Does board turnover enhance firm performance? A contingency approach

• Published date: 01 May 2023
• Author: Wei Qiang,Sze‐Sze Wong,Kevin Koh,Yen H. Tong
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/corg.12455

EDITOR'S PICK

Does board turnover enhance firm performance?

A contingency approach

Wei Qiang

1

| Sze-Sze Wong

2

| Kevin Koh

2

| Yen H. Tong

2

1

School of Economics and Management,

Harbin Institute of Technology, Shenzhen,

Shenzhen, China

2

Nanyang Business School, Nanyang

Technological University, Singapore

Correspondence

Sze-Sze Wong, Nanyang Business School,

Nanyang Technological University,

50 Nanyang Avenue, Singapore 639798.

Email: aszewong@ntu.edu.sg

Funding information

Humanities and Social Sciences Development

Special Fund of Harbin Institute of Technology,

Shenzhen, Grant/Award Number:

GD11000024; Shenzhen Key Research Base of

Humanities and Social Sciences, Grant/Award

Number: KP191001; Shenzhen Peacock Talent

Plan Start-up Research Fund, Grant/Award

Number: GA11409008; Ministry of Education,

Singapore, Grant/Award Number: RG71/16

Abstract

Research Question/Issue: Does board turnover improve future firm performance?

Our research investigates whether and when board turnover is beneficial from an

information processing perspective.

Research Findings/Insights: Drawing from information processing theory, we pro-

pose and test a novel model that explains how magnitude of board turnover influ-

ences future firm performance, and what pre-turnover board characteristics mitigate

the negative impact of board turnover on future firm performance. We find that

board turnover negatively influences future firm performance, and pre-turnover board

meeting frequency, board job-related diversity, CEO power relative to the board, and

board tenure moderate this negative impact.

Theoretical/Academic Implications: Past findings of the impact of board turnover

are limited and equivocal, suggesting the need to conduct more systematic investiga-

tion to explain post-turnover firm performance and to consider boundary conditions

that affect this relationship. Building on information processing theory, we explain

that the negative impact of board turnover on future firm performance is due to dis-

ruption of the board's information elaboration ability. Furthermore, we advance the

novel perspective that boards which developed higher information elaboration ability

prior to turnover can better mitigate the disruption in information processing resulting

from board turnover.

Practitioner/Policy Implications: There are costs to board turnover that should be

considered seriously. Our study demonstrates that higher magnitude of board turn-

over leads to poorer subsequent firm performance. The importance of pre-turnover

board's information elaboration ability implies that board turnover should be planned

and actively managed—just like CEO succession planning—to minimize information

processing disruption from turnover.

KEYWORDS

corporate governance, board of directors, board turnover, board membership changes,

information processing

1|INTRODUCTION

Board turnover refers to changes in board membership through the

arrival or departure of formally designated members of the board.

Calls for more board turnover are increasing among investors and the

corporate governance community (Institutional Shareholder

Services, 2017). Underlying such calls is the premise that the addition

or replacement of directors would overcome potential problems of

Received: 8 June 2021 Revised: 13 April 2022 Accepted: 13 April 2022

DOI: 10.1111/corg.12455

Corp Govern Int Rev. 2023;31:405–424. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd. 405

stagnant knowledge or cozy relationships with management that

accompany stable boards (Vekshin, 2015).

The veracity of this growing belief that board turnover is benefi-

cial to firm performance in the corporate governance community

requires investigation. Yet, past research on board turnover tends to

focus on its antecedents, highlighting firm performance and environ-

ment changes as drivers for membership changes in the board

(Arthaud-Day et al., 2006; Hillman et al., 2000; Marcel &

Cowen, 2014; McDonnell & Cobb, 2020). For example, declining firm

performance and fraudulent activities (Arthaud-Day et al., 2006;

Marcel & Cowen, 2014) or regulatory changes (Hillman et al., 2000)

trigger board turnover. We know much less about whether board

turnover improves or hinders future firm performance. Exceptions are

Anderson and Chun's (2014) descriptive study of a sample of S&P

500 firms and Liu et al.'s (2013)) study of Taiwanese firms. Anderson

and Chun (2014) find that a modest amount of board turnover

improves firm performance. Liu et al. 's (2013) study, however, dem-

onstrates that board turnover negatively impacts firm performance.

