involvement. Finally, organization size
and organization age moderate the relationship between board involvement and firm
financial performance.
Contributions of the Research
This dissertation is timely and significant for theoretical, methodological and
practical reasons. From a theoretical perspective, this dissertation first offers a more
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complete test of the contextual contingencies associated with antecedents and
consequences of board involvement than prior studies. The dissertation utilizes a multi-
theoretic, more fully specified model of boards than previous research. This is important,
because it allows us to incorporate the full complexity of the relevant board constructs
simultaneously, rather than examining each relationship separately. Second, the
dissertation designates the construct of board involvement as a central construct in boards
research, rather than treating it as a peripheral construct, as in previous studies. Focusing
on the construct in a new way, by highlighting and detailing the underlying processes
associated with the construct, enabled me to then directly measure those processes
through the collection of survey data. Third, the instrument developed for this
dissertation is substantially more detailed survey instrument than those utilized in the
prior two boards studies that relied on survey data (Judge & Zeithaml, 1992; Westphal,
1999).
This dissertation also makes a substantial methodological contribution to the field
of corporate governance and our understanding of boards of directors, in addition to the
theoretical contributions highlighted above. Most important, I test the key assumption of
the relationship between board attributes and board roles and processes. This was made
possible by developing a valuable, unique database with direct measures of underlying
board processes from the supplemental questionnaire in the Kom Ferry Annual Board of
Directors Survey. With one or two exceptions, prior research has been conducted
without direct measures of board processes and roles, resulting in considerable concern
for the validity o f findings. This dissertation has distinct methodological advantages in
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that it not only developed this unique and valuable database of direct board measures, but
also that it utilizes archival data from a number o f sources. The dissertation, then, has
two additional, distinct contributions. One, it is unique in its acquisition of direct board
measures from a large-scale survey questionnaire. Two, the dissertation uses a research
design wherein the independent measures come from archival data and the dependent
measures come from the survey data, eliminating the common method variance problem
that the majority of prior board research suffers from. Finally, in contrast to the few
instances where the construct of board involvement is examined (Judge & Zeithaml,
1992; Westphal, 1999), the measure of board involvement used in this study is developed
from multiple items and is applied to a large-scale, multiple industry sample.
This dissertation is also of practical significance. From a practitioner perspective,
this dissertation is important in that it advances our understanding o f the relationship
between board attributes and board roles and functions. While prior work has overlooked
the essential question of whether and in what ways board attributes influence board roles
and processes, this dissertation confronts this critical issue head on. Business
practitioners, stakeholders and business press writers have recently placed great
importance on achieving the most effective board configuration in terms of structural and
demographic composition. However, prior to this study, we have no direct tests that
confirm the assumption that board attributes influence board roles and process in
systematic ways. In addition, the dissertation introduces the critical issue of trade-offs
across board roles, although it does not examine it empirically. Corporations are
struggling with the challenge to construct the “ideal” board, for monitoring and strategic
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purposes, and, perhaps, to gain legitimacy in the eyes of its stakeholders and the general
public. Examining the trade-offs associated with performing these various functions will
contribute importantly to efficient and effective corporate performance. Finally, the
dissertation focuses on the consequences of board involvement in light of the broader
context that is relevant for the firm. By examining the organizational and environmental
moderators of the relationship between board involvement and firm financial
performance, top executives and board members can more appropriately adjust their
overall and specific type of involvement to fit the context of their firm. The questions
examined in this dissertation directly inform key strategic decisions made every day by
managers in Fortune 1000, and other, firms.
The organization of the dissertation is as follows. Chapter 2 reviews the empirical
literature that has been conducted on boards of directors and broadly classifies it into
three streams. The main theoretical perspectives in this field are identified. An
integrative framework o f boards is developed from the review and serves to organize the
review discussion. Next, I present the research findings, patterns across studies,
contradictory findings, research gaps and unanswered questions. Chapter 3 narrows the
scope o f the discussion o f boards, focusing on the second stream o f research. The
theoretical model and research hypotheses are developed in this chapter. Chapter 4
describes the empirical methodology. First, I summarize the sample and data collection
methods used in this dissertation. Second, I review the definitions and sources of the
measures used in this dissertation. Then, I discuss the analytic methods used in the
dissertation. Chapter 5 presents the empirical findings of the analysis. Finally, Chapter 6
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reviews the theoretical and methodological implications o f the results, highlights the
contributions and limitations of the dissertation, and suggests directions for future
research.
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Chapter 2
Literature Review
Research on boards of directors has produced a multitude of empirical studies.
Based on the extensive review conducted for the dissertation, I developed an integrative
framework to map out and help organize the empirical research. This chapter will first
review the literature according to the framework, identifying those portions of the model
that have been well-researched and that have produced consistent, reliable findings. Next
1 will highlight the gaps, areas of contradictory or inconclusive findings, identifying
relatively under-researched areas in the field that would benefit from further examination.
1 will conclude with a more focused discussion on the research stream and gaps that
generated the motivation for this dissertation. The integrative framework is presented in
Figure 1.
The empirical literature on the broader domain of board research can be broadly
classified into three streams as reviewed below.
Stream I: Antecedents to Board Structural Attributes.
Literature in Stream I examines antecedents to board structural attributes, and
corresponds to links 1-3 and 2-3 in the framework. Links 1-3 and 2-3 relate
environmental and organizational antecedents, respectively, to variations in board
structural attributes. This stream o f research has been conducted primarily from a
resource dependence (PfefFer & Salancik, 1978) perspective. This perspective views
ll
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Figure 1
Boards of Directors: An Integrative Framework
Board Roles and
Processes
Organizational
Factors
Environmental
Factors
Board Attributes
Organizational Outcomes
Board Outcomes
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boards as boundary spanning mechanisms through which information and resources
critical to a firm’s performance are obtained. By helping the firm interface with its
environment, boards are believed to increase a firm’s access to key resources and
improve efficiency and performance (Pfeffer, 1973; Provan, 1980). The resource
dependence perspective views the board as a key means to acquire resources critical to
the firm’s performance (Pfeffer, 1972; 1973; Pfeffer & Salancik, 1978). Firms can
address key contingencies posed by their environment by selecting board members with
strong influence over these contingencies (e.g., the selection of board members with
strong connections to financial institutions presumably enhances the firm’s access to
financial resources (Mizruchi & Steams, 1988; Steams & Mizruchi, 1993). Key
organizational contingencies, which affect board structure and composition, include
organization size (Daily & Dalton, 1992), prior performance (Kaplan & Minton, 1994)
and firm strategy (Pearce & Zahra, 1992).
Researchers have identified four key environmental antecedents: munificence,
complexity, uncertainty, and dynamism. Salient organizational factors include age, size,
ownership structure, the power distribution between the CEO and board, prior
performance, firm level of diversification. These antecedent conditions and changes
therein, are expected to influence two broad categories of board structural attributes:
composition attributes and network/linkage attributes. Compositional attributes have been
defined in prior literature to include variables such as board size,
insiders/outsiders/affiliated members, various demographic characteristics o f board
members including age, tenure, functional and industry experience, and stock ownership
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o f individual directors. Network attributes, on the other hand, focus on the board
member’s external connections as reflected in memberships on other boards and
interlocking ties.
Stream II: Board Attributes as antecedents.
Stream II focuses on board attributes as antecedents. Prior research in this area
has focused on board attributes as antecedents, corresponding to links 3*5, 3-6, and 3-4
in the framework. Links 3-5 and 3-6 relate variations in board structural attributes to
board outcomes and organizational outcomes, respectively. The literature in this stream
has been dominated primarily by an agency theory (Jensen & Meckling, 1976)
perspective.
Agency Perspective
Studies grounded in this perspective have primarily examined board composition
and its effects on a board’s ability to monitor and control managerial behaviors. The
central concept of agency theory, as it relates to boards research, is the potential conflict
of interest between a firm’s managers and shareholders. Agency perspectives suggest
that because executives (agents) have considerable discretion, they may pursue objectives
contrary to the goals o f the owners (principals), thereby not maximizing shareholder
wealth (Jensen & Meckling, 1976).
In assessing the role of the board as an instrument for corporate control,
researchers have often focused on executive compensation decisions, CEO selection and
dismissal, and other mechanisms for reward/punishment aimed at aligning managerial
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interests with those of the firm’s shareholders. Agency theorists have articulated various
factors that affect the ability of the board to effectively monitor a firm’s top managers
and protect the interests of its shareholders. Empirical evidence tends to be rather mixed
and even contradictory at times (Johnson, et al., 1996). For example, while several
studies have identified the positive effects of outside, non-affiliated directors in
protecting shareholder interests (e.g., Kosnik, 1990; Kerr & Kren, 1992; Boyd, 1994),
others have found that inside directors can perform an important monitoring function by
providing valuable information on the CEO’s activities and firm performance to the other
board members (e.g., Baysinger & Hoskisson, 1990). More recently, researchers from a
social-psychological perspective have identified other factors that may constrain the
ability of board members to exercise independent control in the interests of the firm’s
shareholders. Studies conducted by Wade, O ’Reilly & Chandradat (1990), Westphal &
Zajac (1995), Zajac & Westphal (1995), etc. identify the crucial role o f factors such as
relative power of the CEO and the board, demographic similarity on age, tenure, and
prior backgrounds, and social ties outside the workplace, in the corporate governance
process. These studies indicate that the control and monitoring functions o f the board
may not always operate as efficiently as assumed by agency theorists.
The final link included in this stream is link 3-4. Link 3-4 postulates that
variations in board structural attributes will manifest themselves in the ability of the
board to perform each of the four distinct roles identified in prior literature: control/
monitoring, strategic decision support, resource acquisition, and symbolic management.
My review indicates that board processes and roles have remained virtually a “black box”
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in prior empirical research - most prior studies have assumed the existence o f these board
roles and have not measured them directly. Most of the research on link 3-4 has focused
on one board role, namely, board involvement in the strategy process, and has used a
strategic choice perspective.
Strategic Choice Perspective
In examining how boards perform their strategic decision support function, prior
literature has primarily adopted a strategic choice (Child, 1972) perspective. Strategic
choice theorists argue that purposeful actions exist in organizations and that
organizational members have substantial leeway in shaping their own fates (Child, 1972).
Therefore, the perspective focuses on the proactive choices individuals and groups within
organizations make to influence organizational outcomes. According to this view, boards
can enhance the quality of strategic decisions by participating in the strategic process and
contributing their experience and expertise in particular areas (environmental trends,
strategic decision making, assessing strategy implementation progress, and best practices
from other firms and industries). Each of the three studies that examined link 3-4 (board
attributes affecting board roles) used different operational definitions of board roles
(although they all tapped into some aspects of board involvement) but all three studies
operationalized board roles from a strategic choice perspective and hence, only measured
some aspects o f the strategic decision support function o f boards. These studies are
dissected in detail in the last section of this chapter, as they provide critical motivation for
this dissertation.
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Stream 1 1 1 : Consequences of Variations in Board Roles and Processes.
Stream III examines the consequences of board processes, and corresponds to
links 4-5 and 4-6 in the framework and, to a limited extent, link 5-6. Link 4-5 represents
the relationship between the ability o f a board to successfully perform each o f its four
main functions (as discussed above) and board outcomes related to each o f these four
functions. To illustrate link 4-5, outcomes such as changes in the compensation system,
new CEO selection, CEO firings, etc. can be directly attributed to the board’s
monitoring/control function whereas changes in firm strategy, restructuring,
diversification, etc. can be linked to the strategic decision support function of the board.
Interestingly, no study in the review examined link 4-5. This is consistent with my earlier
conclusion that most prior research has examined a board’s structural attributes and has
typically used these structural attributes as proxies for the board’s ability to actually
perform its various functions.
Finally, link 4-6 in the framework indicates that boards may influence
organizational outcomes directly. Although one can argue that overall organizational
outcomes are affected by a variety of internal and external factors extraneous to the board
functions, I retain the direct effect to accommodate the one prior study which did
examine link 4-6.
The three streams described above provide a general overview of the broad
domain o f the empirical research that has been conducted on boards of directors. The
overwhelming focus o f prior empirical research has been on antecedents and
consequences o f board attributes, and falls within the second stream. This stream also
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suffers from competing theoretical perspectives, contradictory findings, and lack of
consensus regarding the operationalization of terms. 1 address these issues next.
Conclusions and Limitations
The two main limitations of prior research that emerge from the above discussion
concern the omission of direct examination of board roles and processes, and the limited
operationalization of the board involvement construct.
Omission of Board Roles and Board Processes. An omission that emerges
from this body of research is the lack o f focus on, and direct examination of, board roles
and processes, themselves. With rare exception, prior studies have relied almost
exclusively on board attributes to serve as proxies for the ways in which boards fulfill
their roles. This omission is critically important, because without support for the
assumption that board attributes are systematically related to underlying board roles and
processes, we do not know how to make sense of the competing and sometimes
contradictory findings in prior research. We do not know whether the difference in
findings across studies is due to a measurement problem, or a model-specification
problem. We do not know if empirical studies would produce similar findings if the
measures were more appropriately operationalized, or if our studies built upon previous
studies to develop their definitions and operationalizations o f constructs, or whether
empirical research would produce more reconcilable findings if we rethought our
models, and focused on examining, measuring, and operationalizing different constructs
from the ones currently being employed.
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A number o f researchers are o f the prior opinion, that empirical research in this
area would greatly benefit from an improvement and refinement o f our measurement
techniques. In the last decade, a new stream of boards research has emerged that focuses
on the committees within the board of directors as a whole. It suggests that we may be
focusing on an inappropriate unit of analysis. Rather than examining structural attributes
of the board of directors as a whole, we should be focusing on the structural attributes of
the various board committees, where the decisions are actually made. For example, we
should be looking at the structural attributes of the compensation committee to test the
effects o f board attributes on CEO and top executive compensation. Similarly, we should
examine the structural attributes of the resource allocation committee to test the effects of
board attributes on resource allocation outcomes. Singh and Harianto have emphasized
that “the most important means for facilitating the decision making process o f the board
is the creation of various committees such as the ...executive compensation... committee”
(1989:147).
This perspective has resulted in a new line o f research which tests, for the most
part, the same questions that have already been examined at the board level, at the
committee level. For example, Conyon & Peck (1998) examine the role of board control
and remuneration committees in determining management compensation. Remuneration
committees, they argue, potentially have an important positive role in the exercise of
board control. They draw on agency theory arguments that suggest these committees are
forums within which directors determine the appropriate design or reward structures for
management and align management and shareholder interests. Conyon and Peck (1998)
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cite the evidence to question the effectiveness of remuneration committees. O’Reilly, et
al (1988) found that the average salary of compensation committee members had a
positive effect on CEO pay. Also, Singh & Harianto (1989) found that the proportion of
executives on a compensation committee is a significant predictor of the number of
executive directors covered by golden parachute arrangements. The findings of Conyon
& Peck (1998) indicate that neither the proportion of outside directors on the board nor
CEO duality was related to management compensation. In addition, companies adopting
remuneration committees, or with high proportions of outsiders on those committees,
generally had higher level of top management pay. It is interesting to note that the results
found in this empirical study are consistent with prior research (Westphal & Zajac, 1995;
Finkelstein & Hambrick, 1989; Main, et al, 1994) and offer little ground-breaking strides
in our understanding o f boards.
In contrast, Daily, et al (1998) examined compensation committee composition as
a determinant of CEO compensation, and found results that may suggest the
consideration of theories other than agency theory as explanation for the continued focus
on board independence. They conducted a longitudinal assessment of the relationship
between the composition of a firm’s compensation committee and multiple measurements
of CEO compensation. They found no evidence that “captured’’ directors led to greater
levels of, or changes in, CEO compensation (Daily, et al, 1998). Captured directors is a
term used to refer to directors who are highly likely to be subject to CEO influence
(insiders, affiliated outsiders, interdependent and CEO directors). These results are
inconsistent with predictions o f board reform critics, and agency perspectives, that
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boards, specifically board committees, that include such “captured” directors are more
likely to award very attractive CEO compensation packages. Again, Daily, et al (1998)
found no systematic relationship between compensation committee interdependence and
CEO compensation.
While the approach outlined above has provided a new and more sophisticated
perspective that has improved our understanding of how and where board members affect
board decisions, it is difficult to assess whether the conclusions drawn from the research
generated by these scholars contributes to our ultimate understanding of board outcomes.
One could argue, 1 suppose, for the further dropping down of the level of analysis- from
the board, to the committee, to the individual level. One could postulate that there may
be one member or head of each committee who is the most powerful and influential in the
decision-making process, and therefore, understanding how compensation committee
decisions are made requires an examination of this one individual’s demographic
attributes. There may be some valid contribution of the approach and findings discussed
above. However, the problem is that we do not know the value of the contribution,
because we do not know whether or not board attributes serve as valid proxies for board
roles and processes. The question concerning the issue of measurement problem or
model-specification problems remains. How far can we choose to continue incrementally
“improving” and refining our measurements, when we do not have evidence that the
systematic relationships, in fact, exist?
Addressing this fundamental, yet unanswered research question, is the focus of
this dissertation. However, before turning to the framework of the dissertation
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specifically, let me briefly return to the issue of board roles and processes more generally.
Having stated that prior research has not examined this question, there are three papers
that address this question to some degree. I will now review these three papers in detail,
so that we can understand the true contribution of the dissertation.
Limitations of prior operationalizations of Board Involvement. The second
conclusion from the literature review is that previous operationalizations of board
involvement are limited. Three recent empirical studies have directly examined the
construct of “board involvement” (Judge & Zeithaml, 1992; Johnson, et al, 1993;
Westphal, 1999). The development o f the construct “board involvement” was a first
attempt to tap into directly measuring board roles and processes. Johnson, Hoskisson &
Hitt (1993) reported that boards become involved in corporate restructuring (a form of
strategic change) when firms face declining financial performance. They found that
outside directors and outside directors’ shareholdings were significant predictors of board
involvement in corporate restructuring. However, since they relied upon proxy measures
of board processes (i.e., structural attributes), their study only offers indirect evidence of
board involvement in strategic decisions.
In contrast, Judge & Zeithaml (1992) carefully assessed board involvement
through interviews with multiple informants in each sample firm and through the use of
multi-item scales. They found several organizational antecedents to board involvement
in strategy formulation and evaluation. Specifically, organization age was positively
associated with board involvement, and board size, firm diversification and proportion of
insiders were negatively associated with board involvement. Also, they found that higher
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levels of board involvement improved firm performance. Both o f these studies support
the theoretical assertions offered by Andrews (1986) who identified boards as important
but neglected strategic resources within firms in that “involved” boards force managers to
check their assumptions and do careful homework, and outsiders bring objectivity to
decision-making processes and challenge narrow thinking (Baysinger & Hoskisson,
1990). However, it is important to note that both of these studies used different
operational definitions of board roles (although they both tapped into some aspects of
board involvement). In addition, they operationalized board roles solely from a strategic
choice perspective, and hence, only measured (tapped into) some aspects of the strategic
decision support function of boards.
The final, and most recent, study that has directly examined link 3-4 was
conducted by Westphal (1999). This study is conducted from a social-psychological
perspective and focuses on the behavioral and performance consequences of social ties
between the CEO and the board. Specifically, it examines how social ties between top
managers and outside directors may facilitate board involvement by encouraging the
provision of advice and counsel in the strategy-making process. It draws on original
survey data to test its hypotheses. The results indicate that not only do social ties
between the board and CEO typically fail to reduce the level of board monitoring
activity, but also that such ties enhance the provision of advice and counsel from outside
directors on strategic issues. These results support the view that CEOs are more willing
to take the social and professional risks associated with advice-seeking behavior when
they can rely on the loyalty o f their boards (Westphal, 1999). Westphal concludes that
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rather than impairing corporate governance by reducing the vigilance of board
monitoring, social ties can ultimately contribute to board effectiveness and firm
performance by fostering collaboration between CEOs and directors in the strategy-
making process without reducing board control. To explore the validity of his
interpretation, Westphal (1999) used four indicators of expertise to analyze the effect of
director expertise and experience on the observed relationship- again using attributes as
proxies for experience.
The Westphal (1999) study takes an important step forward in the treatment of
empirical research towards directly examining board roles. It is the only study that
directly examines the effect of board attributes on board roles and also is the only study
to operationalize board roles from more than only the strategic choice perspective.
Specifically, it operationalizes board roles from both the strategic choice perspective and
the agency perspective, to tap into both the strategic decision support and the monitoring
functions of the board. This piece of research makes a substantial contribution to the
literature, yet, it suffers from a critical omission. The questions in the survey used to
operationalize the monitoring and strategic decision support functions of the board lack
any objective criteria, and so are purely perceptual in nature. This is important, because
given the current spotlight on boards, and the pressure boards face today to prove their
responsibility and effectiveness, these types of questions could easily elicit,
unconsciously, socially desirable responses from the respondents.
In addition, there is a further, and perhaps more serious, limitation of this study’s
approach to operationalization of the strategic decision support and monitoring roles of
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the board. Again, the questions in the survey simply ask whether those two roles are
performed by the board. The questions do not take strides forward in terms of defining
what is meant by either of those functions (which leaves it open to interpretation of the
respondent- meaning some inconsistency could exist there across respondents within the
same board or across respondents from different boards), or through what specific
behaviors and actions boards actually perform those roles. Finally, when trying to
validate the interpretation o f his results, Westphal (1999) turns again to structural and
demographic attributes to conduct further analysis. One could argue that in the presence
of CEO-board social ties, the ways in which (i.e., the behaviors and actions through
which) the board performs its monitoring and strategic decision support roles, are
ultimately performed differently. What is important here is that as scholars we try to
examine what actually is happening, rather than relying on proxy variables as indicators
of what might or could be happening. However, Westphal (1999) is prevented from
conducting such an analysis, as the study did not measure actual behaviors and actions
associated with the monitoring and strategic decision support roles.
The criticisms offered here are not meant to detract from the overall value and
contribution of the studies mentioned above. In fact, these studies reviewed in this
section have provided the motivation for this dissertation! Rather, the criticisms are
presented to rigorously review, define, position and assess the exact nature of the
contributions o f each piece o f research, so that the imperatives, uniqueness, and valuable
contribution o f this dissertation can be clearly defined.
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Chanter 3
Dissertation Framework and Research Questions
This chapter narrows the scope of the discussion on boards of directors and
focuses on the specific omissions identified above. First, I take steps to understand the
omissions in their broader context. Second, I develop broad research questions aimed at
addressing the limitations. Third, I return to the literature to develop theoretically
grounded hypotheses for examining the direct effects of environment, organization and
board attribute antecedents of board involvement. Finally, I examine the consequences of
board involvement and hypothesize that the relationship between board involvement and
firm performance is moderated by critical environmental and organizational
contingencies. These hypotheses are tested through an empirical study discussed in the
next chapter.
Issue 1: Relative dominance of an instrumental theory of boards. The review
o f empirical work on boards in the previous chapter echoes an observation recently made
by Lawrence (1997) in the context of studies of organizational demography - the
dominance o f an instrumental perspective which attempts to relate boards’ structural
attributes directly to board outcomes (link 3-5) and firm outcomes (link 3-6) under the
assumption that these attributes are congruent with the underlying subjective processes
which are causally related to the outcome variables. Instrumental theories typically focus
on accurate prediction rather than explanation and once predictive relationships are
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found, explanatory relationships between board attributes, subjective processes and board
outcomes are unnecessary and irrelevant. However, my review indicates several
contradictions and inconsistencies across empirical studies that have focused on
examining the direct effects of board attributes on outcome variables. For example, a
common assumption in prior research is that the greater the proportion of outsiders the
greater the board vigilance, and hence, the greater the ability o f the board to perform its
monitoring function. However, my review identified several inconsistencies in empirical
findings from studies grounded in this perspective. As mentioned earlier, sometimes
there is a positive relationship between outsider-dominated boards and monitoring
outcomes and at other times exactly the opposite has been found. These inconsistencies
may indicate that observed board attributes may not be congruent with the underlying
processes through which boards influence organizational outcomes.
Prominent boards scholars have recently voiced their concern over the meaning
and importance o f these contradictions and inconsistencies. Specifically, in their meta
analysis o f board composition, leadership structure and financial performance, Dalton, et
al (1998) found no evidence of a meaningful relationship between board composition and
financial performance. Furthermore, in their interpretation o f these results, they observe:
“Given the considerable investment in research of this type (the board
composition/performance relationship is comprised o f some 1S9 samples with a
total ‘n’ size of over 40,000; ...) a conclusion that there is no actual relationship
among these variables is quite aggressive. It suggests, a possibility that we earlier
noted, that the conflicting findings- some positive, some negative- reported in past
narrative review o f the literature were artifactual” (Dalton, et al, 1998:282).
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An unanswered question remains: does the proportion o f outsiders represent an
unambiguous indicator of a board’s monitoring ability? It may well be that a board’s
structural attributes may only be weak indicators of the actual board processes associated
with monitoring, strategy making, etc. However, no study has explicitly examined this
assumption. Research question #1 reflects the need to test this assumption.
Research Question # 1: Are there systematic relationships between a board’ s
structural attributes (such as proportion o f insiders, stock ownership, etc.) and
the degree and type o f involvement o f the board in the monitoring and strategic
decision support functions o f the organization?
In addition, prior research on boards has largely focused on basic, direct effects,
rather than developing more fine-grained tests of board antecedents. Moreover, while the
dominance of board attributes in boards research has certainly resulted in great
advancements in this area, it may have also inadvertently drawn attention away from
equally critical environmental and organizational contingencies related to boards.
Examining the moderating effects of organization, environment and board attributes on
the relationship between board involvement and performance may offer a richer, more
fine-grained, though complex, view of boards of directors. Research question #2 reflects
the need to address these issues.
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Research Question #2: Is the relationship between board involvement and firm
financial performance moderated by critical contingencies, such that the
relationship is significant under certain environment and organizational
conditions and not significant under others?
In order to examine whether board attributes are indeed congruent with
underlying processes (i.e., “the black box”), researchers will need to invoke alternative
theoretical models of the corporate governance process. Lawrence (1997) describes in
detail the characteristics of two such models also relevant to a study of board processes.
In the first model, termed an “indicator explanation,” board attributes are considered to
be indicators o f the underlying board roles identified in Figure 1. To assess if these
attributes are reliable and valid indicators of the underlying subjective roles researchers
will need to measure board roles distinctly from board attributes and examine if, as
assumed, board attributes are reasonable substitutes for underlying board roles. If board
attributes are found to be reliable predictors of subjective roles, researchers can then use
these attributes as direct antecedents in predicting various outcomes and ignore the role
of subjective processes.
Incorporating this fundamental change in the underlying theoretical models
researchers have tended to use in prior research also implies certain changes in the
relative centrality of board roles and processes, compared to board attributes, in the
boards of directors literature. This issue is discussed next.
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Issue 2: Board roles and processes as a “black box”. The relative paucity of
empirical studies examining links 3-4 and 4-5 (board attributes affect board processes,
which in turn affect board outcomes) is a striking omission in prior research. Out of the
studies reviewed for this dissertation, only three examined link 3-4 and no study
examined link 4-5. Similarly, very few studies have examined whether the incidence and
criticality of the different board roles are contingent upon specific environmental and
organizational contingencies (i.e., links 1-4 and 2-4 in the conceptual framework). No
study examined link 1-4 and only two examined link 2-4 among the studies reviewed.
Overall, these patterns reveal a serious empirical gap in our understanding of how boards
actually fulfil their various roles and what effects board processes have on both board-
related outcomes and more indirectly, on organizational performance.
Before we can begin to open the “black box” o f board roles, however, we need to
have a better grasp of the specific actions and processes, which define the conceptual
domain of each role. These actions and processes can be the foundation for developing
more specific research constructs, which can then be systematically examined in
empirical studies and related to both observed board attributes and board outcomes. To
do this, we can draw upon the earlier discussion o f the dominant theories which have
guided empirical research to offer a preliminary conceptualization of these actions and
processes.
Interestingly, no study in the review has conceptualized and measured distinct
processes that underlie the board roles identified in Figure 1, with the exception of the
strategic decision support role, as mentioned above. This is again a noteworthy omission
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given that the underlying theories used to study boards clearly highlight the process
aspects of each critical board function. To illustrate, I will briefly discuss the agency
perspective on board roles and relate it to its corresponding function.
From an agency perspective, it is clear that the control/monitoring function of the
board cannot be performed effectively in the absence of specific actions and process
mechanisms in place within the board. If a board is to effectively monitor a firm’s top
managers and punish ineffective behaviors, the following actions (among others) need to
be performed: the gathering of information internal and external to the firm, the
evaluation of managerial performance against internal and external benchmarks, actively
participating in and directing key appointments on board committees, synthesizing and
providing feedback to the CEO, and taking corrective action independent of the CEO’s
preferred choices. These actions are consistent with the monitoring-related board
outcomes central to an agency perspective - changes in CEO compensation, CEO hiring
and firing, adoption of anti-takeover provisions, golden parachutes, etc. (Singh &
Harianto, 1989a; 1989b). Appropriate actions and behaviors could be similarly outlined
for additional board roles and functions. In this way, boards researchers can obtain
systematic empirical data to develop reliable, multi-item constructs for each board role,
distinct from structural attributes.
The issues identified above are more than mere theoretical speculations. Indeed
they suggest specific questions for focused empirical research. In this dissertation,
therefore, I take important steps to open up “the black box” of board roles and processes
by directly testing these two critical research questions. First, I focus on the antecedents
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of board involvement. I examine whether there are systematic relationships between
environment factors, organization factors and board’s attributes, and the degree and type
o f involvement of the board in the monitoring and strategic decision support functions.
Second, I turn to the consequences of board involvement. I examine the relationship
between board involvement and firm financial performance, highlighting moderating
effects. In the first set of hypotheses examining the antecedents of board involvement, I
relate specific contextual factors and board attributes to distinct aspects of board
involvement, i.e., time, information and expertise. However, in the second set of
hypotheses examining the consequences of board involvement, for the sake of theoretical
parsimony, I only focus on overall board involvement. Consistent with prior research,
overall board involvement in both the strategic decision support and monitoring function
is expected to affect firm performance and there is no reason to expect that these might
affect performance differentially.
For the purposes of this dissertation I have limited the scope to two key functions-
monitoring and strategic decision support. I chose to limit the scope to these two key
functions for a number of reasons. First, these two functions have been the focus of the
bulk of prior research. Second, because this study marks a new direction for board
research, I thought it wise to limit the scope, leam from this exploratory research and
then refine the approach before proceeding further with a comprehensive examination.
Third, given the highly sensitive nature of asking these questions of boards in our
questionnaire, I chose to focus on developing in-depth multi-item scales of two board
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roles, rather than very broadly and potentially superficially capturing single-item
measures o f all four board roles.
These broad research questions are linked to the specific literature to develop
testable hypotheses for this dissertation. The logic for, and the organization of, these
hypotheses corresponds to the diagram presented in Figure 2.
Hypotheses I: Antecedents of Board Involvement
Board Attributes
The majority o f boards research has focused on board attributes as the key
antecedents o f board outcomes. O f the empirical studies that have tested the effects of
board attributes on board outcomes, the effects of inside vs. outside directors on various
board outcomes has been the most frequently examined research question, with
percentage stock ownership, board size and board tenure also figuring prominently as
frequently studied board attributes (Zahra & Pearce, 1989; Johnson, et al, 1996);
Finkelstein & Hambrick, 1996). In this hypothesis development section, I will turn my
attention to the theoretical perspectives that have linked board attributes to the monitoring
and strategic decision support functions of the board.
Outside directors play a critical role in ensuring the overall effectiveness of both
the board and the firm as a whole. From an agency theory perspective, outsiders help to
ensure effective monitoring o f and control over the CEO and top executives,
guaranteeing that decision-making reflects the interests of the shareholders. This is based
on the premise that outside directors maintain a degree of independence and autonomy
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Figure 2: Dissertation Model
Antecedents and Consequences of Board Involvement
Environment Board Attributes Organization
Factors 3 Factors
1 2
- Munificence - Portion Outsiders - Organization Age
- Dynamism - % Ownership - Organization Size
- Board Size - Diversification
- Board Tenure - Prior Performance
Amount of Time board spends
on monitoring and strategy
activities
Frequency with which board
receives information from
internal and external sources
Expertise o f board in
monitoring and strategy
Organizational Outcomes
6
- Firm Financial Performance
Board Involvement
4
Moderators
5
Environment:
Munificence
Dynamism
Organization:
Organization
Size
Organization
Age
Diversification
Level
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from the CEO and firm as a whole that inside directors do not enjoy. Because outsiders
are not subject to the same threat of retaliation, etc. by a powerful firm and/or CEO as are
insiders, outsiders are argued to have more freedom to voice concerns, speak real
opinions and openly criticize CEO or firm decisions and actions. Prior research has
produced evidence linking outsiders to more vigilant behavior, because they are more
likely to focus on financial performance (Fama & Jensen, 1983; Johnson, Hoskisson &
Hitt, 1993), they are more likely to dismiss CEOs following poor performance (Coughlan
& Schmidt, 1985; Weisbach, 1988), they have an incentive to monitor to protect their
personal reputations as directors (Fama & Jensen, 1983), and they are likely to enact
greater objectivity by not being so dominated by CEOs as are inside directors (Walsh &
Seward, 1990). Essentially, outsiders act as agents for the shareholders (principals) to
ensure that top management and shareholder interests are aligned (Jensen & Meckling,
1976).
Contrary to the arguments presented above, scholars have also argued that inside
directors contribute equally to the overall effectiveness o f the board’s monitoring
function (Baysinger & Hoskisson, 1990; Baysinger, et al, 1991; Boyd, 1994). This
argument is based on the premise that insiders hold relevant, firm-specific knowledge
that allows them to verify CEO communications to the rest of the board, as well as to
alert the board to other key firm-specific issues besides genetically utilized outcome
variables. For example, insiders can inform the board of important CEO failings that
might be reflected in low employee morale and commitment, which have been found to
be important in evaluating the overall success of the CEO and firm. A board dominated
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by outsiders and lacking important insiders with sources o f internal information, might
only be able to evaluate the CEO and firm based on financially-oriented outcome
measures.
Turning now to the strategic decision support function of the board, from a
Strategic Choice perspective, inside directors play the central role in ensuring effective
board performance in terms of the strategic decision support role. This argument is based
on the premise that insiders hold rich, accurate knowledge about what a firm is actually
capable of doing (executing and implementing), given a choice of possible strategic
options. As insiders have an intimate knowledge of the specific firm itself, their expertise
in this area is essential for effective governance. It can also be argued that insiders are
critical for effective board functioning due to the necessity of “buy-in” from top
executives who will actually be implementing the actions to achieve the strategies
adopted by the firm and approved by the board. A number of studies have yielded results
to lend empirical support to this perspective. Insider representation has been positively
associated with the innovativeness of strategies (Hill & Snell, 1988), the amount of
strategic change (Goodstein & Boeker, 1991), and the level of corporate R&D spending
(Baysinger, Kosnik & Turk, 1991). Interestingly, in the most recent study to examine
this relationship, and the only study utilizing a survey questionnaire, the coefficient for
the effect of insider representation on board involvement was negative and significant
(Judge & Zeithaml, 1992). The authors suggest that explicit and implicit organization
norms concerning the role of key managers (insiders) limit their contribution to board
involvement (Judge & Zeithaml, 1992). These results are noteworthy, as this is the only
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prior study yielding empirical results through directly measured board involvement,
rather than relying on board attributes to serve as proxies for board involvement.
In addition, strategic choice theorists argue that outside directors also contribute
valuably to strategy formation and evaluation, increasing the overall effectiveness of the
strategic decision support function. This is based on the premise that outsiders hold
valuable, broad-based experience and expertise in business, in general, rather than firm-
specific, narrowly-held knowledge. This broad-based knowledge provides a diversity of
perspectives, familiarity with a broad array of competitive and strategic issues facing
firms in similar or different environments, industries and markets. This diversity in
perspective helps develop a more heterogeneous board perspective, due, at least in part,
to the fact that outsiders have access to a greater variety of information sources than do
insiders. Finally, recent research has indicated that outsiders appointed to the board after
the CEO contribute significantly in terms of strategic involvement on the board
(Westphal, 1999). Outsiders appointed to the board after the CEO may be more likely to
elicit information from sources internal to the firm, as they follow a more collaborative
relationship in their relations with the CEO and the inside directors (Westphal, 1999).
