Does the Team Leverage the Board's Decisions?

• DOI: http://doi.org/10.1111/j.1467-8683.2009.00772.x
• Author: Julio Vecino Gravel,Ma Mar Villegas Periñan,Marta Dominguez De La Concha,Carmen Barroso Castro
• Published date: 01 November 2009
• Date: 01 November 2009

Does the Team Leverage the Board’s Decisions?

Carmen Barroso Castro*, Marta Dominguez De La Concha,

Julio Vecino Gravel, and MaMar Villegas Periñan

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study analyses the form of the board-TMT interaction and the f‌irm’s level of strategic

change. Relatedly, we explore the premise that there needs to be a good f‌it between the board of directors and the top

management team to effectively bring about strategic change.

Research Findings/Insights: Using archival data from a sample of 119 f‌irms in the period 1993–2000, we found that when

a synergy exists between the board and the TMT, there will be a greater inclination for strategic change. The results indicate

that a board’s inclination to contribute to strategic change increases as the board size increases. Equally, it is possible to

accept that the relationship between board tenure and their inclination towards strategic change is not linear. Finally, the

simultaneous analysis of board composition and the ratio of directors on the TMT, demonstrates that the interaction of both

variables has effects on the f‌irm’s strategic change.

Theoretical/Academic Implications: This study provides empirical support in favor of an active role of the board shaping

the f‌irm’s strategic decisions. We have developed and tested a set of arguments regarding with the role of the board on the

f‌irm’s change in strategy. We have investigated as well, the leveraging effect of one of the variables that def‌ine the

composition of the management team on the relationship board-change in strategy.

Practitioner/Policy Implications: In order to create an effective board, a broader governance structure must be examined

with a detailed study of aspects of the composition of the board and the TMT (previous research has only considered

characteristics linked to the CEO). The dynamics of the relationships between both governance mechanisms are essential

and leverage the board capability.

Keywords: Corporate Governance, TMT-Board Relationship, Strategic Change, Board Involvement

INTRODUCTION

The current literature on corporate governance high-

lights the importance of board effectiveness for the

success of a company (Petrovic, 2008). However, the evolu-

tion of research on boards appears to follow a dialectical

sequence from a thesis (managers dominate directors) to

an antithesis (directors should control managers). Early

research on board roles embraced a managerial dominance

perspective and proposed that boards are ineffective gov-

erning structures because incumbent managerscontrol them

(Lorsch & Maclver, 1989; Mace, 1986; Vance, 1983). In con-

trast, the primary research of agency theory argued that

boards are an eff‌icient mechanism for monitoring a f‌irm’s

managers (Baysinger & Butler, 1985). Therefore, a third stage

of synthesis (directors and managers work together toward

organizational success) can be expected to work (Rindova,

1999). Both groups – TMT and boards – have a direct re-

sponsibility for the decision-making process, which has

prompted a signif‌icant body of research (Ocasio, 1994;

Pearce & Zahra, 1992; Zahra & Pearce, 1989). This stage of

synthesis defend an active board of directors (Demb & Neu-

bauer, 1992; Westphal, 1999) and relies on stewardship

(Donaldson, 1990), agency (Eisenhardt, 1989), and resource

dependence (Pfeffer, 1973) theories.

This line of argument understands that the board is a

valuable resource (Macus, 2008; McIntyre, Murphy, & Mitch-

ell, 2007), which should be exploited when the f‌irm needs to

take important decisions – such as a change in strategy

(Ginsberg, 1994; Rindova, 1999). The board of directors is

therefore part of a collective, together with the top manage-

ment, which should work together, for the sake of improv-

ing the organization’s performance (Anderson, Melanson, &

Maly, 2007). Our investigation, in the activeschool, studies if

does the team leverage the board’s decision over strategic

change.

*Address for correspondence: Department of Business Management and Marketing,

Av. Ramón y Cajal 1, 41018 Seville, Spain. Tel: +34-954557521; Fax: +34-954556989;

E-mail: barroso@us.es

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Corporate Governance: An International Review, 2009, 17(6): 744–761

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00772.x

We argue that the board and managementformulate strat-

egy in a partnership approach (Hendry & Kiel, 2004). As

Andrews (1980) already pointed out, it is advisable that

directors work with managers on devising strategic plans

for two reasons: (1) directors can contribute to creative strat-

egizing because they can offer a variety of experiences; and

(2) directors can better perform their functions if they under-

stand in depth a f‌irm’s strategy.

Despite the current development of the active school,

research carried out on joint inf‌luence of TMT and boards,

regarding decisions taken, are scarce (Tricker, 1996). In this

sense, previous research focuses with few exceptions, in

the analysis of one type of governance mechanism, while

excluding others (Daily & Dalton, 1993; Forbes & Milliken,

1999; Johnson, Daily, & Ellstrand, 1996). As Brunninge, Nor-

dqvist, and Wiklund (2007) point out, governance research

would benef‌it from studies that investigate how board and

management are interrelated in creating key organizational

outcomes.

