CEO Outside Directorships and Firm Performance

1. CEO Outside Directorships and Firm Performance Marta Geletkanycz Boston College Brian Boyd Arizona State University Academy of Management Journal, forthcoming

2. Who Do You Want as Your MD?

3. The Medieval Medical Practitioner • Medical training (circa 1200) emphasized rhetoric and debate • Writings of the Greeks held to be be infallible -- e.g., “De Materia Medica” used as medical text for 1,500 years • Believed in airborne invisible objects which could cause disease -- but called spirits, not germs • Bloodletting the treatment of choice

4. Governance Interest is Worldwide • Governance guidelines exist on a wide variety of stock exchanges: From Austria, to Malaysia, to Pakistan • Borsa Italiana (2006): ‘good governance is an effective instrument to increase value and to protect the investments of their shareholders’. • Governance ratings done by ISS and others on firms in many nations • Governance was listed as a key issue at fall 2010 Dubai debt conference

5. Medieval or Modern Practice? Comments from ‘best practice’ advocates: • “If contradictory research did exist, such standards would never have been developed.” • “Good governance goes beyond studies”, Deputy Director of ISS • No one “seriously expected the Dey committee to recommend fundamental changes” -- committee member

6. My Focus on Governance Research • Many ‘good governance’ guidelines inconsistent with empirical evidence • Outsiders (SMJ 1994, 2005) • Duality (SMJ, 1995) • Overall commentary on codes (EBJ, 2000) • Boundary conditions for theories • SMJ 1995, JMS in press • Methodological emphasis to tease out nuanced effects • Construct measurement (discretion, board control, CEO human capital) • Contingency modeling

7. 2001 SMJ with Geletkanycz & Finkelstein on CEO outside board ties While boards value CEO external ties, markets react negatively.

8. Growing Opposition to CEO Outside Board Ties • 1991: Business Week describes limits on outside seats as a ‘treatment to cure CEO disease’ • 1996: NACD recommends curbs on outside ties • 1997-98: Business Roundtable and Council of Institutional Investors recommend curbs • 2005: Percent of large firms with limits on their own CEOs is 51%, up from 11% ten years prior • 2009: Mean number of CEO outside board seats drops to 0.7, down from 1.9 in 1990

9. Agency Perspective on CEO Outside Board Ties • Outside seats a distraction from primary responsibilities • CEO benefits in the form of monetary gain and improved standing vis-a-vis social capital • CEOs with external board seats may be better able to thwart monitoring by the board, due to higher status

10. Networks Perspective on CEO Outside Board Ties • CEO ties function in a similar manner as board ties – e.g., access to information, resources, etc. • Status of CEO ties facilitates access to a broader range of exchange partners • Ties are socially complex and difficult to replicate, giving them the characteristics of a strategic resource • Outside boards are a lower risk setting to assess new strategies and tactics

11. A Mid-Range View:Situational Benefits • H1: CEO ties positively related to firm performance (embeddedness view) • H2: CEO ties negatively related to firm performance (agency view) • H3: CEO ties are more beneficial in low versus high growth settings • H4: CEO ties are more beneficial in low concentration settings • H5: CEO ties are more beneficial in less diversified firms

12. Sample Characteristics • 460 firms from the 1987 Fortune 1000 listing • CEOs maintained, on average, one directorate link to another Fortune firm, and less than two outside board seats overall. • One third of CEOs had no outside directorships at all. • Five percent of CEOs had four or more outside directorships • Sample is consistent with findings reported in other studies (Booth & Deli, 1996, Davis, 1996).

13. Total Directorships Average Size Average Profitability ROA ROS Fortune Directorships Prior Performance FirmSize .98 (25.0) 1.0 CEO Directorships .84 (20.2) .06 (1.3) Moderators Industry Growth Industry Concentration Diversification .21 (4.0) -.10 (2.2) 1.0 Subsequent Performance .35 (8.1) .32 (2.6) .09 (2.0) CEO Human Capital

14. Results for H3 • Path coefficient for CEO ties to performance was significantly higher in the low growth setting

15. Results for H4 • Path coefficient for CEO ties to performance was significantly higher in the low concentration setting

16. Results for H5 • Path coefficient for CEO ties to performance was significantly higher in the low diversification setting

17. Implications for Theory/Practice • Empirically, little evidence of negative effects of CEO ties on subsequent firm performance • Firms benefit most when CEOs forge outside ties in low growth and fragmented market structures – i.e., in challenging markets • Less diversified firms benefit more due to greater CEO involvement for single versus portfolio organizations

18. A Strategic View of Governance Practice • Reform efforts which have limited empirical and theoretical support should be re-assessed • Topic emphasis should be shifted – e.g., more attention on the attributes of directors versus simplistic (outsider/NED) distinctions • Broader recognition of the role of bundles of governance structures, and their implications for firm performance

19. What’s Next? Methods side • Content analysis of contingency modeling in 30 years of SMJ articles • Early-stage project on citation analysis of contingency studies Theory side • Multi-theoretic study of determinants of within-group ties among business group members • Contingency study of the interaction of CEO power and governance on performance among S&P 500 firms