Regardless of the perspective adopted, there are both construct and measurement
issues from this body of empirical research that limit our understanding of boards. First,
in both o f these streams of prior research board monitoring has been captured by a “board
vigilance” construct. This construct has been acknowledged to be essentially a power
construct (Finkelstein & Hambrick, 1996). Reducing the monitoring function to a
unidimensional construct may contribute to our conflicting findings. By focusing on the
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power dimension of the monitoring function, researchers highlight the competitive
dynamics between the board and top executives of a firm. Yet, it is equally possible to
argue that boards have much more of a cooperative or collaborative relationship with the
top executives of the firm, and therefore work with, rather than against, the top
executives in the firm (Davis, et al, 1997; Westphal, 1999). Adopting a more
collaborative view o f the relationship between boards and the firms they serve would
suggest a more multi-dimensional construct representing the monitoring function than
just the unidimensional board vigilance construct currently used. Specifically, in addition
to requiring power, it is essential for the board to have expertise in both monitoring and
strategic decision support functions, to effectively fulfill their responsibilities.
Furthermore, leading scholars in the field have acknowledged the drawbacks of all
previous board vigilance measures: “... they are also all removed from the actual actions
of behaviors o f boards. Without primary data, it is difficult to determine the actual level
of board vigilance” (Finkelstein & Hambrick, 1996:227).
To summarize the logic from the above discussions, outsiders are expected to
enhance the effectiveness of the monitoring function through their independence from the
CEO and firm, allowing them to objectively evaluate and criticize without fear of
retaliations; and through their experience with non firm-specific business situations,
increasing their overall expertise in this function. Insiders have been argued to contribute
to a board’s ability to perform its monitoring function by contributing key information
from inside the firm that the board might otherwise be unaware of. Similarly, both
insiders and outsiders contribute to the strategic decision support function of the firm-
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insiders through their firm-specific experience and knowledge, contributing to their
expertise in key decisions; and outsiders through their broad-based experience and access
to a variety of information sources that insiders might not have available to them.
However, the recent empirical study yielding a negative relationship between insiders and
board involvement (Judge & Zeithaml, 1992) suggests that ultimately, insiders are
restricted from contributing to board involvement.
I use the above theoretical logic and empirical evidence to generate hypotheses
with regard to outside and inside director actions and behaviors, in the domains o f both
the monitoring and strategic decision support functions. 1 utilize the multi-dimensional
monitoring and strategic decision support function construct developed for this
dissertation, which corresponds to the time, information and expertise dimensions of
board involvement.
Hypothesis 1. The higher the percentage of outsiders on the board, the greater the
amount of time spent on monitoring activities.
Hypothesis 2. The higher the percentage of outsiders on the board, the more
frequently the board will receive information from external sources.
Hypothesis 3. The higher the percentage of outsiders on the board, the greater the
board’s monitoring expertise.
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Hypothesis 4. The higher the percentage of insiders on the board, the lower the
amount of time spent on strategic decision support activities.
Hypothesis 5. The higher the percentage of insiders on the board, the less
frequently the board will receive information from internal sources.
Hypothesis 6. The higher the percentage of insiders on the board, the less the
board’s strategic decision support expertise.
Hypothesis 7. The higher the percentage of outsiders appointed after the CEO on
the board, the more frequently the board will receive information from internal
sources.
After outside vs. inside directors, the percentage of stock owned by directors
has been the second most frequently studied board attribute (Finkelstein & Hambrick,
1996). While ownership structures have received much attention in boards studies, the
effects of ownership directly on board processes has largely been ignored (Ravasi &
Zattoni, 2000). The percentage o f stock owned by directors has been so frequently
studied, because it has been argued to align the interests of the board of directors with
those of the shareholders, resulting in increased incentives for the board to effectively
perform its monitoring and strategic decision support functions. Specifically, ownership
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stakes provide outside directors the motivation to monitor CEO actions to maximize their
own personal wealth (Zald, 1969; Finkelstein & Hambrick, 1989; Beatty & Zajac, 1994).
Following from this logic then, ownership stakes increase outsiders’ desire (commitment
and/or effort) to monitor and contribute to strategic decision support more effectively, but
does not necessarily increase their ability or expertise in either area. Therefore, I
hypothesize:
Hypothesis 8. The higher the percentage of stock owned by outside directors on
the board, the greater the amount of time spent on monitoring activities.
Hypothesis 9. The higher the percentage o f stock owned by outside directors on
the board, the more likely the board is to receive information from external
sources of information.
Board size is another board attribute that has been highlighted in prior empirical
research. In one o f only three empirical studies examining the effects of board attributes
on board involvement, board size was found to be negatively associated with board
involvement (Judge & Zeithaml, 1992). This finding is consistent with arguments from
the body of literature on group size that suggests larger groups have limited information-
processing ability (Haleblian & Finkelstein, 1993); are too diverse to reach consensus
(Shaw, 1981); and are generally unmanageable (Alexander, et al, 1993). This diversity in
the larger board groups, however, results in a similar diversity of perspectives and
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corresponding sources o f information used in decision making, ultimately affecting
aspects of expertise in a variety o f strategic dimensions. Moreover, the greater the size of
the board, the greater the potential access to and availability of intellectual capital
resources. Therefore, I hypothesize:
Hypothesis 10. The larger the board, the greater the board’s strategic decision
support expertise.
Board tenure is another board attribute that has received much attention in prior
empirical studies. Research has produced a number of conflicting arguments and
findings regarding the consequences o f board tenure, most of which have examined the
effects of board tenure on the monitoring function. Lower board tenure has been argued
to be associated with higher monitoring, due to the fresh and objective perspectives of
new board members, as well as the need to prove one’s value, knowledge and expertise to
other board members. Alternatively, higher board tenure may be associated with lower
monitoring behavior, due to the development of social ties to management or the
development o f group norms that discourage monitoring. General complacency as board
tenure increases, as well as time conflicts have also been suggested as reasons for the
decrease in monitoring behavior as board tenure increases.
On the other hand, it is also important to consider how board tenure affects the
strategic decision support role of the board, in addition to the monitoring function. As
board tenure increases, familiarity with firm-specific strategic and general competitive
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issues increases. Similarly, as familiarity with firm-specific strategic and general
competitive issues increases, the board’s expertise in this area should also increase. Thus,
I hypothesize:
Hypothesis 11. The higher the board tenure, the greater the board’s strategic
decision support expertise.
Organization Factors
In addition to board attributes, organization factors have also figured prominently
in prior boards o f directors studies. The most commonly examined organization factors
include organization size, organization age, level o f diversification and prior
performance.
Organization size has been identified in prior literature as an important
antecedent factor to many board conditions (Wade et al, 1990). For example, as larger
firms are highly visible, scholars have argued that size o f firm is an indicator of prestige,
resulting in increased board interlocking in large firms (Davis & Mizruchi, 1999). Others
have found that CEO duality is common in large firms (Rechner, & Dalton, 1991),
indicating the importance of greater board involvement, depending on the success o f the
CEO (Finkelstein & D’Aveni, 1994). Studies grounded in economic arguments have
found that size also increases the differentiation and structural complexity of firms
(Meyer, 1972), making them more difficult to be acquired by, or integrate assets with,
other firms (Jemison & Sitkin, 1986; Jensen, 1988; Palepu, 1986). Taken together, these
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prior findings and theoretical arguments suggest that larger organizations, for the variety
of reasons highlighted above, will benefit from greater board involvement.
At the same time, however, others have argued that organization size, because of
associated increased scale and complexity, compromises a board’s ability to perform its
monitoring and strategic decision support function (Zahra & Pearce, 1989). The
argument here, using the monitoring function as an example, is that the availability of
high-quality information about the performance of the firm and officers is inversely
related to the size and complexity of the firm (Dalton et al, 1998). Furthermore, specific
practical influences o f organizational size on various governance performance
relationships have been identified. Specifically, organizational systems and structures in
large firms may constrain CEOs and directors more than in small firms, reducing their
discretion (Daily & Dalton, 1992, 1993; Schoonhoven, et al, 1990; Finkelstein &
Hambrick, 1990). This would suggest that larger firms might restrict board influence as
well as corresponding performance relationships. Thus, we can expect organization size
to impact board involvement in some specific ways, and not in others. I hypothesize:
Hypothesis 12. The larger the organization, the greater the amount of time spent
on monitoring activities.
Hypothesis 13. The larger the organization, the more likely the board is to receive
information from external sources o f information.
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Hypothesis 14. The larger the organization, the greater the board’s monitoring
expertise.
Hypothesis IS. The larger the organization, the greater the board’s strategic
decision support expertise.
Organization age is another key organizational variable that has been found to
impact boards in significant ways. The strategic choice perspective argues that as
organizations age, they require less board involvement in certain ways. The logic
underlying this perspective is that critical strategic decisions occur only periodically.
Essentially they argue that strategic decision-making in firms largely follows a
punctuated equilibrium model, where critical decision-making periods to identify,
evaluate, select and implement strategies are followed by periods of status-quo and
maintenance of those strategies. As organizations age, the periods of status-quo
maintenance become longer and longer. Additionally, Population Ecologists have argued
that as organizations age they develop inertia associated with their current strategy and
become embedded in their status-quo (Hannan & Freeman, 1984). More recently,
scholars have found that organization age was positively related to overall board
involvement (Judge & Zeithaml, 1992). However, it is not clear that this relationship
would hold for all dimensions o f board involvement. Therefore, specific aspects of board
involvement would be argued to be very important and appropriate at earlier stages of
organizational age, and less important at later stages. Therefore, I hypothesize:
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Hypothesis 16. The older the organization, the lower the amount of time spent on
strategic decision support activities.
An organization’s level of diversification has also been identified as an important
organizational factor affecting boards. Similar to other forms of complexity, higher
degrees of diversification have been argued to increase the overall complexity of the
competitive environment of an organization (Sanders & Carpenter, 1998). As boards of
directors are suggested to reduce the uncertainties associated with complex environments
(Pfeffer, 1972), higher levels of diversification are expected to affect boards, as well.
Level of diversification is a strategic contingency, and therefore, 1 hypothesize that an
organization’s level of diversification affects the board’s activities in the strategy area:
Hypothesis 17. The higher the level of diversification of the organization, the
greater the amount of time spent on strategic decision support activities.
Prior performance of a firm has also been identified in the strategy literature to
affect boards of directors. Prior research has offered mixed evidence on the relationship
between prior firm performance and changes in board composition to increase monitoring
(Daily & Dalton, 1995). However, evidence from two recent studies suggests a negative
relationship between a firm’s prior performance and overall board involvement (Johnson,
et al., 1993; Judge & Zeithaml, 1992). Consistent with arguments offered above, given
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that boards are facing greater pressure from both inside and outside their firms, poorly
performing firms (as indicated by low prior performance) are subject to greater scrutiny
by the public and by shareholders, increasing the pressure on the board to demonstrate its
responsibility in the monitoring function. From a different perspective, high performing
firms are making strategic decisions that enable them to successfully interface with their
competitive environment, and may contribute to a board's expertise in the strategy area.
Therefore, I hypothesize:
Hypothesis 18. The lower the past performance of the organization, the greater
the amount of time spent on monitoring activities.
Hypothesis 19. The higher the past performance of the organization, the greater
the board’s expertise in strategic decision support activities.
Environment Factors
Finally, environmental factors have been found to have significant effects on
boards of directors in prior research. Resource dependence theorists have argued that
boards provide critical links to the external environment, thereby reducing the negative
effects of uncertain and complex environments (Burt, 1983; Pfeffer & Salancik, 1978).
Prior empirical studies have found that boards may provide access to valued resources
and information, and may also assist in interfirm commitments (Pfeffer & Salancik, 1978;
Steams & Mizruchi, 1993). Specifically, Pfeffer and Salancik (1978:168) observed that
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“one would expect that as the potential environment pressures confronting the
organization increased, the need for outside support would increase as well.” More
recently, research has yielded evidence that indicates environmental instability affects
board structural and composition attributes. Studies have found partial support for
increased environmental instability (measured as environment dynamism) affecting
board size (Boyd, 1990) as well as increased environmental instability (measured as
competitive uncertainty) affecting the interlocking behavior of boards (Lang & Lockhart,
1990).
Interestingly, of the three prior studies that have directly examined board
involvement, none have included the direct effects of environment factors on board
involvement. Prior research has, as evidenced above, focused on the effects of
environment factors on board composition and structural attributes. The evidence from
the empirical studies mentioned above indicates that environment instability impacts
boards in significant ways, suggesting that instability would affect how the board spends
its time and the sources of information it receives in its overall involvement. Therefore, I
hypothesize:
Hypothesis 20. The higher the environmental dynamism, the greater the amount
of time spent on monitoring activities.
Hypothesis 21. The higher the environmental dynamism, the more likely the
board is to receive information from external sources of information.
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Finally, to permit comparability to prior research that has focused on overall
board involvement, and as an extension to the logic outlined above, the following
integrative hypotheses are presented:
Hypothesis 22. The higher the percentage of outsiders on the board, the greater
the overall board involvement.
Hypothesis 23. The higher the percentage of insiders on the board, the less the
overall board involvement.
Hypothesis 24. The higher the percentage of stock owned by outside directors on
the board, the greater the overall board involvement.
Hypothesis 25. The larger the organization, the greater the overall board
involvement.
Hypothesis 26. The higher the environmental dynamism, the greater the board
involvement.
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Hypotheses II: Consequences of Board Involvement
This second set of hypotheses addresses the relationship between board
involvement and performance. Here, there are two main arguments that inform the
development of these hypotheses. The first addresses the performance consequences
associated with the amount of board involvement. The second addresses the performance
consequences associated with the appropriateness of the board involvement, given
various organization and environmental conditions.
When attempting to better understand the consequences of board involvement, as
mentioned above, it is useful to examine the actual actions and behaviors of boards. In
general, it is logical to expect that the amount of board involvement impacts
performance. In other words, the more involved a board is, the better the financial
performance of the firm will be. Thus, I hypothesize the following relationship:
Hypothesis 27. The greater the board involvement, the higher the financial
performance of the firm.
This fundamental argument may hold sometimes, but not always. When thinking
more carefully about this issue, it is clear that this relationship will hold only under
certain circumstances, and more fine-grained arguments emerge. The argument, again, is
that the amount of time or effort a board devotes to an issue- in this case, a monitoring or
strategic decision support function- the more effective it is. This logic is based on a
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critical assumption that the necessary environmental and organizational conditions exist
for the board to be able to translate its potential into realized outcomes.
This assumption is addressed in the subsequent hypotheses highlighting the
financial performance consequences of the appropriateness of the board involvement. In
general, the relationship between board involvement and performance is one that has
been largely ignored in prior empirical research, given that previous studies have focused
on the direct link between board attributes and performance, instead. However, from
these studies, important environmental and organizational contingencies emerge as
additional potential moderators of the relationship between board involvement and
performance. The environmental contingencies include munificence and instability. The
organization contingencies include size, age and level of diversification of the firm.
These contingencies have significant implications for the nature of the relationship
between board involvement and performance.
Organizational factors. Organization size, as mentioned above, has been
identified in prior literature as an important contingency factor to many board conditions
(Wade et al, 1990). For example, as larger firms are highly visible, scholars have argued
that size o f firm is an indicator of prestige (Davis & Mizruchi, 1999). This visibility and
prestige result in greater pressure on boards of these firms to be highly involved. Others
have found that CEO duality is common in large firms (Rechner, & Dalton, 1991),
indicating the importance of greater board involvement, depending on the success of the
CEO (Finkelstein & D’Aveni, 1994). Studies grounded in economic arguments have
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found that size also increase the differentiation and structural complexity of firms
(Meyer, 1972), making them more difficult to be acquired by, or integrate assets with,
other firms (Jemison & Sitkin, 1986; Jensen, 1988; Palepu, 1986). In addition, large
organizations may have the necessary resources and support infrastructure to devote to
effectively utilizing their board’s involvement. Taken together, these prior findings and
theoretical arguments suggest that larger organizations, for the variety of reasons
highlighted above, will benefit from greater board involvement. Therefore, I hypothesize
the following moderating relationship:
Hypothesis 28. The relationship between board involvement and firm financial
performance will be significant in larger organizations but not in smaller
organizations.
Prior literature grounded in Institutional Theory has identified organizational age
as an important construct (Judge & Zeithaml, 1992). According to this perspective,
because organizations change slowly, older organizations founded in earlier and different
environmental and competitive environments are expected to behave differently than
organizations founded later (Hannan & Freeman, 1984). Early empirical research in this
area has produced evidence to support this view. For example, Eisenhardt’s (1988)
study, where organizational age was a major predictor of compensation practices in the
retail shoe industry, for example. More recent work conducted in this perspective and the
strategic choice perspective, however, has found the opposite relationship to hold.
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Specifically, Judge and Zeithaml (1992) found that organization age was positively
related to board involvement. They suggested that boards of directors may increase their
involvement as the organization experiences a wide range of circumstances and they
themselves develop a broad range of skills. Thus, I hypothesize the following
moderating relationship:
Hypothesis 29. The relationship between board involvement and firm financial
performance will be significant in organizations characterized by higher age but
not in organizations characterized by lower age.
Finally, an organization’s level of diversification may also moderate the
relationship between board involvement and performance. Institutional theorists, again,
have argued that the level of diversification of an organization represents the
organization’s activity in many distinct businesses. Logic grounded in this perspective
suggests that diversification dilutes, to some degree, the pressures of environmental
isomorphism by making an organization less dependent on any one industry (DiMaggio
& Powell, 1983). Oliver (1991) has argued that diversified organizations, then, may be
less subject to industry norms. Thus, depending on the industry norms, diversified
organizations may have less pressure to demonstrate board involvement, making board
involvement inconsequential to overall firm financial performance. Therefore, I
hypothesize the following moderating relationship:
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Hypothesis 30. The relationship between board involvement and firm financial
performance will be significant in organizations characterized by low levels of
diversification but not in organizations characterized by high levels of
diversification.
