The Strategic Role of the Board: The Impact of Board Structure on Top Management Team Strategic Action Capability

• Published date: 01 November 2009
• Date: 01 November 2009
• Author: Michael L. Burns,John E. Prescott,Bongjin Kim
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00775.x

The Strategic Role of the Board: The Impact of

Board Structure on Top Management Team

Strategic Action Capability

Bongjin Kim*, Michael L. Burns, and John E. Prescott

ABSTRACT

Manuscript Type: Conceptual

Research Question/Issue: Board reforms around the globe, corporate governance failures, and equivocal research f‌indings

provide the impetus for studying boards from a perspective different from the current emphasis on control and service

roles. A board’sstrategic role is conceptualized and the impact of boarddiversity and leadership structure on the speed and

breadth of top management team (TMT) strategic capabilities is explicated.

Research Findings/Insights: Four board conf‌igurations are identif‌ied by examining the joint impact of diversity and

leadership. Each conf‌iguration differentially inf‌luences TMT strategic action capabilities. We then proposethat the nature of

the competitive environment (dynamism and complexity) impacts the effectiveness of a particular conf‌iguration. Testable

propositions applicable in communitarian, Anglo-Saxon, and emerging markets are developed in a manner that leverages

current theoretical insights and empirical f‌indings.

Theoretical/Academic Implications: Theorizing that board strategic control manifests in multiple forms and inf‌luences

TMT strategic capabilities in nuanced ways highlights how particular board conf‌igurations differentially impact f‌irm

processes and outcomes. This approach links the board, TMT, and competitive rivalry literatures, providing a potential

explanation for mixed research f‌indings, and suggests directions for future research.

Practitioner/Policy Implications: Universally prescribed board conf‌igurations may be harmful to f‌irm and industry per-

formance as well as national economies. Specif‌ic board conf‌igurations differentially impact TMT capabilities and should be

properly aligned with environmental contexts. Those charged with governance design and board conf‌iguration should be

cognizant of how the diversity and leadership of strategically involved boards inf‌luences the speed and breadth of TMT

strategic action capabilities.

Keywords: Corporate Governance, The Board’s Strategic Role, Top Management Team Strategic Capability, Environ-

mental Dynamism and Complexity

INTRODUCTION

While the role of boards continues to evolve (Anderson,

Melanson, & