CEO outside directorships and managerial efficiency: The role of host board capital

• Author: Canan C. Mutlu,Steve Sauerwald,Sunay Mutlu
• Published date: 01 January 2021
• Date: 01 January 2021
• DOI: http://doi.org/10.1111/corg.12337

ORIGINAL ARTICLE

CEO outside directorships and managerial efficiency: The role

of host board capital

Canan C. Mutlu

1

| Sunay Mutlu

1

| Steve Sauerwald

2

1

Coles College of Business, Kennesaw State

University, Kennesaw, Georgia, USA

2

School of Business, The University of Illinois

at Chicago, Chicago, Illinois, USA

Correspondence

Canan C. Mutlu, Coles College of Business,

Kennesaw State University, Kennesaw, GA,

USA.

Email: cmutlu@kennesaw.edu

Abstract

Research Question/Issue: Do CEO outside board directorships improve or reduce

CEO managerial efficiency? What is the role of host board capital in this relationship?

Research Findings/Insights: We explore the value of CEO outside directorships on

managerial efficiency by identifying a unique empirical setting where a CEO's number

of outside board seats is exogenously decreased by a merger that eliminates the

board of a host firm the CEO is serving on. Using this event as our empirical instru-

ment, we find that outside directorships decrease a CEO's managerial efficiency

while host board capital reduces this effect.

Theoretical/Academic Implications: Proponents view outside board service as a

valuable leadership development tool to mentor the CEO while others promulgating

an agency view argue that outside board service detracts from the CEO's ability to

improve the efficiency of the home firm as it leads to busyness of the CEO. We shed

light on this debate by arguing that CEO outside directorships might reduce CEO's

managerial efficiency; however, this effect might be contingent on the characteristics

of the host board.

Practitioner/Policy Implications: Our findings offer insights to practitioners about

the value of multiple directorships and the importance of the host board capital while

informing policy makers about the potential restrictions on outside board

assignments.

KEYWORDS

corporate governance, board capital theory, board of directors, CEO managerial efficiency,

CEO outside directorships

1|INTRODUCTION

Do CEO outside board directorships help or impede CEO manage-

rial efficiency? Managerial efficiency is an important concern for

CEOs as it affects the financial performance of their firms. CEO

outside board directorships have a crucial impact on managerial

efficiency because previous research suggests that managerial effi-

ciency requires high levels of attention to the efficient use of firm

resources while keeping up-to-date with management practices to

optimize the efficient use of resources (Bloom & Van

Reenen, 2007; Hambrick & Cannella, 2004). Drawing on an

embeddedness perspective, previous research suggests that CEO

outside directorships benefit the CEO's home firm by granting

access to valuable resources in other boardrooms and the corporate

elite (Geletkanycz & Boyd, 2011) and by allowing first-hand insights

into successful firm strategies (Boivie, Graffin, Oliver, &

Withers, 2016; Oh & Barker, 2018). Promulgating an agency view

of CEO outside directorships, proxy advisors and the media label

connected directors often as “overboarded”and “busy”(Fich &

Shivdasani, 2006) suggesting that outside directorships consume

the scarce time of the CEO while remitting little or no value to the

CEO's own firm (Conyon & Read, 2006; Hauser, 2018).

Received: 21 January 2020 Revised: 7 July 2020 Accepted: 9 July 2020

DOI: 10.1111/corg.12337

Corp Govern Int Rev. 2021;29:45–66. wileyonlinelibrary.com/journal/corg © 2020 John Wiley & Sons Ltd 45

Understanding the impact of outside directorships on managerial

efficiency is therefore critical to reconcile these disparate views in

the literature.

In exploring the impact of outside directorships on managerial

efficiency, we consider the potential merits of host board capital.

Board capital refers to the resource provision role of the corporate

board and is a function of the skills, expertise, and legitimacy of its

members (Hillman & Dalziel, 2003; Sauerwald, Lin, & Peng, 2016). The

resource provision potential of the host board might compensate for

some of the disadvantages of CEO outside directorships. Specifically,

host boards with access to peer CEOs and directors with more diverse

backgrounds offer ample learning opportunities. Peer CEOs share rel-

evant and up-to-date experiences that help advance the CEO's

decision-making skills and managerial efficiency (Davis, 1991; Oh &

Barker, 2018). In the same vein, host board diversity increases the

CEO's exposure to diverse resources, heterogeneous information, and

wider networks (Carter, Simkins, & Simpson, 2003; Zhu, Shen, &

Hillman, 2014). Acknowledging the unique attributes of host boards,

we investigate how the characteristics of the host board affect mana-

gerial efficiency in a CEO's home firm.