Environmental factors may also be important moderators of the relationship
between board involvement and firm financial performance. Munificence is a measure
of the abundance of resources in the environment, whereas dynamism is a measure of the
volatility of the environment (Boyd, 1990). Both are standard measures of environment
factors and have been used in prior boards research, but each may impact the relationship
between board involvement and firm performance in a different way. As munificence
measures the abundance of environmental resources, it is negatively related to scarcity of
resources. As scarcity implies greater uncertainty, we would expect inputs on the part of
the board to be more critical under these conditions, in order for the firm to make
effective decisions. In this case, involvement on the part o f the board can result in the
board contributing its experience and expertise to the firm in how to manage the scarce
resources, given that condition. On the other hand, given conditions of abundant
resources, board involvement may be less critical for enhanced firm performance. Thus,
I hypothesize the following moderating relationship:
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Hypothesis 31. The relationship between board involvement and Arm financial
performance will be significant in environments characterized by low levels of
munificence but not in environments characterized by high levels o f munificence.
Turning now to environmental dynamism, a different relationship is suggested.
Dynamism refers to the levels of turbulence or volatility in the environment. Under
conditions of high dynamism, the firm’s environment may be so uncertain that the inputs
of the board’s experience and expertise cannot translate effectively into enhanced
effectiveness for the firm, if the environment is changing at such a rapid pace that the
recommendations of the board are no longer relevant for the firm’s environment. On the
other hand, if dynamism is low, then the board can more effectively put its experience
and expertise to applied use for the firm. Therefore, I hypothesize the following
moderating relationship:
Hypothesis 32. The relationship between board involvement and firm financial
performance will be significant in environments characterized by low levels of
dynamism but not in environments characterized by high levels of dynamism.
These specific hypotheses were tested in an empirical study. The data sources,
sample, and analytic methods used in this study are discussed next.
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Chapter 4
Methods
Data
This study incorporates data on variables from each o f the six key elements
associated with board research identified in the dissertation framework in Figure 2.
Therefore, the models that were analyzed benefit from comprehensive inputs.
Specifically, for this dissertation, data were collected on environmental and
organizational factors (elements 1 and 2 in the framework), board attributes (element 3),
board roles and processes (element 4), organizational and environmental contingencies
(element 5) and organizational outcomes (element 6).
To minimize the effects of method variance, each stage of the hypothesized model
was operationalized using different types of survey or archival data. Data on board
involvement and board effectiveness were drawn from an annual national written survey
o f the directors of all of the Fortune 1,000 companies conducted by Korn Ferry
International, an international executive search firm, in conjunction with the Center for
Effective Organizations (CEO) at the University of Southern California. Data were taken
from the survey of 1998 boards in which approximately 1,046 chief executives, inside
and outside directors responded for an overall response rate of 17%. Previous boards
researchers have indicated it is not uncommon for surveys of corporate top managers to
suffer from response rates of less than 25 percent (Westphal, 1999; Judge & Dobbins,
1995).
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Survey data were then matched with archival data on board attributes taken from
proxy statements filed with the Securities and Exchange Commission (SEC) and firm
size, age, prior performance, level of diversification, and firm financial performance data
from COMPUSTAT. Finally, additional archival data on industry factors were collected
from the Census of Manufacturers, the Dunn and Bradstreet’s Key Industry Norms
Directories, the Robert Morris Associates, Directories, and Troy Almanac Directories.
In order to match the survey data with archival information, company names were
discerned for as many respondents as possible using two different methods. Directors
were asked to give the name o f the company for the board which they described in the
survey. This question was described as strictly optional. Second, company names were
taken from the return address on the envelopes in which the director returned the survey
to USC. Due to specific instructions on the survey, this method was only used when the
respondent self-identified as an inside director of a firm. Instructions on the survey asked
inside directors of a company to respond for that company. Outside directors, on the
other hand, were asked to respond for board of the largest company they served.
This process allowed 340 companies to be identified. Each of the 340 company’s
responses was then matched with as much archival data as possible. To estimate the
complete model, a total of 35 variables were required from four different sources.
However, either financial, industry, proxy or survey data was missing for a number of the
responses. In addition, cusips could only be obtained for 311 companies (i.e. 311
publicly traded companies). Since the model only used cases for which company cusips
could be merged to complete data for all o f the survey, financial, proxy, industry and
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control variables, the number o f usable responses for the regression analyses conducted
ranges from 231 to 256.
Several efforts were made to identify any potential differences between the
responses selected for analysis and those for which one or more variables from the survey
or archival data were unavailable. First, performance data for these 340 firms were tested
against the remaining 620 firms in the Fortune 1000 for which financial data were
available. In general, the sample of companies selected for analysis were very similar in
industry distribution to the larger group of Fortune 1000 companies. 1 conducted a two-
tailed test for representativeness to determine whether significant differences exist for
size (number o f employees) and return on sales. The results are reported in Appendix 1 .
The results indicate that the sample in this dissertation is somewhat smaller in employees
and larger in sales. While this means that statistically the sample is different from the
Fortune 1000 sample, reasons for this have been identified. Specifically, the largest
employer in my sample is Ford, which is big, but which is dwarfed by the very big
companies in the Fortune 1000 such as General Motors and Walmart. This is one reason
why my sample is smaller in size (number of employees). Additionally, the sample is
larger in sales. While the sample might be qualitatively different from the Fortune 1000
sample, it is still an important and relevant sample because it represents 250-300 Fortune
1000 companies and 8.3 million employees in total. Firms in the final sample
represented 287 different four-digit Standard Industrial Classification (SIC) categories in
both the manufacturing and service sectors, including financial services firms and electric
utilities, ranging from highly-diversified conglomerates to single-product firms. In
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addition, these firms ranged from 40 million to 48S billion in total assets and from 100 to
345,000 employees. Finally, I examined the data to check if differences in the type of
respondent exist between the total sample and the companies selected for analysis. As the
sample included 112 CEO respondents, 45 inside director respondents and 153 outside
director respondents, I controlled for type of role in my regression models.
Measures
Dependent Variables
Board Involvement. This dissertation utilizes a number o f dependent variables,
corresponding to different sets of hypotheses. The dependent variable for the first set of
hypotheses, corresponding to Research Question #1, which examines the systematic
relationships between board attributes and board involvement, is board involvement. The
operationalization o f board involvement used in this dissertation is unique. Board
involvement has been used as a dependent measure in three previous empirical studies
(Judge & Zeithaml, 1992; Johnson, Hoskisson & Hitt, 1993; and Westphal, 1999). In
Judge & Zeithaml, 1992, board involvement was operationalized as a two-level
involvement measure: formation involvement and evaluation involvement. Johnson, et
al, 1993, operationalized board involvement as a combination of a variety of board
attributes. Westphal (1999) operationalized board involvement as a two-level
involvement measure: advice and counsel interactions and board monitoring.
It is important to note key differences between prior operationalizations of board
involvement and the one used in this dissertation. First, the Johnson, et al (1993) study
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measures board involvement by developing a variable that is composed o f two items
using a 7-point Likert scale on which high scores represent significant board pressure or
involvement in key decisions. The responses to the two items were summed to obtain a
scale score. Second, the Judge & Zeithaml (1992) study is the first study identified in the
literature review to directly measure board involvement as a board role/process. In their
study, they utilize survey data to ask questions such as, “The board usually helps to form
strategic decisions with top management in board meetings”, (Judge & Zeithaml, 1992:
793). While Judge and Zeithaml (1992) directly measure board processes, the measures
are not developed from multi-item scales. Rather, involvement is assessed as a two-level
measure, depending on the involvement of the board in two areas: formation of new
strategic decisions and evaluation of prior strategic decisions. For each of these areas
respondents were asked to select the statement that best described their board’s general
level of involvement in strategic decision-making during the given time period. My
dissertation, in contrast, operationalizes board involvement in a way that directly
measures underlying board processes, using variables assessed by multi-item scales, in
the survey. Finally, the Westphal (1999) study does directly measure underlying board
roles/processes, using variables assessed with multi-item scales from survey questions.
However, similar to the other two studies mentioned here, the Westphal (1999) research
measures board involvement by focusing on outcomes of board involvement. In sum,
then, prior operationalizations of board involvement have emphasized to what extent
boards are involved (how much) and have measured this by asking questions about
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outcomes associated with that level of involvement. Essentially, they have focused on
what happens as a result of the board involvement.
This dissertation is distinct in that it operationalizes board involvement in a way
that measures distinct dimensions of types of board involvement. This is important,
because it represents an approach that offers a more fine-grained understanding of how
boards perform their roles. Specifically, the operationalization developed in this
dissertation contributes to the area of process aspects o f board involvement, an under
researched area. Drawing on the literature from decision-processes (Fredrickson, 1984),
and consistent with the logic presented in the beginning of this chapter concerning the
specification o f actions and underlying behaviors associated with the board roles, I
hypothesized three dimensions of board involvement: time spent on various board
activities; the frequency with which certain kinds of information is received by the
board; and aspects o f board expertise. Board involvement was measured by asking
questions in the survey about these three.
Exploratory factor analyses indicate that there are, in fact, multiple dimensions of
time and information. The results of the factor analyses are reported in Appendix II. In
line with my expectations drawn from the literature, the dimensions are in line with
predictions corresponding to the monitoring and strategic decision support roles of
boards. Exploratory factor analysis extracted three factors for the time dimension that
correspond to time spent on monitoring activities, time spent on strategic decision
support activities, and time spent on symbolic activities. Exploratory factor analysis
extracted two factors for the information dimension: information received from external
61
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sources (consistent with my expectations about boards fulfilling their monitoring and
control function) and information received from internal sources (consistent with my
expectation about boards fulfilling their strategic support function). Exploratory factor
analysis extracted only one factor for the expertise dimension, indicating that the
respondents may not distinguish between monitoring and strategic expertise, although
these are theoretically distinct concepts. This issue will require further examination in
future studies. As these are theoretically distinct concepts, two separate scales were
created. Hence, in hypotheses I used two distinct measures. Overall, the Cronbach’s
alphas for the scales range from .546 to .81, suggesting acceptable interitem reliabilities,
with one exception. (Nunally, 1978). The individual questions corresponding to each
factor of the three dimensions and the reliability statistics for the multi-item scales are
reported in Appendix III.
Previous researchers have identified social desirability biases as important factors
in surveying boards and other top executives (Westphal, 1999; Finkelstein, 1992).
Scholars have argued that respondents in such high positions with sensitive information
about board issues may be unwilling to respond to questionnaires, or that their responses
may not be reliable (Finkelstein, 1992). To minimize the likelihood o f social desirability
bias, the items in the survey were carefully worded. In addition, I examined the
descriptive statistics for the survey scales to detect potential skewed distributions or other
problems that would indicate a social desirability response bias. Examination of the
descriptive statistics reveals overall normal distributions for each o f the scales. The
overall descriptive statistics and histograms are shown in Table 1 and Appendix IV. The
62
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normal distributions on all of the survey scales indicate that there is no social desirability
bias.
Firm Performance. Firm Performance as a consequence was defined as relative
firm performance, measured as the firm ROA for the year following the survey divided
by the industry ROA for that year. Data for this measure is collected both at the firm
level and at the 4-digit SIC code level and comes both from COMPUSTAT (firm level)
and from a combination of the Census of Manufacturers, the Dunn and Bradstreet’s Key
Industry Norms Directories, the Robert Morris Associates, Directories, and Troy
Almanac Directories.
Survey data was collected during the year 1998. The survey was administered in
October of 1998 and data was received in December of 1998. The firm performance data
was collected for the years 1998 and 1999. Proxy data was collected from 1998 proxy
statements file with the SEC.
Independent Variables
Board Attributes. The measures of board structural attributes included in this
dissertation are those board attributes identified by prior research: board size; board
tenure; percentage outsiders; percentage stock ownership; outsiders appointed to the
board after the CEO. Board size is calculated as the total number of directors on the
board. Board tenure is calculated by taking the average of the sum of each director’s
board tenure. Percentage outsiders is calculated as the number of outsiders on the
board divided by board size. Percentage stock ownership is calculated as the number of
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shares owned by outsiders divided by the total number of outstanding shares. Outsiders
that were appointed to the board after the CEO is calculated as the number o f outside
directors appointed during a CEO’s tenure divided by the total number o f outside board
members (Westphal, 1999).
Organizational factors. The organizational factors included in this dissertation
(size, age, level of diversification and prior performance) serve alternately as independent
and control variables, depending on which part of the dissertation model is being
examined.
The effect of firm size on board involvement in prior research is mixed, as
scholars argue the relative impact of breadth vs. depth of involvement by the board as the
size of the board increases (Hambrick & Finkelstein, 1996). Additionally, the literature
on group size suggests that larger groups are difficult to manage (Gladstein, 1984), have
difficulty reaching consensus due to diversity (Shaw, 1981), experience increased conflict
(O’Reilly, et al, 1989), and have limited information-processing abilities (Haleblian &
Finkelstein, 1993). Thus, I include organization size, measured as a logarithm of the
average assets and employees for the past three years.
Evidence from prior research concerning the effect of firm age on board decision
making is also unclear (Finkelstein & Hambrick, 1996). Organization age is simply
defined as the number of years between its founding and the present. While researchers
(Zald, 1969) have suggested that boards o f newer firms may take a more active role, the
only empirical test o f relationship found a positive relationship between organization age
and board involvement in strategic decision making (Judge & Zeithaml, 1992).
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However, the widespread applicability of this finding is uncertain, as Judge & Zeithaml
(1992) studied boards of hospitals, which others have argued are significantly different
than boards o f other firms (Alexander, et al, 1993). Thus, 1 include organization age,
measured as the number of years since incorporation.
In addition, I include level of firm diversification, using the entropy measure
(Jacquemin & Berry, 1979; Palepu, 1983) according to the approach specified by David
and Duhaime. This measure takes into account the number of segments in which a firm
operates and the relative importance of each segment’s sales (Palepu, 1985). This
continuous measure of diversification has been found to have good construct validity
relative to other diversification measures (Chateijee & Blocher, 1992; Hoskisson, et al.,
1993).
Finally, prior research has also offered mixed evidence on the relationship
between prior firm performance and changes in board composition to increase monitoring
(Daily & Dalton, 1993). However, evidence from two recent studies suggests a negative
relationship between firm performance and overall board involvement (Johnson, et al.,
1993; Judge & Zeithaml, 1992). Thus, I include firm prior performance, measured as
the relative ROA for the firm, taking the average for the past three years (where the
relative ROA is computed as the firm ROA divided by the industry ROA, where industry
ROA is computed using the weighted average of the segment divided by the industry).
Data for the organization size and level o f diversification measures comes from
COMPUSTAT. Data for the prior performance measure is combined from Census of
Manufacturers, the Dunn and Bradstreet’s Key Industry Norms Directories, the Robert
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Morris Associates, Directories, and Troy Almanac Directories. Data for the organization
age comes from the Dun and Bradstreet Million Dollar Directories.
Environmental factors. In this dissertation, key environmental factors that have
been identified in prior literature (Boyd, 1990; Lang & Lockhart, 1990; Boeker &
Goodstein, 1991; Pearce & Zahra, 1992) act alternatively as independent variables or
control variables. This dissertation utilizes the Dess and Beard (1984) model of
environment, which has been used in prior empirical research directly testing the effect of
environmental characteristics on board composition (Boyd, 1990). Dess & Beard’s
(1984) model of environment took Aldrich’s (1974) typology of organizational
environments, and condensed the dimensions. Munificence is defined as the relative
level of resources available in an environment, measured by growth at the industry level.
Dynamism, defined as the level o f turbulence or instability facing an environment, is
measured by variability in growth rates. The exact measurement equations for these
variables are elaborated in Appendix V. Data for the environmental factor variables was
collected from the Census of Manufacturers, the Dunn and Bradstreet’s Key Industry
Norms Directories, the Robert Morris Associates, Directories, and Troy Almanac
Directories.
Board Involvement: The overall board involvement independent measure is a
composite measure developed by standardizing and summing the scales of the specific
dimensions of board involvement described above. Specifically, the following three
scales were combined: time, information and expertise.
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Control Variables
In an effort to control as much as possible the systematic variance not attributed to
the independent variables, several control variables were included in the analyses. In
some regression equations, these include the organizational and environmental factors
and board attributes described above as well as three additional board attribute variables.
Board attributes. Previous research has indicated that when the CEO also serves
as chairman o f the board, directors lack the structural power to influence management
decisions (Mallette & Fowler, 1992). Other research has linked board leadership
structure to responsible decision making (Westphal & Zajac, 1995). Thus, 1 controlled
for duality, a variable indicating shared CEO and board chair positions. I also
controlled for the role of the respondent, as the role of CEO, inside or outside director
might have influenced the respondents’ perspective. Finally, I controlled for relative
tenure, defined as the average tenure of the board divided by the CEO’s tenure.
Analysis
Each step in the model was estimated using ordinary least squares (OLS) multiple
regression analysis (Johnston, 1984). Regression equations were estimated with and
without control variables in an effort to partition the variance explained in board
involvement that might be attributed to the environmental factors, organizational factors
and board attributes as hypothesized. Next, regression equations were estimated with and
without control variables in an effort to partition the variance explained in firm financial
performance that might be attributed to board involvement. Finally the key
67
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environmental and organizational variables were used to divide the pooled sample into
subgroups and analyzed separately, to determine whether they moderate the relationship
between board involvement and firm financial performance. In each of the regression
equations, independent variables that were highly correlated were entered separately, to
avoid problems of multicollinearity.
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Chapter 5
Empirical Findings
Results
Descriptive statistics are displayed in Table 1 and bivariate correlations are
displayed in Table 2. The results of multiple regression analyses are provided in Tables
5-19. Summary tables reporting the findings of my hypotheses are presented in Table 3
and Table 4.