The equivocal findings of and limited research on the consequences

of board turnover point to the need for more systematic research in

this area.

Agency theory and resource dependence theory have been the

two dominant theoretical lens to explain the influence of board struc-

ture on firm performance or decisions (Deutsch, 2005; Hillman &

Dalziel, 2003). Based on the premise that vigilant board monitoring

assures that management interests do not diverge from those of

owners, agency theory recommends board independence and separa-

tion of the positions of CEO and Chairman of the board (Dalton

et al., 2007). Resource dependence perspective views directors as

resource providers who offer counsel to management, therefore

emphasizing various dimensions of board diversity that would provide

management with a rich resource pool to inform firm decisions or

enhance firm performance (Haynes & Hillman, 2010; Westphal &

Bednar, 2005). In this light, one approach to understand the impact of

board turnover is to examine how individual characteristics of incom-

ing and outgoing directors influence changes in board structure such

as changes in board independence and board diversity. Based on the

tenets of agency and resource dependence theories, impact of board

turnover on firm performance would depend on whether board inde-

pendence or diversity improves after the turnover. However, research

evidence shows that the impacts of board independence and board

diversity on firm performance are decidedly mixed (Bhagat &

Black, 1999; Hillman, 2015; Uribe-Bohorquez et al., 2018).

The lack of empirical support for theoretical models of board

independence and board diversity suggests the need for an alternative

theoretical approach to understand how board turnover might influ-

ence firm performance. We offer the information processing perspec-

tive as a novel and viable theoretical framework for two key reasons.

Information processing refers to the acquisition, interpretation, and

integration of information for decision making, and how groups pro-

cess information impacts the quality of their decisions (Hinsz

et al., 1997; Mesmer-Magnus & DeChurch, 2009; van Knippenberg

et al., 2004). First, boards of directors are decision-making groups that

process complex information (Forbes & Milliken, 1999). Boards with

greater information processing abilities to manage their information

load are more effective at performing their functions (Boivie

et al., 2016). Second, there are two established literatures in social

psychology and management that have examined how turnover in

small groups affects information processing and group performance

(Heavey et al., 2013; Li & van Knippenberg, 2021). The information

processing perspective therefore provides strong theoretical and

empirical foundations to explain and predict how board turnover influ-

ences future firm performance.

Drawing from the information processing perspective, our model

posits that the magnitude of board turnover—which refers to the pro-

portion of outgoing and incoming directors—negatively impacts future

firm performance by disrupting the board's information elaboration

ability. In addition, we advance the notion that boards with higher pre-

turnover information elaboration ability can better mitigate the disrup-

tion in information processing resulting from board turnover. Our

findings from a sample of 3890 publicly listed U.S. firms from 2003 to

2015 largely support our theoretical model.

Our findings contribute to the literatures on corporate gover-

nance and information processing in two main ways. First, to the

research on corporate governance, we deviate from dominant agency

or resource dependence perspectives to offer information processing

as a promising theoretical perspective to explain the disruptive

impact of board turnover. Although we do not measure and test the

intervening information elaboration process, we leverage past theory

and findings from social psychology and management research to

develop and test our arguments about how board turnover nega-

tively influences firm performance. By casting the effects of board

turnover in terms of magnitude of membership change, our findings

add new theoretical understanding to how board turnover might

impact subsequent firm performance. Second, to the research on

information processing, our findings underscore the role of pre-

turnover information elaboration ability of groups as a way to miti-

gate the disruptive impact that turnover triggers. As documented in

Li and van Knippenberg's (2021) review of information processing in

groups, past research tends to focus on individual member character-

istics or group attributes after the turnover to determine whether

groups can adapt to the disruption caused by turnover. Our research

advances this perspective by highlighting the importance of pre-

turnover group characteristics as determinants of whether a group

can cope with the information processing disruption brought about

by turnover.

2|LITERATURE REVIEW AND

HYPOTHESES DEVELOPMENT

2.1 |Literature review of board turnover and

information processing

Extant research on board turnover has focused on its antecedents,

providing consistent evidence that board turnover increases with the

406 QIANG ET AL.