To explore our questions, we use a new measure of managerial

efficiency that is created and validated by Demerjian, Lev, and

McVay (2012). To address the endogeneity problem between mana-

gerial efficiency and CEO outside board directorships, we use a quasi-

experimental setting where a CEO's number of outside board seats is

exogenously decreased by a merger event that eliminates the board

of the host firm (Hauser, 2018). This identification provides us with an

intuitive and unique instrument, which clearly affects the number of

outside directorships with no direct effect on managerial efficiency.

Overall, our main finding shows that CEO outside board service has a

negative impact on managerial efficiency. Specifically, by accepting a

new board seat, an average CEO will drop to the bottom 25th percen-

tile of managerial efficiency distribution. Our finding indicates that

efficient use of firm resources requires a clear focus on firm internal

operations and an up-to-date understanding of industry trends both

of which require focus and time. Outside board appointments, there-

fore, can be viewed as an additional toll on the CEOs' valuable time

that affects their attentional capacity of managing firm operations

efficiently. However, our contingency findings suggest that while

outside directorships are in general detrimental to managerial effi-

ciency, CEOs might benefit from appointments to host boards with

significant board capital. Specifically, our findings show that host

boards with more CEO directors and more diverse board structure

reduce the adverse effect of a CEO's outside board service on her

managerial efficiency.

With this study, we aim for two contributions. First, we investi-

gate a new perspective in terms of how CEO managerial efficiency is

affected by the CEO's outside directorships. The past literature has

examined firm performance outcomes of CEO outside directorships

including return on assets (Geletkanycz & Boyd, 2011), Tobin's

q(Hauser, 2018), or market reaction (Perry & Peyer, 2005; Rose-

nstein & Wyatt, 1994). We turn our attention to managerial effi-

ciency, which is an overlooked precursor to firm performance and

corresponds with executives' time management (Porter &

Nohria, 2018). Defined as managers' ability, “relative to their industry

peers, in transforming corporate resources to revenues”(Demerjian

et al., 2012, p. 1229), managerial efficiency enables us to uncover the

relationship between the busyness arguments of outside directorships

and executives' ability to learn how to manage firm resources effi-

ciently through learning from other directors. Unlike other measures

of firm performance, which can be affected by factors outside of man-

agement's control such as media mentions or stock volatility, manage-

rial efficiency is highly attributable to managerial ability as it is purged

of firm and industry level determinants of performance.

Second, we highlight the importance of the host board context in

which CEO outside directorships may affect managerial efficiency by

drawing on board capital and agency theories (Hillman &

Dalziel, 2003; Zona, Gomez-Mejia, & Withers, 2018). The past litera-

ture has emphasized the importance of a midrange view between pos-

itive and negative consequences of outside board services by

examining industry level contingencies (Geletkanycz & Boyd, 2011).

We complement this view by investigating the effect of host boards.

Unlike other external contingencies such as industry growth or com-

petition, firms have more control over which boards their CEOs can

sit on. We show that not all directorships will equally affect CEOs'

managerial efficiency.

2|THEORETICAL BACKGROUND

2.1 |Managerial efficiency

An important indicator of how well CEOs perform is how efficiently

they utilize and orchestrate existing firm resources to generate higher

revenues than industry peers or minimize resource use to sustain cur-

rent sales levels (Demerjian et al., 2012). The efficient management of

firm resources is a necessary condition to achieve competitive advan-

tage (Porter, 1996), and CEOs are primarily responsible for the effi-

cient use of firm resources (Chadwick, Super, & Kwon, 2015).

Companies increasingly compete on efficiency to be faster and nim-

bler than the competition and to “wresting new efficiencies from exis-

ting assets”(McGrath, 2013). As a result, firms are increasingly

rewarded for efficient management. For instance, shareholders

respond positively to firing CEOs with a track record of low efficiency

(Demerjian et al., 2012), and creditors respond with better credit

ratings when CEOs utilize firm resources efficiently (Bonsall, Hol-

zman, & Miller, 2017).

The existing literature has so far examined the consequences of

managerial efficiency such as investment decisions (Bertrand &

Schoar, 2003; García-Sánchez & García-Meca, 2018), innovation out-

comes (Chen, Delmas, & Lieberman, 2015), earnings forecasts

(Demerjian, Lev, Lewis, & McVay, 2013), and corporate social respon-

sibility (García-Sánchez, Aibar-Guzmán, Aibar-Guzmán, &

Azevedo, 2020; Yuan, Tian, & Lu, 2019). The factors that enhance or

impede managerial efficiency have received relatively less attention.

Firms may respond to the need for the efficient management of their

46 MUTLU ET AL.