Table S presents the findings of the regression equation with the amount of time
the board spend on monitoring activities as the dependent variable. This corresponds to
Hypotheses 1,8, 12, 18 and 20, testing the effects of the percentage o f outside directors
on the board, the percentage of outside ownership, organization size, firm prior
performance, and environmental dynamism on the amount of time the board spend on
monitoring activities, respectively. Models 1, 2, and 3 present the control variables for
the equation, with highly correlated control variables entered separately to avoid
multicollinearity problems. Model 4 adds the environmental antecedent variable
hypothesized to affect time spent on monitoring, environmental dynamism. Model 5
adds the organizational antecedent independent variables hypothesized to affect time
spent on monitoring, namely, firm prior performance and organization size. Finally,
Model 6 adds the board attribute antecedent independent variables hypothesized to affect
time spent on monitoring, namely, the portion of outside directors on the board and the
percentage o f outside director stock ownership, representing the full model. In this table,
69
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Table 1: Descriptive Statistics
VARIABLES N I Minimum 1 Maximum 1 Mean 1 Std. Deviation 1
Environment Munificence 293 -2.80 19.30 2.6570 3.1801
Environment Dynamism 295 -.50 10.60 2.5210 2.8888
Organization Size 296 3.71 12.91 8.1880 1.4588
Organization Age 269 .00 231.00 59.9888 41.8681
Level of Diversification 297 .00 2.12 .3732 .4762
Prior Performance 295 -.77 2.65 .4000 .5469
Board Size 275 3.00 22.00 11.1055 3.0899
Board Tenure 275 .78 22.00 9.5840 3.7036
Portion Outsiders 275 .30 .95 .7773 .1198
Portion Insiders 275 .05 .70 .2227 .1198
Outsiders Appointed after CEO 255 .00 1.00 .5824 .3223
Outsider Ownership 276 .00 1.68 4.400E-02 .1518
Duality 266 .00 1.00 .7594 .4283
Insider Role 310 .00 1.00 .5065 .5008
Relative Tenure 259 -16.64 36.73 2.2280 8.3235
Board Time Spent on Strategy
Activities
309 1.50 4.75 3.4736 .5359
Board Time Spent on
Monitoring Activities
309 1.00 5.00 2.9191 .7352
Information Board Receives
from External Sources
310 1.67 5.00 3.5457 .6618
Information Board Receives
from Internal Sources
310 1.00 4.25 2.6454 .6044
Board Expertise in Monitoring 311 2.00 5.00 3.8816 .5521
Board Expertise in Strategy 311 2.00 5.00 3.9453 .5966
Board Involvement 311 -2.74 1.88 -1.6650E-02 .7169
Performance 279 -.10 2.55 .2680 .4486
Valid N (listwise) 222
70
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Table 2. Correlations
Variable* 1 2 3 4 5 6 7 8 9 10 11
1. Eaviroameat
Muailkeace
2. Eaviroaawat
Dyaamism
.809(**)
1
i
i
a
I
-.I63(**) -,I63(*»)
4. Ortaaizatioa Ace -0.023 -0.059 0.1 IS
5. DivenlfkatioB -,237(**) -.2 5 0 0 )
•1730) .2 4 3 0 )
6. Prior Performaace -,532(**) -,546(**) 0.085 -.1 3 4 0 - 1 2 4 0
7. Board Size -.174 -.2I5(**) .5 2 8 0 ) .1 9 2 0 ) .I71(**) 0.062
8. Board Teaare -0.062 -0.072 0.028 .2 2 6 0 )
0.092 0.013 0.105
9. Portioa Oatiiders -0.047 -0.027 .1 6 1 0 )
0.06 0.003 -0.018 .1 3 8 0 -2I3(**)
19. PortioB laiiders 0.047 0.027 -.1 6 1 0 )
-0.06 -0.003 0.018 -1 3 8 0 .2 1 3 (0 -1.00(*»)
11. Oatsidcrs After
CEO
0.043 0.033
.1 9 6 0 )
0.118 0.049 0.013
• I76<**)
0.047 0.021 -0.021
12. Oalsider
Owaenhip
0.069 0.024 0.099 -0.038 -0.018 0 -0.027 -0.08 -0.034 0.034 0.06
13. Daality -0.097 -0.076 .2 4 6 0 ) 0.105 0.042 0.011 0.05 -.204(**) .2 2 2 0 ) -,222(**) .252(**)
14. laiidc Retpoadeat 0.022 -0.037 -0.027 0.049 0.021 0.089 -0.095 -0.004 -0.009 0.009 0.032
15. Relative Teaure -0.021 -0.017 .1 2 6 0 0.054 0.024 0.069 0.107 0.056 -0.101 0.101 .777(**)
16. Tiaie Strateey 0.103 .1 3 5 0 0.037 - 0.111 -0.025 -0.049 -0.092 -.176(**) .1 6 5 0 ) -.1 6 5 0 ) 0.047
17. Tiaie Moaitoriae 0.083 0.102 .1 2 2 0
0.104 0.051 -0.047 0.08 -0.017 0.02 -0.02 0.013
18. lafo Exteraal 0.04 0.062 .1 8 8 0 ) 0.107 -0.058 0.04 0.071 0.017 .1 4 4 0 -.1440 • 1300
19. lafo lateraal -0.023 -0.004 143 0 -0.033 -0.008 0.06 0.054 -0.077 .1 2 2 0 -.1220 0.117
20. Moaitoriag
Expertise
.1 2 6 0
.1 5 0 0 )
0.052 -0.028 0.024 -0.061 -0.057 -0.071
.1 9 3 0 )
-,I93(**) 0.049
21. Strateey Expertise 0.04 0.077 .1 4 6 0
0.003 0.002 -0.05 0.059 -.1310 .2 1 3 0 ) -.213(**) 0.122
22. Board lavolveaieat 0.088
• 1250 .1 6 2 0 ) 0.012 -0.008 -0.051 0.03 -0.1 II .2 0 2 0 ) -.202(**) 0.11
23. Firm Performaace -.2 1 0 0 ) -.1 8 6 0 ) 0.078 -0.096 0.064 .203(**) 0.08 -0.019 0.1 II - 0.111 0.027
* p<.05 **p<.OI •♦•pc.OOl
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Table 2 (continued). Correlations
Variable* 12 13 14 15 16 17 18 19 20 21 22
1. Eaviroameal
Maaificcace
2. Eaviroameat
Dvaamism
3. Organization Size
4. Ortaaizatioa Ace
S. Diversification
6. Prior Performaace
7. Board Size
8. Board Tcaurc
9. Portioa Outsider*
10. Portioa lasiders
11. Outsider* After
CEO
12. Outsider
Ownership
13. Duality •0.026
14. luside Respoadeat .I26(*) 0.008
15. Relative Tenure 0.008 .253(**) 0.005
16. Tiaie Strateey 0.049 0.06 -0.067 0.028
17. Time Moaitoriae 0.015 -0.096 0.005 -0.028 .2 2 2 0 )
18. lafo Eiteraal 0.036 0.016 -0.059 0.024
.4 0 6 0 )
,229(**)
19. lafo Internal 0.029 -0.014 -0.0% 0.08 .347(**) .278(**) .4 0 6 0 )
20. Monitoring
Expertise
0.048 -0.107 0.057 -0.021
.5 1 2 0 ) .3 0 5 0 ) .3 8 2 0 )
.386(**)
21. Strategy Expertise 0.057 0.062 -0.053 0.081
.5 9 7 0 )
,269(**) ,403(**) .4 4 0 0 ) ,662(**)
22. Board Involvement 0.055 -0.021 -0.05! 0.034 .739f •*)
.5 4 3 0 ) .6 7 3 0 ) .673(**) .7 7 3 0 ) .814(**)
23. Firm Performaace 0.003 0.072 0.077 0.016 -.1 4 5 0 -0.044 -0.108 0.03 -0.106 -0.091 -0.108
* p<.05 **p<.OI •**p<.001
Table 3: Summary of Hypotheses Results
Antecedents of Board Involvement
Hvnothesis Pr^iftion Results Findine/ Conclusion
flndeuendent Var & Denendent V»rt Table Direction
1
Percent Outsiders 4 * Time Monitoring
5
not
significant
not
supported
2
Percent Outsiders < ? Information External
7
* (positive) supported
3
Percent Outsiders < ? Expertise Monitoring
9
*** (positive) supported
4
Percent Insiders ( ? Time Strategy
6
* (negative) supported
5
Percent Insiders f i Information Internal
8
+ (negative) supported
6
Percent Insiders & Expertise Strategy
10
** (negative) supported
7
Percentage Outsiders Appointed After CEO &
Information Internal
8
* (positive) supported
8
Percentage Outsider Ownership P Time
Monitoring
5
not
significant
not
supported
9
Percentage Outsider Ownership P Information
External
7
not
significant
not
supported
10
Board Size P Expertise Strategy
10
not
significant
not
supported
11
Average Tenure P Expertise Strategy
10
not
significant
not
supported
12
Organization Size P Time Monitoring
5
* (positive) supported
13
Organization Size P Information External
7
** (positive) supported
14
Organization Size P Expertise Monitoring
9
* (positive) supported
15
Organization Size P Expertise Strategy
10
* (positive) supported
16
Organization AgeiP Time Strategy
6
not
significant
not
supported
17
Level of Diversification P Time Strategy
6
not
significant
not
supported
18
Prior Performance P Time Monitoring
5
not
significant
not
supported
19
Prior Performance P Expertise Strategy
10
not
significant
not
supported
20
Environment Dynamism P Time Monitoring
5
not
significant
not
supported
21
Environment Dynamism P Information External
7
not
significant
not
supported
22
Percent Outsiders P Board Involvement
11
** (positive) supported
23
Percent Insiders & Board Involvement
12
** (negative) supported
24
Percentage Outsider Ownership P Board
Involvement
11
not
significant
not
supported
25
Organization Size P Board Involvement
11
** (positive) supported
26
Environment Dynamism & Board Involvement
11
* (positive) supported
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Table 4: Summary of Hypotheses Results
Consequences of Board Involvement
Hvuothesis Prediction Results Findine/ Conclusion
(Indenendent Var & Deuendent Table Direction
Var)
27
Board Involvement^ Performance
13
Significant
(-)
Contradictory
28
Board Involvement^ Performance
(moderated by organization size)
15
Significant
(hi)
Supported
29
Board Involvement^ Performance
(moderated by organization age)
16
Significant
(hi)
Supported
30
Board Involvement^ Performance
(moderated by level of diversification)
17
Not
significant
Not
Supported
31
Board Involvement^ Performance
(moderated by environment
munificence)
18
Not
significant
Not
Supported
32
Board Involvement^ Performance
(moderated by environment dynamism)
19
Not
significant
Not
Supported
organization size was significantly and positively related to the amount of time the board
spent on monitoring activities at the .05 level, supporting Hypothesis 12. As the other
independent variables were not significant, Hypotheses 1, 8, 18, and 20 were not
supported.
Table 6 presents the findings of the regression equation with the amount of time
the board spend on strategic decision support activities as the dependent variable. This
corresponds to Hypotheses 4, 16, and 17, testing the effects of the percentage of inside
directors on the board, organization age, and level of diversification on the amount of
time the board spend on strategic decision support activities, respectively. Models 1 and
2 present the control variables for the equation, with highly correlated control variables
entered separately to avoid multicollinearity problems. Models 3 and 4 add the
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Table 5: Results of OLS Regression Modelsa
Antecedents o f the Amount of Time Board Spends on Monitoring Activities
(Testing Hypotheses 1,8,12,18 and 20)
Variables Time
Monitoring
Model 1
Time
Monitoring
Model 2
Time
Monitoring
Model 3
Time
Monitoring
Model 4
Time
Monitoring
Model 5
Time
Monitoring
Model 6
Intercept 3.028
(.181)
3.010
(.183)
2.818
(.242)
2.756
(.246)
2.345
(.320)
2.301
(.435)
Inside
Respondent
-.0132
(091)
-.0137
(.091)
-.00175
(.092)
.01064
(.092)
.001797
(.092)
-.00257
(.093)
Environment
Munificence
.01746
(.014)
.01963
(.015)
.02215
(.015)
-.00354
(.025)
.001031
(.025)
.0004820
(.025)
Organization
Age
.002540*
(.001)
.002364*
(.001)
.002145+
(.001)
.002177+
(.001)
.002296+
(.001)
.002299*
(.001)
Duality -.212*
(.111)
-.211+
(.111)
-.215+
(•111)
-.217+
(•111)
-.271*
(.114)
-.272*
(.115)
Board
Tenure
-.0151
(.013)
-.0152
(.013)
-.0161
(.013)
-.0159
(.013)
-.0164
(.013)
-.0157
(.013)
Level of
Diversificati
on
.06387
(.102)
.05268
(.102)
.0629
(.102)
.06207
(.108)
.06187
(109)
Board Size .01874
(.015)
.02118
(.016)
.003278
(.018)
.002741
(.018)
Environment
Dynamism
.03598
(.027)
.03832
(.028)
.03866
(.028)
Past
Performance
.04919
(.110)
.04886
(.110)
Organization
Size
.07518*
(.038)
.07636*
(.039)
Portion
Outsiders
.04232
(.402)
Outsider
Director
Ownership
.116
(305)
F-Value 1.908+ 1.651 1.629 1.649 1.752+ 1.461
Model R-
Square
.037 .038 .044 .051 .067 .067
Change in
R-Square
.001 .006 .007 .016 .001
1 N=255. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
• p < .05
•* p<.01
***p<.001
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Table 6: Results of OLS Regression Models *
Antecedents of Amount of Time Board Spends on Strategic Decision Support Activities
(Testing Hypotheses 9,16 and 17)
Variables Time
Strategy
Model 1
Time
Strategy
Model 2
Time
Strategy
Model 3
Time
Strategy
Model 4
Time
Strategy
Model 5
Intercept 3.489
(.221)
3.524
(.230)
3.515
(.231)
3.518
(.231)
3.708
(.243)
Inside
Respondent
-.0667
(.066)
-.0792
(.066)
-.0806
(.066)
-.0752
(.067)
-.0750
(.066)
Environment
Dynamism
.02450*
(.012)
.02419+
(.014)
.02666+
(.015)
.02620+
(.015)
.02702+
(.015)
Organization
Size
.01991
(.024)
.04261
(.028)
.04136
(.028)
.04077
(.028)
.03678
(.028)
Duality .02901
(.081)
.01943
(.082)
.01978
(.082)
.03189
(-.083)
.004313
(.083)
Board Tenure -.0239**
(.009)
-.0226*
(.009)
-.0228*
(.009)
-.0206*
(.009)
-.0160+
(.010)
Board Size -.0206
(.013)
-.0208
(.013)
-.0190
(.013)
-.0218
(.013)
Past
Performance
.02558
(.073)
.03745
(.077)
.02840
(.078)
.03555
(.077)
Level of
Diversification
.03524
(.077)
.04843
(.078)
.05676
(.078)
Organization
Age
-.000858
(.001)
-.000995
(.001)
Portion
Insiders
-.672*
(.289)
F-Value 2.893* 2.471* 2.181* 2.049* 2.419**
Model R-
Square
.054 .065 .066 .069 .090
Change in R-
Square
.011 .001 .004 .020*
1 N=256. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p < .01
***p<.001
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organizational antecedent variables hypothesized to affect time spent on strategic
decision support, level of diversification and organization age, entered separately to avoid
problems o f multicollinearity. Finally, Model 5 adds the board attribute antecedent
variable hypothesized to affect time spent on strategic decision support, the portion of
inside directors on the board, representing the full model. In this table, the percentage of
insider directors was significantly and negatively related to the amount of time the board
spent on monitoring activities at the .05 level, supporting Hypothesis 4. As the other
independent variables were not significant, Hypotheses 16 and 17 were not supported.
Table 7 presents the findings o f the regression equation with the frequency with
which the board receives information from external sources as the dependent variable.
This corresponds to Hypotheses 2, 9, 13 and 21, testing the effects of the percentage of
inside directors on the board, the percentage o f outside director stock ownership,
organization size and environmental dynamism on the frequency with which the board
receives information from external sources, respectively. Models 1, 2 and 3 present the
control variables for the equation, with highly correlated control variables entered
separately to avoid multicollinearity problems. Model 4 adds the organizational and
environmental antecedent variables hypothesized to affect the frequency with which the
board receives information from external sources, organization size and environmental
dynamism. Finally, Model 5 adds the board attribute antecedent variable hypothesized to
affect the frequency with which the board receives information from external sources, the
portion o f outside directors on the board and the percentage of outside director stock
ownership, representing the full model. In this table, organization size was significantly
77
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Table 7: Results of OLS Regression Modelsa
Antecedents o f Board Receiving Information from External Sources
(Testing Hypotheses 2,9,13 and 21)
Variables Info
External
Model 1
Info
External
Model 2
Info
External
Model 3
Info
External
Model 4
Info
External
Model 5
Intercept 3.462
(.165)
3.496
(.167)
3.395
(.232)
2.837
(.288)
2.292
(.388)
Inside
Respondent
-.0916
(.083)
-.0905
(.083)
-.0771
(.084)
-.0772
(.083)
-.0900
(.083)
Environment
Munificence
.009831
(.013)
.005639
(.013)
.002951
(.017)
-.00674
(.023)
-.00649
(.023)
Organization
Aee
.001860+
(.001)
.002199*
(.001)
.001999+
(.001)
.002107*
(.001)
.001994+
(.001)
Duality .008334
(.101)
.007527
(.101)
.003166
(.101)
-.0775
(.103)
-.105
(.103)
Board Tenure -.00164
(.012)
-.00137
(.012)
-.00195
(.012)
-.00251
(.012)
.003352
(.012)
Level of
Diversification
-.124
(.093)
-.145
(.098)
-.162
(.098)
-.155
(.097)
Board Size .01323
(.014)
-.0111
(.016)
-.0150
(.016)
Past
Performance
-.0437
(.097)
-.0409
(.099)
-.0339
(.098)
Organization
Size
.107***
(.034)
.107***
(.034)
Environment
Dynamism
.01646
(.025)
.01675
(.025)
Portion
Outsiders
.703*
(.359)
Outsider
Director
Ownership
.324
(.272)
F-Value .982 1.118 .969 1.836* 1.974*
Model R-Square .019 .026 .030 .070 .089
Change in R-
Square
.007 .004 .040*** .019+
* N=255. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
• p < .0 5
** p< .01
♦••pc.001
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Table 8: Results of OLS Regression Modelsa
Antecedents of Board Receiving Information from Internal Sources
(Testing Hypotheses 5 and 7)
Variables Info
Internal
Model 1
Info
Internal
Model 2
Info
Internal
Model 3
Info
Internal
Model 4
Info
Internal
Model 5
Intercept 2.408
(.255)
2.409
(.255)
2.426
(.259)
2.372
(.267)
2.533
(.281)
Inside
Respondent
-.117
(.076)
-.117
(.076)
-.121
(.077)
-.126
(.077)
-.133
(.077)
Environment
Dynamism
.002156
(.013)
.0007787
(.014)
-.000145
(.014)
.008306
(.017)
.004527
(.017)
Organization
Age
-.000102
(.001) .00000368
(.001)
.00006105
(.001)
.0001552
(.001)
-.0000533
(.001)
Organization
Size
.06502*
(.027)
.06643*
(.028)
.07378*
(.032)
.07205*
(.032)
.06502*
(.032)
Duality -.106
(.095)
-.107
(.095)
-.112
(.096)
-.109
(.096)
-.178
(.099)
Board Tenure -.0165
(.011)
-.0164
(.011)
-.0163
(.011)
-.0163
(.011)
-.0142
(.011)
Level of
Diversification
-.0388
(.086)
-.0378
(.086)
-.0152
(.091)
-.0143
(.090)
Board Size -.00684
(.015)
-.00639
(.015)
-.0122
(.015)
Past
Performance
.07314
(.090)
.06561
(.090)
Portion Insiders -.553+
(.335)
Portion
Outsiders
Appointed after
CEO
.248*
(125)
F-Value 1.737 1.513 1.345 1.267 1.633+
Model R-Square .042 .042 .043 .046 .071
Change in R-
Square
.000 .001 .003 .025*
* N=246. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p c . l
* p < .05
• • p c .O l
•••pc.001
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and positively related to the frequency with which the board receives information from
external sources at the .001 level, supporting Hypothesis 13. In addition, the percentage
o f outside directors was significantly and positively related to the frequency with which
the board receives information from external sources at the .05 level, supporting
Hypothesis 2. As the other independent variables were not significant, Hypotheses 9 and
21 were not supported.