On the other hand, and in keeping with this active

school of thought, the most recent studies about boards

have adopted a multitheory perspective, as they have

become aware that the active role of this government

mechanism entails multiple tasks and that this implies, in

turn, an explicit recognition of the board’s processes that

take place within the board that inf‌luence the outcomes.

(Forbes & Milliken, 1999; Golden & Zajac, 2001; Macus,

2008). Given the complexity of this concept, a good starting

point would be examining the relationship within the

boards as the building blocks of any board process. We

believe that the correct approach to any research on boards

must focus on its relationships. These relationships can

arise, among others, between directors and top managers.

The effectiveness of the board may also be driven by the

nature of inter-group dynamics between the board and

the top management team. A healthy dialogue between

the team and the board can contribute to the quality

of the strategic decisions, whereas conf‌licts and power

struggles can create negative dynamics and an inappropri-

ate decision-making environment. We argue that for this

relational dynamics to be present, it is necessary that the

composition of both bodies of government be related. For

this reason, our work is centered in studying the compo-

sition of the boards as well as its inf‌luence on the compo-

sition of TMT, concretely the weight of the board director

onto the TMT. Rather than dynamics within the board, this

paper investigates how the interactions between the man-

agement team and the board may inf‌luence the governance

role with respect to strategic change. This is where we

make our contribution.

Thus, following Kor (2006), this paper examines whether

both the top management team and board have direct addi-

tive effects on a f‌irms’ strategic change. This examination is

superior to examining management and board effects as

separate systems of constructs because it allows us to under-

stand whether management teams and board governance

play unique roles in shaping a f‌irm’s strategy change. In

addition, this paper theorizes about and tests complex inter-

action effects of the dynamics between the management

team and the board. These interaction effects demonstrate

when conf‌licts between management teams and boardswith

specif‌ic compositions may undermine the effectiveness of

board.

The results of this investigation show that the presence of

board members on the management team affects the devel-

opment of these relationships, in such a way that the board’s

composition has a leveraging effect on strategic change.

In the subsequent sections of this article we conduct a

literature review, and propose a series of hypotheses relating

to the direct effects of and the interaction between different

variables that def‌ine a f‌irm’s corporate governance (boards

of directors and TMT) on its strategic changes. After present-

ing and discussing our empirical results, we conclude by

outlining the implications for theory and managerial prac-

tice of our f‌indings.

THEORY AND HYPOTHESES

In this section, we develop the argument that the board

composition may affect the board’s inclination towards the

f‌irm’s strategic change. Furthermore, we suggest that an

appropriate combination of board and management team

composition can leverage this inclination.

Board Involvement in the Firm’s Strategy

The literature traditionally describes two broad schools of

thought regarding the board’s involvement in strategy,

referred to as active and passive (Golden & Zajac, 2001;

Hendry & Kiel, 2004). According to the passive school,

boards are a legal f‌iction, dominated by management

(Pfeffer, 1972) and the CEO in particular (Mace, 1972). This

school of thought is supported by the theoretical perspective

of managerial hegemony. On one hand, the presence of

inside directors (i.e., executive directors) who report to the

CEO confers power and control onto the chief executive

(Baliga, Moyer, & Rao, 1996; Boeker & Goodstein, 1993; Hill

& Snell, 1988; Kesner, Victor, & Lamont, 1986; Mallette &

Fowler, 1992; Wade, O’Reilly, & Chandratat, 1990); on the

other hand, outside directors are often appointed by the

management and therefore management again controls

the board (Pfeffer, 1972). From this perspective, strategy is

the responsibility of the TMT and the board’s only role is to

review and approve (rubber-stamp function) (Herman,

1981; Rosenstein, 1987).

In contrast to the passive school, the active school sees the

board’s directors as independent thinkers who shape the

strategic direction of their organization (Davis & Thompson,

1994; Finkelstein & Hambrick, 1996). From this perspective,

strategy is the responsibility of both the TMT and the board

of directors. Some studies argue that the board should par-

ticipate as an equal partner with management, while others

suggest that the board should only provide oversight in this

area (Hendry & Kiel, 2004; Walsh & Seward, 1990). This

evolution of the board to strategic management partner pre-

sents an opportunity to produce a superior governance

regime. The board as strategic partner can bring differing

perspectives to the planning of strategy, risk management,

and execution, potentially leading to better decision out-

comes and improved company performance (Anderson

et al., 2007). Johnson et al. (1996), in their extensive literature

DOES THE TEAM LEVERAGE THE BOARD’S DECISIONS? 745

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