A Fine-Grained Analysis of Director Dependence: Examining Board Composition in Detail

TLDR: In this article, the authors examine the relationship between board members' dependence on the CEO and the corporation itself and find that reciprocated interlocks are positively associated, and inside directors are negatively associated, with the presence of antitakeover provisions.

Abstract: Past corporate governance research that has incorporated the concept of directors' dependence on the CEO has operationalized dependence in numerous ways, often aggregating various indicators into a single construct. We extend this research with an examination of individual indicators of director dependence by partitioning director relationships into six categories. Relying on agency theory in combination with other organizational theories, we test hypotheses about relationships between the different categories of director dependence and the presence of antitakeover provisions and golden parachutes. We find that reciprocated interlocks are positively associated, and inside directors are negatively associated, with the presence of antitakeover provisions. Implications for theory, method, and practice are discussed. Introduction The relationships that corporate board members share with the CEO and/or the corporation itself have been of interest to researchers and governance activists for years. In both realms, the conventional wisdom holds that directors who are in some way dependent on the CEO are more likely to be derelict in their fiduciary duties to stockholders than wholly independent directors. Researchers, most of whom rely on agency theory, have formalized the argument and operationalized its constructs in myriad, but largely unsystematic, ways. Corporate governance activists agitate for independence, frequently by asking or demanding that directors with specific kinds of relationships with the CEO or the organization be precluded from serving on the board. Although these arguments are grounded in well-accepted theory, and activists have been quite successful in bringing about change, the empirical record on the consequences of board composition is mixed (e.g., Dalton, Daily, Ellstrand, & Johnson, 1998; Westphal & Milton, 2000; Zahra & Pearce, 1989). in this paper, we investigate one factor that may help account for the inconsistent findings across studies--alternative and potentially conflicting operationalizations of the director dependence construct. The confusion associated with the conflicting operationalizations has theoretical, methodological and practical implications. The theoretical underpinnings vary for the different forms of director dependence on the CEO. For example, dependence that arises from directors who are related to the CEO is likely to be qualitatively different from that expected from directors who are also current officers. Different relationships may connote fundamentally different interests that are being represented on the board. Methodologically, the inconsistent operationalizations of the dependence construct across studies may account for the mixed empirical record, rendering tests of theory inconclusive in cases where the central construct is measured differently (Dalton, Daily, & Johnson, 1999). Practically, the need to disentangle the different forms of director dependence are important if for no other reason than that corporate governance activists, many of whom wield considerable market power, continue to agitate for the removal of several classes of directors. Institutional investors have become very willing to engage in publicized conflicts with the managers of specific firms in public and private forums (Serwer, 1996; Useem, 1993); activists publish books (e.g., Monks & Minow, 1995) and distribute other materials that detail their recommendations for board composition (e.g., Minow & Bingham, 1995); governmental agencies and stock exchanges impose reporting requirements to explicitly disclose the variety of potentially conflicting relationships (Daily & Dalton, 1994); and the business press commonly publishes stories and commentary devoted to issues of corporate governance (e.g., Byrne, 1997; Colvin, 2001; Lavelle, 2001). Thus, a more detailed examination of the kinds of relationships that exist between directors, the CEO, and the corporation itself may provide theoretical and practical insights for those interested in corporate governance. …