Table 8 presents the findings of the regression equation with the frequency with
which the board receives information from internal sources as the dependent variable.
This corresponds to Hypotheses 5 and 7, testing the effects of the percentage o f inside
directors on the board and the percentage o f outside directors appointed to the board after
the CEO on the frequency with which the board receives information from internal
sources, respectively. Models 1, 2, 3 and 4 present the control variables for the equation,
with highly correlated control variables entered separately to avoid multicollinearity
problems. Finally, Model 5 adds the board attribute antecedent variables hypothesized to
affect the frequency with which the board receives information from internal sources, the
portion of inside directors on the board and the percentage of outside directors appointed
to the board after the CEO, representing the full model. In this table, the percentage o f
inside directors was marginally significant and negatively related to the frequency with
which the board receives information from internal sources at the .01 level, supporting
Hypothesis 5. In addition, the percentage of outside directors appointed to the board after
the CEO was significantly and positively related to the frequency with which the board
receives information from internal sources at the .05 level, supporting Hypothesis 7.
80
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Table 9 presents the findings of the regression equation with the monitoring
expertise o f the board as the dependent variable. This corresponds to Hypotheses 3 and
14, testing the effects of the percentage of outside directors on the board and
organization size on the monitoring expertise o f the board, respectively. Models 1,2 and
3 present the control variables for the equation, with highly correlated control variables
entered separately to avoid multicollinearity problems. Model 4 adds the organizational
antecedent variable hypothesized to affect the monitoring expertise of the board,
organization size. Finally, Model S adds the board attribute antecedent variable
hypothesized to affect the monitoring expertise o f the board, the portion of outside
directors on the board, representing the full model. In this table, organization size was
significantly and positively related to the monitoring expertise of the board at the .05
level, supporting Hypothesis 14. In addition, the percentage of outside directors was
significantly and positively related to the monitoring expertise of the board at the .001
level, supporting Hypothesis 3.
Table 10 presents the findings of the regression equation with the strategic
decision support expertise of the board as the dependent variable. This corresponds to
Hypotheses 6, 10, 11, 15 and 19, testing the effects of the percentage of inside directors,
board size, board tenure, organization size, and firm prior performance on the strategic
decision support expertise of the board, respectively. Models 1 and 2 present the control
variables for the equation, with highly correlated control variables entered separately to
avoid multicollinearity problems. Model 3 adds the organizational antecedent Wariables
hypothesized to affect the strategic decision support expertise of the board, organization
81
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Table 9: Results of OLS Regression Models *
Antecedents of Board Expertise in Monitoring
(Testing Hypotheses 3 and 14)
Variables Monitoring
Expertise
Model 1
Monitoring
Expertise
Model 2
Monitoring
Expertise
Model 3
Monitoring
Expertise
Model 4
Monitoring
Expertise
Model 5
Intercept 4.018
(.136)
3.995
(.138)
3.999
(.197)
3.725
(.238)
2.991
(.314)
Inside
Respondent
.06318
(.068)
.06351
(.068)
.05839
(.069)
.05645
(.069)
.05666
(.067)
Environment
Dynamism
.02702*
(.012)
.03007*
(.012)
.03359*
(.016)
.03285*
(.015)
.03409*
(.015)
Organization
Age
.0002377
(.001)
.00002609
(.001)
.0001120
(.001)
.0001506
(.001)
-.0000573
(.001)
Duality -.156+
(.083)
-.156+
(.083)
-.155+
(.083)
-.199*
(.085)
-.241**
(.084)
Board Tenure -.0141
(.010)
-.0142
(.010)
-.0140
(.010)
-.0145
(.010)
-.00740
(.010)
Level of
Diversification
.08007
(.076)
.09281
(.081)
.07620
(.080)
.08889
(.079)
Board Size -.00337
(.012)
-.0172
(.013)
-.0214
(.013)
Past
Performance
.03613
(.081)
.02526
(.080)
.03616
(.079)
Organization
Size
.05813*
(.029)
.05206+
(.028)
Portion
Outsiders
1.024***
(.293)
F-Value 2.358* 2.149* 1.637 1.934* 3.036***
Model R-
Square
.045 .049 .050 .066 .110
Change in R-
Square
.004 .001 .016* .044***
* N=256. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p< .05
** p < .01
***p<.001
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Table 10: Results of OLS Regression Modelss
Antecedents of Board Expertise in Strategic Decision Support
(Testing Hypotheses 6,10,11,15 and 19)
Variables Strategy
Expertise
Model 1
Strategy
Expertise
Model 2
Strategy
Expertise
Model 3
Strategy
Expertise
Model 4
Intercept 3.884
(.102)
3.879
(.105)
3.449
(.236)
3.902
(.269)
Inside Respondent -.0657
(.075)
-.0658
(-075)
-.0544
(.075)
-.0589
(.075)
Environment
Munificence
.009074
(.012)
.009613
(.012)
.008154
(.015)
.008425
(.015)
Organization Age .000003672
(.001)
-.0000405
(.001)
-.000229
(.001)
.00009536
(.001)
Duality .09259
(.088)
.09276
(.089)
.04398
(.091)
-.0409
(.093)
Level of Diversification .01582
(.084)
-.0197
(.088)
-.00375
(.087)
Organization Size .06204*
(.027)
.061458*
(.031)
Past Performance -.0445
(.087)
-.0308
(.086)
Portion Insiders -.891**
(.325)
Board Size -.00568
(.014)
Board Tenure -.0159
(.011)
F-Value .570 .461 1.104 1.997*
Model R-Square .009 .009 .030 .075
Change in R-Square .000 .021+ .045**
1 N=255. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p< .05
** p< .01
***p<.001
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size and prior performance. Finally, Model 4 adds the board attribute antecedent variable
hypothesized to affect the strategic decision support expertise o f the board, the portion of
inside directors on the board, board size and board tenure, representing the full model. In
this table, the organization size was significantly and positively related to the strategic
decision support expertise of the board at the .05 level, supporting Hypothesis 15. In
addition, the percentage o f insider directors was significantly and negatively related to
the strategic decision support expertise of the board at the .01 level, supporting
Hypothesis 6. As the other independent variables were not significant, Hypotheses 10,
11, and 19 were not supported.
Table 11 presents the findings of the regression equation with board involvement
as the dependent variable. This corresponds to Hypotheses 22,24, 25, and 26, testing the
effects of the percentage of outside directors on the board, the percentage o f outside
director stock ownership, organization size, and environmental dynamism on board
involvement, respectively. Models 1, 2 and 3 present the control variables for the
equation, with highly correlated control variables entered separately to avoid
multicollinearity problems. Models 4 and 5 add the environmental antecedent variables
hypothesized to affect board involvement, environmental munificence and environmental
dynamism, entered separated to avoid problems of multicollinearity. Model 6 adds the
organizational antecedent variables hypothesized to affect board involvement,
organization size and past performance. Finally, Model 7 adds the board attribute
antecedent independent variables hypothesized to affect board involvement, the portion
of outside directors on the board and the percentage of outside director stock ownership,
84
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Table II: Results of OLS Regression Models *
Antecedents of Board Involvement
(Testing Hypotheses 22,24,25 and 26)
Variables Board
Inv’l
Model 1
Board
Inv’l
Model 2
Board
Inv’l
Model 3
Board
Inv’l
Model 4
Board
Inv’l
Model 5
Board
Inv’l
Model 6
Board
Inv’l
Model 7
Intercept .299
(.169)
.302
(.170)
.232
(.224)
.04748
(.241)
.05196
(242)
-.522
(.310)
-1.370
(.415)
Inside
Respondent
-.0840
(.089)
-.0839
(.090)
-.0791
(.090)
-.0694
(.090)
-.0667
(.090)
-.0748
(.090)
-.0899
(.089)
Organization
Age
.001024
(.001)
.001088
(001)
.001008
(.001)
.0008919
(.001)
.0009177
(.001)
.001032
(.001)
.0008389
(.001)
Duality -.0986
(.108)
-.0981
(.108)
-.100
(.109)
-.0840
(.108)
-.0867
(.109)
-.171
(.111)
-.215
(.110)
Board Tenure -.0274*
(.013)
-.0273*
(013)
-.0277*
(.013)
-.0262*
(.013)
-.0264*
(.013)
-.0270*
(.013)
-.0182
(.013)
Level of
Diversification
-.0232
(.097)
-.0290
(.098)
.01488
(.100)
.01237
(.101)
-.00721
(.105)
.006002
(.104)
Board Size .007182
(.015)
.01271
(.015)
.01276
(.015)
-.0144
(.017)
-.0202
(.017)
Environment
Dynamism
.03263*
(.016)
.03996
(.027)
.03946
(.027)
.03947
(.027)
Environment
Munificence
-.00833
(.024)
.00429
(.024)
-.00310
(.024)
Organization
Size
.114**
(.037)
.112
(.037)
Past
Performance
.01764
(.107)
.02981
(.105)
Portion
Outsiders
1.114**
(.383)
Outside
Director
Ownership
.376
(.291)
F-Value 1.143 1.137 .983 1.427 1.259 2.001* 2.543**
Model R-
Square
.022 .022 .023 .039 .039 .075 .112
Change in R-
Square
.000 .001 .016* .000 .036** .037**
* N=255. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
• p< .05
•* pc.O l
***p<.001
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Table 12: Results of OLS Regression Modelsa
Antecedents o f Board Involvement
(Testing Hypotheses 23)
Variables Board
Involvement
Model 1
Board
Involvement
Model 2
Intercept -.522
(.310)
-.215
(.325)
Inside Respondent -.0748
(.090)
-.0743
(.089)
Environment
Dynamism
.03946
(.027)
.03881
(.027)
Environment
Munificence
-.00429
(.024)
-.00132
(.024)
Organization Size .114***
(.037)
.107***
(.037)
Organization Age .001032
(.001)
.0008044
(.001)
Level of Diversification -.00721
(.105)
.008266
(.104)
Past Performance .01764
(.107)
.03346
(.106)
Duality -.171
(•111)
-.216+
(.111)
Board Tenure -.0270*
(.013)
-.0192
(.013)
Board Size -.0144
(.017)
-.0189
(.017)
Portion Insiders -1.077***
(.403)
Inside Director
Ownership
-.0784
(.475)
F-Value 2.001* 2.390***
Model R-Square .075 .106
Change in R-Square .031*
1 N=256. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p<.01
•**p<.001
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
representing the full model. In this table, the percentage of environmental dynamism was
significantly and positively related to board involvement at the .O S level, supporting
Hypothesis 26. In addition, organization size was significantly and positively related to
board involvement at the .01 level, supporting Hypothesis 25. Finally, the percentage of
outside directors was significantly and positively related to board involvement at the .01
level, supporting Hypothesis 22. As the other independent variable was not significant,
Hypothesis 24 was not supported.
Table 12 presents the findings of the regression equation with board involvement
as the dependent variable, with independent variables related to inside directors (as this
variable is highly correlated with the outside director variables, it needed to have a
separate equation). This corresponds to Hypothesis 23, testing the effects of the
percentage o f inside directors on the board on board involvement. Model 1 presents the
control variables for the equation. Model 2 adds the board attribute antecedent variable
hypothesized to affect board involvement, percentage of inside directors on the board. In
this table, the percentage o f insider directors was significantly and negatively related to
the amount o f time the board spent on monitoring activities at the .001 level, supporting
Hypothesis 23.
Table 13 presents the findings of the regression equation with firm financial
performance as the dependent variable. This corresponds to Hypothesis 27, testing the
effects of board involvement on firm financial performance. Model 1 presents the control
variables for the equation. Model 2 adds the independent variable hypothesized to affect
firm financial performance, board involvement. In this table, board involvement was
87
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significantly and negatively related to firm financial performance at the .05 level,
contradicting Hypothesis 27.
Table 13: Results of OLS Regression Models *
Board Involvement Predicting Performance
(Testing Hypothesis 27)
Variables Financial Performance Financial Performance
Model 1 Model 2
Intercept .05849
(.221)
-.0791
(.227)
Munificence -.0210 -.0211+
(.014) (.014)
Dynamism -.0672
(.016)
.-.0333
(.016)
Organization Size 0.7313
(.022)
.08874
(.022)
Organization Age -.0102
(.001)
-.0101+
(.001)
Level of Diversification .08457 .08508
(.060) (.060)
Board Size .05247 .03896
(.010) (.010)
Portion Outsiders .345 .442*
(.226) (.227)
Board Involvement -.0889*
(.038)
F-Value 2.253* 2.675**
Model R-Square .061 .081
Change in R-Square .02
Note: A separate regression was run with highly correlated variables entered separately.
Analysis under this procedure yielded same overall results and coefficients.
1 N=250. All coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p < .01
***p<.001
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Table 14 presents the findings of the regression equation with board involvement
as the dependent variable, with the sample split into low and high subgroups on the
financial performance variable. This table was presented as supplemental analysis to
further inform the discussion of the interpretation and of the contradictory findings for
hypothesis 27. In this table, the sample is split into low and high subgroups based on the
financial performance variable to determine if the model predicting board involvement
holds and is significant for one subgroup and not for the other. The table indicates that
the overall model is positive and significant at the .05 level for one subgroup (low
performers), but not for the other subgroup (high performers), supporting the
interpretation discussed in the concluding chapter of this dissertation.
Table 15 presents the findings of the regression equation with firm financial
performance, with the sample split into low and high subgroups on the organization size
variable. This corresponds to Hypothesis 28, testing the moderating effect of
organization size on the relationship between board involvement and firm financial
performance. For each subgroup, Model 1 presents the control variables for the equation,
and Model 2 adds the independent variable, board involvement, representing the full
model. In this table, board involvement is marginally significant at the .1 level for larger
organizations, but is not significant for smaller organizations, supporting Hypothesis 28.
Table 16 presents the findings of the regression equation with firm financial
performance, with the sample split into low and high subgroups on the organization age
variable. This corresponds to Hypothesis 29, testing the moderating effect of
organization age on the relationship between board involvement and firm financial
89
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Table 14: Results of OLS Regression Models *
Supplemental Analysis
Variables Board Involvement Board Involvement
Model 1 Model 2
(Low Performers) (High Performers)
Intercept -0.1402 -.01463
(.520) (.553)
Munificence .02291 -.0612
(.028) (.047)
Dynamism .0393 .07143
(0.32) (.052)
Organization Size .127* .06417
(.055) (.050)
Organization Age .09577 -.0194
(.002) (.002)
Level of Diversification .132 -.0833
(.164) (.130)
Board Size -.0228 -.0186
(.027) (.024)
Portion Outsiders .442 .01409
(.537) (.052)**
F-Value 2.233* 1.531
Model R-Square .122 .082
Note: A separate regression was run with highly correlated variables entered separately.
Analysis under this procedure yielded same overall results and coefficients.
* N=112 for Low Performers and 120 for High Performers. All coefficients listed are
unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p < .01
***p<.001
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Table 15: Results of OLS Regression Models *
Moderating Effects o f Organization Size on the relationship between Board
Involvement and Firm Financial Performance
(Testing Hypothesis 28)
Variables Smaller
Organizations
Model 1
Smaller
Organizations
Model 2
Larger
Organizations
Model 1
Larger
Organizations
Model 2
Intercept .225
(.256)
.192
(.261)
-.280
(.370)
-.347
(.368)
Environment -.0252 -.0250 -.0163 -.0195
Munificence (.020) (.020) (.023) (.023)
Environment .01297 .01435 -.0322 -.0272
Dynamism (.023) (.023) (.024) (.024)
Organization Age -.0156
(.001)
-.0550
(.001)
-.0192*
(.001)
-.0181+
(.001)
Level of Diversification -.0295 -.0240 .07202 .06283
(.107) (.107) (.079) (.079)
Board Size -.0102 -.0109 .02074 .02003
(.018) (.018) (.013) (.013)
Portion Outsiders .223 .264 .637+ .736*
(.332) (.339) (.362) (.362)
Board Involvement -.0365
(.056)
-.107+
(.057)
F-Value .446 .441 4.188*** 4.166***
Model R-Square .023 .027 .168 .192
Change in R-Square .004 .024+
* N=120 for Smaller Organizations and 130 for Larger Organizations. All coefficients listed are
unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p< .01
***p<.001
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Table 16: Results of OLS Regression Models *
Moderating Effect of Organization Age on the relationship between Board
Involvement and Firm Financial Performance
(Testing Hypothesis 29)
Variables Younger
Organizations
Model 1
Older
Organizations
Model 2
Younger
Organizations
Model 1
Older
Organizations
Model 2
Intercept -.206
(.305)
-.301
(.312)
.429
(.399)
.180
(.413)
Environment -.0168 -.0158 -.0262 -.0294
Munificence (.020) (.020) (.021) (.021)
Environment -.0125 -.0960 .07901 .01311
Dynamism (.022) (.022) (-024) (.024)
Organization Size .01186
(.035)
.01186
(.035)
-.0681
(.030)
.05196
(.031)
Level of Diversification .110 .114 .02048 .01206
(.100) (.099) (.080) (.079)
Board Size .01404 .01206 -.0199 -.0181
(.015) (.015) (.017) (.017)
Portion Outsiders .403 .493 .168 .328
(.353) (.357) (.350) (.355)
Board Involvement -.0869
(.062)
-.105*
(.052)
F-Value 2.461* 2.408* .984 1.454
Model R-Square .110 .125 .048 .081
Change in R-Square .015 .033*
* N=122 for Younger Organizations and 125 for Older Organizations. All coefficients listed are
unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p < .01
***p<.00l
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
performance. For each subgroup, Model 1 presents the control variables for the equation,
and Model 2 adds the independent variable, board involvement, representing the full
model. In this table, board involvement is significant at the .05 level for older
organizations, but is not significant for younger organizations, supporting Hypothesis 29.
Table 17 presents the findings o f the regression equation with firm financial
performance, with the sample split into low and high subgroups on the level of
diversification variable. This corresponds to Hypothesis 30, testing the moderating effect
of level of diversification on the relationship between board involvement and firm
financial performance. For each subgroup, Model 1 presents the control variables for the
equation, and Model 2 adds the independent variable, board involvement, representing
the full model. Hypothesis 30 was not supported, as board involvement is not
differentially significant across the models corresponding to the two subgroups.
Table 18 presents the findings of the regression equation with firm financial
performance, with the sample split into low and high subgroups on the environmental
munificence variable. This corresponds to Hypothesis 31, testing the moderating effect
o f environmental munificence on the relationship between board involvement and firm
financial performance. For each subgroup, Model 1 presents the control variables for the
equation, and Model 2 adds the independent variable, board involvement, representing
the full model. Hypothesis 31 was not supported, as board involvement is not
differentially significant across the models corresponding to the two subgroups.
Table 19 presents the findings o f the regression equation with firm financial
performance, with the sample split into low and high subgroups on the environmental
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Table 17: Results of OLS Regression Models *
Moderating Effects o f Firm Level of Diversification on the relationship between
Board Involvement and Firm Financial Performance
(Testing Hypothesis 30)
Variables Less Diverse Less Diverse More Diverse More Diverse
Organizations
Model I
Organizations
Model 2
Organizations
Model 1
Organizations
Model 2
Intercept -.123
(.285)
-.200
(-295)
.345
(.385)
.209
(.394)
Environment -.0213 -.0217 -.0171 -.0049
Munificence (.016) (.016) (.033) (.033)
Environment -.0617 -.0368 -.0348 -.0357
Dynamism (.018) (.018) (.040) (.040)
Organization Size -.0102+
(.031)
-.0427
(.032)
.02233
(.033)
.03093
(.034)
Organization Age -.0698
(.001)
-.0627
(.001)
-.0158
(.001)
-.0170+
(.001)
Board Size .02378 .02152 -.0194 -.0186
(.014) (.014) (.018) (.018)
Portion Outsiders .443 .498 .209 .285
(.315) (.391) (.363) (.365)
Board Involvement -.0553
(.055)
-.0887
(.061)
F-Value 2.718* 2.477* 1.435 1.543
Model R-Square .120 .127 .068 .084
Change in R-Square .007 .016
a N=124 for Low Levels of Diversification and 126 for High Levels of Diversification. All
coefficients listed are unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p<.01
***p<.001
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Table 18: Results of OLS Regression Modelsa
Moderating Effects of Environmental Munificence on the relationship between
Board Involvement and Firm Financial Performance
(Testing Hypothesis 31)
Variables Low Level of Low Level of High Level of High Level of
Munificence Munificence Munificence Munificence
Model 1 Model 2 Model 1 Model 2
Intercept -.639
(.336)
-.680
(.345)
.727
(.303)
.587
(.317)
Environment -.0335 -.0330 -.0363 -.0295
Dynamism (.031) (.031) (.015) (.015)
Organization Size .02781
(.036)
.03245
(.037)
-.0210
(.026)
-.0161
.026
Organization Age -.0230*
(.001)
-.0223+
(.001)
.02395
(.001)
.01186
(.001)
Level of Diversification .0220 .02056 .161+ .167*
(.097) (.097) (.083) (.083)
Board Size .02319 .02162 -.0271* -.0261+
(.017) (.017) (.014) (.014)
Portion Outsiders .826* .843* -.180 -.0755
(.371) (.373) (.281) (.289)
Board Involvement -.0377
(.281)
-.0637
(.044)
F-Value 3.060** 2.649* 1.794 1.846+
Model R-Square .137 .139 .081 .097
Change in R-Square .002 .016
1 N=122 for Low Munificence and 128 for High Munificence. All coefficients listed are
unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p< .05
** p<.01
*** p < .001
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Table 19: Results of OLS Regression Models *
Moderating Effects o f Environmental Dynamism on the relationship between Board
Involvement and Firm Financial Performance
(Testing Hypothesis 32)
Variables Low Level of Low Level of High Level of High Level of
Dynamism
Model 1
Dynamism
Model 2
Dynamism
Model 1
Dynamism
Model 2
Intercept -.546
(.346)
-.653
(.360)
.558
(.293)
.473
(.301)
Environment -.0595+ -.0599+ -.0685 -.0528
Munificence (.034) (.034) (.012) (.012)
Organization Size .03919
(.036)
.04886
(.037)
-0.264
(.026)
-.0224
(.026)
Organization Age -.0249*
(.001)
-.0230*
(.001)
.01249
(.001)
-.0162
(.001)
Level of Diversification .07202 .05938 .129 .135
(.101) (.102) (.082) (.082)
Board Size .02129 .01808 -.0213 -.0210
(.017) (.017) (.014) (.014)
Portion Outsiders .625+ .690+ .05159 .117
(.375) (.380) (.279) (.284)
Board Involvement -.0705
(.065)
-.0566
(.047)
F-Value 3.081** 2.813** 1.442 1.446
Model R-Square .140 .148 .065 .076
Change in R-Square .009 .011
* N=120 for Low Dynamism and 130 for High Dynamism. All coefficients listed are
unstandardized betas. Standard errors are in parentheses.
+ p < .l
* p < .05
** p < .01
***p<.00l
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dynamism variable. This corresponds to Hypothesis 32, testing the moderating effect of
environmental dynamism on the relationship between board involvement and firm
financial performance. For each subgroup, Model 1 presents the control variables for the
equation, and Model 2 adds the independent variable, board involvement, representing
the full model. Hypothesis 32 was not supported, as board involvement is not
differentially significant across the models corresponding to the two subgroups.
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Chapter 6
Discussion and Implications
The main findings of the empirical study described above can be summarized as
follows. The first sets of results, examining the direct organizational, environmental and
board attribute antecedents to specific dimensions of, and overall, board involvement,
were mixed. O f these 26 relationships hypothesized, coefficients for 14 were significant
and in the direction expected. Regression analysis examining the remaining 12
relationships yielded no significant results, therefore those hypotheses were not
supported.
As far as board attribute antecedents are concerned, director classification
(portion of insiders, outsiders, outsiders appointed after CEO, etc.) was significantly
related to board involvement in a number of ways. Specifically, the greater the
percentage of outsiders on the board, the more frequently the board will receive
information from external sources, the greater its expertise in monitoring, and the greater
its overall involvement (Hypotheses 2, 3, and 22). These relationships were significant at
the .05, .001, and .01 level, respectively. Interestingly, a higher percentage of outsiders
on the board did not result in a significant effect on the amount of time the board spends
on monitoring activities (Hypothesis 1). The higher the percentage o f insiders on the
board, on the other hand, the less likely the board is to spend time on strategic decision
support activities, the less frequently the board will receive information from internal
sources, the lower the board’s expertise in strategic decision support, and the lower the
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board’s overall involvement (Hypotheses 4, 5, 6 and 23). These relationships were
significant at the .05, .1 and .01 level, respectively. The greater the percentage of
outsiders on the board appointed after the CEO, the more frequently the board receives
information from internal sources (Hypothesis 7). This relationship was significant at the
.05 level. Ownership structures did not emerge as significant predictors of board
involvement. Hypotheses 8 and 9, predicting that greater percentages of outsider
ownership will result in more time spent on monitoring and receipt of information from
external sources, were not supported. In addition, Hypothesis 24, predicting that greater
percentages o f outsider ownership will result in more board involvement, was not
supported. Finally, neither board size nor board tenure significantly predicted a board’s
expertise in strategic decision support (Hypotheses 10 and 11).
As far as the organizational antecedents o f board involvement are concerned,
again, consistent with prior literature, organization size is an important antecedent to
board involvement. In fact, organization size was the only organization factor in the
analysis here that yielded significant results. Regression analysis failed to demonstrate
significant effects for organization age, level of diversification and prior firm
performance on board involvement, so these hypotheses were not supported (Hypotheses
16-19). Organization size, in contrast, was significantly related to board involvement in
many ways. Specifically, the greater the organization size, the more time the board
spends on monitoring activities, the more frequently the board will receive information
from internal sources, the greater its expertise in monitoring, the greater its expertise in
strategic decision support, and the greater the overall involvement of the board
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(Hypotheses 12, 13, 14, 15 and 25). These relationships were significant at the .05, .01,
.05, .05 and .01 level, respectively.
Finally, the relationships involving environmental antecedents of board
involvement are addressed. Here, again, the results were mixed, overall. Hypotheses 20
and 21, predicting that greater levels of environmental dynamism would result in more
board time spent on monitoring activities and in the board receiving information from
external sources, were not supported. Hypothesis 26, however, was supported at the .05
level. This hypothesis predicted that greater levels of environmental dynamism would
result in more overall board involvement.
Turning now to the consequences of board involvement, the relationship between
board involvement and firm financial performance, moderated by organizational and
environmental factors, is addressed. Hypothesis 27 predicted that higher levels of board
involvement would result in greater firm financial performance. This relationship was
significant at the .05 level. However, the coefficient was negative, contradictory to the
direction predicted. As noted in the previous chapter, I conducted subsequent analysis to
help interpret these results. I split the sample into two subgroups, based on firm financial
performance, and compared the significance of the overall model to see if it differed
across the subgroups (see Table 14). These results indicate that firm performance may
affect board involvement as an antecedent variable, rather than as an outcome.
The results for the moderating effects of organizational and environmental factors
on the relationship between board involvement and firm performance were also mixed.
The analysis for these relationships was conducted on the split-sample variables for each
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of the moderating variables. Hypotheses 28 and 29 were supported. When the sample
was split on high and low levels of organization size, board involvement was a
marginally significant predictor (at the .1 level) of firm performance for larger firms, but
not at all significant for smaller firms. Similarly, when the sample was split on high and
low levels of organization age, board involvement was significantly related to firm
performance (at the .05 level) in older firms, but board involvement was not significantly
related to firm performance in younger firms. The results did not yield significant results
for the moderating effects of firm level of diversification, environmental munificence or
environmental dynamism, therefore Hypotheses 30, 31 and 32 were not supported.
Theoretical and Methodological Implications
Overall, the empirical findings in this dissertation suggest interesting
implications. In this section I will first discuss the implications of the results of the
analysis regarding antecedents of board involvement, then turn to the implications of the
results of the analysis regarding consequences of board involvement.
Within the set of results examining antecedents of board involvement, strong
patterns emerge. The first set of patterns concerns board attributes. Namely, consistent
with prior literature (Johnson, et al, 1996; Finkelstein & Hambrick, 1996; and Dalton, et
al, 1998), classification of directors emerges as a key antecedent to board involvement.
The independent variables of percentage outsiders and percentage insiders produced over
half o f the resulting significant relationships. Moreover, only one of the hypothesized
relationships concerning insiders or outsiders resulted in non-significant findings. In
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addition, none of the hypotheses involving ownership o f outsiders yielded significant
results.
These strong patterns are important because of their links to prior literature. First,
the significant findings regarding classification of directors offer the first empirical
support for the existence of a relationship between inside and outside directors and board
involvement. This underlying assumption has previously not been tested. Essentially,
these findings confirm a large body of conceptual and theoretical literature on the
importance of director classification for board operations. Specifically, the importance of
outsiders in contributing to the type of information received, to the expertise of a board of
directors, and to the overall involvement of the board, is confirmed.
Second, the dissertation results offer important support for a previous empirical
finding regarding the role of inside directors. The bulk of previous research on boards
examining the importance of insiders has focused on institutional theory and strategic
choice theory explanations for insiders contributing to board effectiveness through their
knowledge of internal information and expertise in firm-specific strategic operations
(Johnson, et al, 1996; Dalton, et al, 1998). Specifically, prior research has linked inside
directors to greater board participation in the strategic planning process (Tashakori &
Boulton, 1983), and to amounts o f strategic change (Goodstein & Boeker, 1991). Only
one prior study has found results that suggest alternative relationships between inside
directors and board involvement. As discussed earlier, Judge & Zeithaml (1992) found
that inside directors were negatively related to board involvement. My analysis confirms
this result and offers a more detailed explanation of this finding. Inside directors were
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significantly and negatively related to all three dimensions of board involvement as well
as overall board involvement. Given that the prior study and this dissertation are the only
two studies examining this relationship through direct measures of board involvement
(rather than relying on board attributes as proxies), these results present compelling
evidence for a negative effect of inside directors on board involvement. This finding
differentiates this study from prior research.
Third, analysis of overall board involvement yielded interesting findings.
Environmental factors, organizational factors and board attributes each provided
variables that were significantly related to board involvement. Taken together, these
results offer a perspective of a richer, more complex view of the antecedents of board
involvement. Whereas prior research has overwhelmingly focused on the contributions
of board attributes to board involvement, organizational and environmental factors have
been under-represented. The results of this dissertation indicate that all three categories
contribute significantly to explaining board involvement, suggesting that future work
incorporate more fully-specified models o f antecedents to board involvement.
Finally, the results of this dissertation reveal that the relationships between
environmental, organizational, and board attribute antecedents and board involvement are
neither uniform nor consistent across the different dimensions of board involvement. For
example, outside directors were significantly related to both the information and expertise
dimensions of board involvement (Hypotheses 2 and 3), but not to the time dimension of
board involvement (Hypothesis 1). This type of pattern was also true for the other
antecedents. This is a most interesting result, as it may be an important factor in
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explaining the inconsistent and contradictory findings regarding antecedents of board
involvement in prior research. As this is the first empirical study to break down the
board involvement construct into specific dimensions o f board involvement, it offers a
more detailed explanation of the ways in which antecedents affect board involvement.
Identifying these non-uniform relationships suggests that antecedents of board
involvement may be a more complex topic than previously acknowledged.
Turning now to the implications o f the consequences of board involvement,
equally interesting and important implications can be drawn from the results. First, the
fact that board involvement is significantly and negatively related to firm financial
performance is a noteworthy finding. A likely interpretation of this result is that the
results are capturing a different effect entirely. Given that involvement by the board of
directors is highly complex, it may take more time for the involvement o f the board to be
reflected in corresponding firm performance changes, than the dissertation model has
allowed. As noted earlier, these results may be indicating the exact opposite predictive
relationship, in other words, that low firm performance predicts subsequent board
involvement. However, these results must be interpreted with caution.
Second, the overall results regarding the moderating effects o f organizational and
environmental factors on the relationship between board involvement and performance
were mixed. In general, environmental factors were not found to moderate this
relationship, but two organizational factors were. Therefore, it is important to recognize
that the effects of board involvement on firm financial performance differ, depending on
the organizational conditions of the specific firm. Again, the implication is that the
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effects o f board involvement on performance may be more complex than previously
conceptualized, and that key contingencies should be considered for a more complete
understanding o f the conditions that influence the performance consequences of board
involvement.
Theoretically, the results for the first set o f hypotheses are provoking for a
number o f reasons. With respect to the arguments put forth by Lawrence (1997), this
dissertation provides only mixed evidence for board attributes as “reliable and valid”
indicators o f the underlying subjective board roles. In general, only certain board
attributes were found to significantly predict the types of board involvement. Director
classification, i.e., the distinction between inside and outside directors yielded significant
results. This is interesting, as the meaning and value of the inside/outside director
distinction has been widely debated. The results of this dissertation offer strong evidence
for the importance of the conceptual distinction between classifications of directors.
Specifically, the fact that insiders are negatively and significantly related to all three
specific dimensions of, as well as overall, board involvement is unanticipated from a
theoretical standpoint (as highlighted earlier). While these results are counter-theoretical
(from traditional institutional theory and strategic choice perspectives), they are also
intriguing and suggest alternative theoretical perspectives may be applicable.
One interpretation of the consistently negative significant relationships between
inside directors and board involvement is through a “knowledge” perspective. Boards
researchers have argued that boards need to have a high degree of specialized knowledge
and skills to perform effectively (Forbes & Milliken, 1999). Others have noted that an
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implicit assumption in the management literature is that expertise will be used. Jackson
(1992) suggests that the availability o f expertise in a group does not translate to use of
that expertise. Others have argued that boards require certain kinds o f tacit knowledge
(Nonaka, 1994) in order to effectively make strategic decisions. However, tacit
knowledge is also more difficult to transfer than explicit knowledge. It is likely that
insiders utilize more tacit knowledge in their board discussions and decision-making
processes, as they are on familiar ground- in their own firm. Outsiders, on the other
hand, may require more effective translation from tacit to explicit knowledge, as they are
operating in a different environment. If insiders are unable to use or communicate their
tacit knowledge effectively to influence board decision-making, then we could expect the
kind o f results that were found in this dissertation. This certainly provides an interesting
avenue for future research.
Methodologically, the results are also intriguing. The fact that board involvement
is significantly and negatively related to performance raises interpretation challenges.
First, this may be a chicken or egg kind of story. It is difficult to make sense of complex
relationships with just cross-sectional data. This research would greatly benefit from
additional years o f post-survey firm performance data. As it stands right now, we cannot
determine what is driving the relationship between board involvement and firm
performance. This study, then, can also serve as a caution to researchers as to the
limitations of cross-sectional research. As in other complex decision-making contexts, it
is likely that a lagged-time effect is more appropriate to capture the true effect of board
involvement on firm performance. In addition, the findings regarding the negative
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relationship between inside directors and board involvement suggest that in-depth
interviews with board members would be needed to more fully understand in what ways
they contribute to board operations.
Contributions
This dissertation is unique and significant for theoretical, empirical and practical
reasons. In this section I review the most significant contributions the dissertation makes
to each of these areas. Overall, the dissertation makes a significant contribution to the
board of directors literature in terms o f its approach, in addition to its results.
Theoretical. First, this dissertation offers a more complete test of the contextual
contingencies associated with antecedents and consequences o f board involvement than
prior studies. The dissertation utilizes a multi-theoretic, more fully specified model of
boards than previous research. This is important, because it allows us to incorporate the
full complexity o f the relevant board constructs simultaneously, rather than examining
each relationship separately. Second, the dissertation designates the construct of board
involvement as a central construct in boards research, rather than treating it as a
peripheral construct, as in previous studies. More importantly, I conceptualized specific
dimensions of what boards actually do to perform their roles and functions, in accordance
with institution theory and strategic choice theory. Focusing on the construct in a new
way, by highlighting and detailing the underlying processes associated with the construct,
enabled me to then directly measure those processes through the collection o f survey
data.
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Empirical. Empirically, this dissertation makes several contributions. First, this
dissertation takes important initial steps in testing direct relationships between board
attributes and processes of board involvement. These relationships have been assumed
by prior empirical work, but have never been tested. Thus, the issue of whether such
relationships in fact exist, has been the topic of many discussion and implications
sections o f boards research papers for years. Above and beyond the outcomes of the
actual tests, the fact that this dissertation contributes direct evidence to support and/or
refute those assumptions is a substantial contribution. Second, and equally noteworthy, is
the contribution and richness o f the unique data. The data collected for this dissertation is
unique in the sense that it comes from numerous archival sources as well as from the
nation’s largest scale survey source on boards of directors (Korn Ferry). Therefore, the
design o f this dissertation does not suffer from the same common method variance
limitations of previous empirical studies on boards. The survey instrument developed
for this dissertation is substantially more detailed than those utilized in the prior two
boards studies relying on survey data. Furthermore, the survey had an acceptable
response-rate, which is rare in large-scale surveys of executives at high levels. Third, the
design o f this study included tests of direct and moderating effects within the
comprehensive board of directors framework. This is an improvement over studies that
have just studied direct effects. Fourth, in working to detail the underlying processes
associated with the board involvement construct, I also created new constructs with high
reliabilities. Finally, this dissertation draws on a large-scale, Fortune 1000 sample, which
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has several advantages. This sample has been demonstrated in prior research to be highly
generalizable to large, diversified firms.
Practical. This dissertation offers practical contributions, as well. From a
practitioner perspective, this dissertation is important in that it advances our
understanding of the relationship between board attributes and board roles and functions,
and the impact of this relationship on firm performance. While prior work has
overlooked the essential question o f whether, and in what ways, board attributes
influence board roles and processes, this dissertation confronts this critical issue head on.
Corporations are struggling with the challenge to construct the “ideal” board for
monitoring and strategic (as well as other) purposes, and perhaps to gain legitimacy in the
eyes of their stakeholders and the general public. Examining the consequences of board
attributes on the performance of the board’s various roles and functions, as well as
overall firm performance, contributes importantly to efficient and effective corporate
performance. As it has been noted that from a practical standpoint, board structure (along
with TMT compensation) is one of the few factors in today’s complex, uncertain global
business environment that boards and top management can directly control (Ghoshal &
Nohria, 1989), therefore, the questions examined in this dissertation directly inform key
strategic decisions made every day by managers in Fortune 1000, and other, firms. The
results from this dissertation identify very different roles for inside and outside directors,
in addition to highlighting organizational and environmental contingencies. The
empirical evidence produced by this dissertation can be used by organizations similar to
those organization studied in the dissertation, to develop guidelines for how to construct
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their board o f directors, given their specific environment and organization conditions.
Finally, the results and discussion regarding the effect of board involvement on firm
performance suggest to top managers and directors that their involvement efforts may
take a long time to be reflected in firm operations and financial performance. Therefore,
expectations and evaluation o f directors might be more effective if this point is taken into
consideration.
Limitations
Although this dissertation has produced important results, a number of limitations
of this study should be acknowledged. In this section I discuss four main limitations (in
addition to the specific issues discussed immediately above) that should be addressed in
future extensions of the dissertation research.
First, this dissertation focused solely on the monitoring and strategic decision
support roles of the board. As explained in Chapter 2, this was for consistency and scope
reasons. While the dissertation takes an important first step in outlining the actions,
behaviors and underlying processes associated with the monitoring and strategic decision
support functions of the board, it does not present a comprehensive, detailed account of
the totality associated with the board’s multi-faceted involvement. Therefore, the
conceptualization of board involvement in this dissertation is incomplete. The literature
has identified additional board roles that should be included in subsequent research of
this type. Specifically, the resource acquisition, symbolic, and social roles of the board
require attention. With all o f the theoretically derived roles o f the board conceptually
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fleshed out, as has been done here with the monitoring and strategic decision support
roles, it is possible that different relationships between board attributes and board
involvement will emerge. This could also impact the relationship between board
involvement and performance.
Second, the survey instrument used in this dissertation relies on a single
respondent. This is an understandable problem, given the difficulty o f obtaining
responses to surveys in this field of research, but it is still a problem. It is critical to
obtain multiple respondents to assess the validity and reliability o f the responses, through
comparison to other respondents from the firm in general (simple inter-rater reliability),
and through comparison to different categories of respondents from the firm (e.g.,
compare a CEO response to an insider response to an outsider response).
Third, the study is limited by its cross-sectional research design. As is argued by
Cliff and Earleywine, “Thus, if the effect of an independent variable on a dependent
variable is mediated by a third variable, each variable must change in sequence” (1994:
17). Particularly in regards to the effects of board involvement on firm performance, this
dissertation would benefit from a number of years of post-survey firm financial
performance data to more adequately assess the nature, direction and sign of the
relationship.
Fourth, and finally, the research questions identified in this dissertation would
benefit from additional analytic methods. Specifically, it will be important in future
extensions o f this research to employ structural equation modeling to test the
hypothesized relationships. For example, in the case o f detailing the underlying
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processes associated with the various board roles and functions, I will develop a path
model that tests whether the distinct measures I have developed (frequency of time,
source of information, and type of expertise), predict board involvement. This type of
analysis is appropriate, as I’m not actually measuring board involvement, but rather,
board involvement would be the latent variable in a structural equations model.
Directions for Future Research
Future research in this area will benefit from addressing the above limitations of
this study. In addition, I have identified three broad directions for future research. The
first area for future research emerged directly from this dissertation. In the process of
developing the preliminary description of the underlying processes corresponding to each
board role, another omission in the literature became apparent. I could not identify any
empirical study which examined whether there are trade-offs between various board
attributes in terms of their ability to support/encourage different board roles. For
example, while independent outside members on a board may be desired from the
viewpoint of performing the “objective” monitoring function identified by agency
theorists, outsiders may not have the richest information and insights into the internal
operations of the firm necessary to conduct a meaningful evaluation. In a similar vein,
board members who have intimate knowledge o f the firm’s focal industry and
competitive practices may be valuable resources in the strategy formulation process but
they may not be effective in conducting an objective appraisal and critical ex-post
evaluation o f the strategy they championed to begin with. In other words, there may not
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be an “ideal” board, i.e., one, which can be equally effective in performing the control,
strategy support, resource acquisition, and symbolic functions. Different board roles may
be critical for different organizations and even for the same organization at different
points in time. This trade-offs issue applies not only to the various board roles, but also
to additional organizational, environmental and contextual contingencies. For example,
the strategic decision support function may be particularly critical for small and newly
established firms that tend to rely on their boards for assistance in development of
fundamental strategic direction, whereas the monitoring function may become more
critical once initial competitive challenges have been met and the firm faces challenges
related to management of its assets and inter-firm relationships. Therefore, one of my
first steps in future research will be examining possible trade-offs across board roles.
The second direction for future research concerns the intersection of boards of
directors and globalization. Although governance structures (e.g., boards of directors)
have been identified as critical determinants of a firm’s ability to successfully deal with
complexity arising from international operations (Prahalad, 1990; Bartlett & Ghoshal,
1989; Hitt, Ireland, & Hoskisson, 1999), very little empirical work has examined this
relationship. One of the few recent papers that touched on this issue, to some degree,
found that board size and proportion of outsiders were positively associated with a firm’s
degree of internationalization (Sanders & Carpenter, 1998). Again, though, this study
relies solely on board attributes as proxies for board actions and behaviors. Therefore, an
opportunity exists to further our understanding of the underlying processes through which
firms use their boards of directors to enhance their performance in a very complex
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managerial decision-making environment. Based on this apparent opportunity, I have
already had the opportunity to work with researchers from USC, CEO and Korn Ferry to
create a questionnaire addressing this topic. This questionnaire was included in the 1999
Kom Ferry Annual Boards Survey, which has already been returned. We will shortly
begin analysis o f this data.
Finally, the last area I have identified for future research is the area of new firms.
This area emerged as a consequence of considering the generalizability o f my dissertation
findings. In general, board researchers have focused their attention on studying boards
of large firms. This is most likely due to the fact that archival data is available on larger,
public firms. In contrast, there is little conceptual or empirical research on the role of
boards of directors in small and new firms. We do not know in what ways the
expectations and functions of the board of directors in small and new firms are similar to
or different from those of the board of directors in large, Fortune 1000 firms. Therefore,
I have identified a number of specific research questions 1 will examine, now that the
dissertation research is completed. From a conceptual standpoint, it is important to
examine the role that the board of directors plays over the course o f an organization’s
lifetime. Strategy researchers have developed models and frameworks to understand the
evolution o f other key strategic developments over time and as a firm grows and changes
(Greiner, 1972), but boards of directors researchers have not yet developed such
frameworks concerning the role of the board. Thus, conducting research on this topic
will contribute to filling critical gaps in our understanding o f the role o f the board. I am
particularly interested in the role of the board in the early stages o f firm development.
114
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Specifically, I will begin my empirical examination o f this area for research by looking at
the role of the board o f directors at the time of Initial Public Offering (IPO). This is a
critical time for younger firms, as they engage in symbolic legitimation activities (e.g.,
mimetic isomorphism) which can be examined from an institutional theory perspective
(DiMaggio & Powell, 1983), as well as strategic activities which can be studied from a
strategic choice perspective (Child, 1972).
Conclusion
Overall, this dissertation contributes to the corporate governance literature by
providing an empirical test of the relationship between board attributes and board
involvement and then examining the nature of the consequences in terms o f performance.
Specifically, it offers empirical evidence to support a wide body of prior research that has
focused on the importance of the distinction between inside and outside directors for
strategy research. Additionally, it develops more fine-grained board involvement
constructs that enable researchers to directly measure types and processes of board
involvement. Finally, it suggests specific directions for future research that stem from
and build on this empirical study. On a more general level, this dissertation highlights
the value o f conducting rigorous empirical research examining the specific underlying
processes o f board behavior.
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123
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Appendix I: Results of two-tailed test for Representativeness.
Overall Conclusion from T-Tests - Significantly different in two measures of size
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
EMPS981 269 96.00 345175.00 30963.7138 52243.4048
SALES981 283 16231000.00 144416000000.00 7531306215.5477 14422782229.4033
Valid N
(listwise)
269
T-Test
One-Sample Statistics
N Mean Std. Deviation
Std. E rror
Mean
EMPS981 269 30963.71 52243.4048 3185.3366
One-Sample Test
Test Value = 430642.54
t df Sig. (2-tailed)
Mean
Difference
95% Confidence
Interval of the
Difference
Lower Upper
EMPS981 -125.475 268 .000 •399678.8 •405950 -393407
T-Test
One-Sample Statistics
N Mean Std. Deviation
Std. E rror
Mean
SALES981 283 7.5E+09 1.442E+10 8.6E+08
One-Sample Test
Test Value = 104023.93
t df Sig. (2-tailed)
Mean
Difference
95% Confidence
Interval of the
Difference
Lower Upper
SALES981 8.784 282 .000 7.53E+09 5.8E+09 9.2E+09
124
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Appendix II: Results of Factor Analyses
Rotated Component Matrix
INFORMATION DIMENSION
Component
Information
External
Information
Internal
information frequency: organizational climate measures .481
information frequency: benchmarks of company performance .724
information frequency: key process benchmarks vis other sectors .596
information frequency: input of institutional investors .533
information frequency: input of major suppliers .769
information frequency: relevant national & global economic
indicators
.724
information frequency: detailed scenarios of threats/opportunities .691
EIGEN VALUES 2.748 1.025
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a Rotation converged in 3 iterations.
Component Matrix
EXPERTISE DIMENSION
Component
Expertise
board independent to question managers .614
board has expertise to evaluate .709
board raises issues to senior mgmt .642
board controls meeting agenda .617
CEO supports strong board .712
board delegates to committees .645
board works with senior mgmt .762
board active in strategy setting .730
EIGEN VALUES 3.707
Extraction Method: Principal Component Analysis.
1 component extracted.
125
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Appendix II (continued): Results of Factor Analyses
Rotated Component Matrix
TIME DIMENSION
Component
Time Strategy
Time
Monitoring
Time
Symbolic
time: identifying threats .685
time: long range strategy discussion .755
time: evaluate implementation .622 .415
time: evaluate perf & comp of mgmt .840
time: succession planning .837
time: external company relations .556
time: fiduciary duties .846
time: discuss major transactions .655
EIGEN VALUES 2.345 1.366 1.131
Extraction Method: Principal Component Ana
Rotation Method: Varimax with Kaiser Norma
ysis.
ilization.
a Rotation converged in 4 iterations.
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Appendix III: Alpha Reliability Coefficients for Survey Measures
Construct Scale and Data Source Aloha Reliability
(Variable Code) Coefficient
Amount of Time spent on
Monitoring Activities
(timmon)
Q: “Please rate how much time your board
spent last year on each of the following
activities: (Circle one for each item)
1. Evaluating the performance and sening
the compensation of top managers
including the CEO.
2. Succession planning
5-point scale:
l=aImost none; 2=little time; 3=moderate
amount of time; 4=lots of time; 5=most time
Alpha = .6348
Amount of Time spent on
Strategic Decision Support
Activities
(timstrat)
Q: “Please rate how much time your board
spent last year on each of the following
activities: (Circle one for each item)
1. Identifying possible threats or
opportunities critical to the future of the
company.
2. Participating in long-range strategic
discussions
3. Monitoring and evaluating strategy
implementing
4. Discussing Major transactions (e.g.,
mergers, acquisition, and/or takeovers)
5-point scale:
l=almost none; 2=little time; 3=moderate
amount of time; 4=lots of time; 5=most time
Alpha = .6348
Frequency of Information
from external sources
(infext)
Q: How frequently does the board receive
the following kinds of information? (Circle
one for each item).
1. Benchmarks of company performance
versus similar companies
2. National and global economic indicators
relevant to the future of the company
3. Detailed scenarios of future threats or
opportunities critical to the company
5-point scale:
l=never; 2=rarely; 3=sometimes;
4=regularly; 5=all the time
Alpha = .6094
127
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Appendix III (continued): Alpha Reliability Coefficients for Survey Measures
Frequency of Information
from internal sources
(inflnt)
Q: How frequently does the board receive
the following kinds of information? (Circle
one for each item).
1. Results of employee surveys and other
measures of the organizational climate
2. Input from institutional investors
3. Input from the firm’s major suppliers
4. Input from consultants especially
commissioned by the boanl.
5-point scale:
1 =never; 2=rarely; 3=sometimes;
4=regularly; 5=all the time
Alpha = .5446
Board Expertise in
Monitoring (expmon)
Q: To what extent do you agree or disagree
with the following statements about your
board?
1. It has the independence to ask senior
managers hard questions
2. It raises issues or questions that senior
management might not have considered
3. It has control over the meeting agenda
4. It has a CEO who supports a strong
board
5-point scale:
l=strongly disagree; 2=disagree; 3=neither
disagree nor agree; 4=agree; 5=strongly
agree
Alpha = .66
Board Expertise in
Strategic Decision Support
(expstrat)
Q: To what extent do you agree or disagree
with the following statements about your
board?
1. It has sufficient relevant expertise to
evaluate strategic options
2. It works in partnership with senior
management
3. It is actively involved in the strategy
setting process
4. It delegates work effectively to
committees
5-point scale:
l=strongly disagree; 2=disagree; 3=neither
disagree nor agree; 4=agree; 5=strongly
agree
Alpha = .72
128
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Appendix IV: Histograms for Survey Scales
Histogram
120^-----------------------------------------------------
1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Time: Strategy
Histogram
120 ------------------------------------------------------
1.00 2.00 3.00 4.00 5.00
1.50 2.50 3.50 4.50
Time: Monitor
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Appendix IV (continued): Histograms for Survey Scales
Histogram
Std. Dev - .66
M ean = 3.55
N = 310.00
Info: External
Histogram
120----------------------
1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50
Info: Internal
1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
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Appendix IV (continued): Histograms for Survey Scales
Histogram
2.00 2.50 3.00 3.50 4.00 4.50 5.00
Expertise: Monitoring
Histogram
120 - -----------------------------------
2.00 2.50 3.00 3.50 4.00 4.50 5.00
Expertise: Strategy
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Appendix IV (continued): Histograms for Survey Scales
Histogram
50----------------------
Board Involvement
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Appendix V: Calculations for Environment Measures
Munificence: Abundance of resources in an industry.
Measurement: Regression slope coefficient, divided by mean value. Coefficients are
based on regression of time against value o f shipments. Estimate for any year is based on
the 5 preceding years, i.e., munificence estimate for 1998 is based on data from 1993-
1998. Industries are defined using four-digit SIC codes.
Data Source: Census of Manufacturers, the Dunn and Bradstreet’s Key Industry Norms
Directories, the Robert Morris Associates, Directories, and Troy Almanac Directories.
Dynamism: Instability or volatility in an industry.
Measurement: Standard error of regression slope coefficient divided by the mean value;
using same regression model as for munificence.
Data Source: (same as above)
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Asset Metadata

Creator Baack, Sally Ann (author)

Core Title Board involvement in monitoring and strategy making: Antecedents and consequences

School Graduate School

Degree Doctor of Philosophy

Degree Program Business Administration

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag business administration, management,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Rajagopalan, Nandini (committee chair), Bhambri, Arvid (committee member), Cummings, Thomas (committee member), Earleywine, Mitchell (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-117703

Unique identifier UC11329539

Identifier 3041432.pdf (filename),usctheses-c16-117703 (legacy record id)

Legacy Identifier 3041432.pdf

Dmrecord 117703

Document Type Dissertation

Rights Baack, Sally Ann

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA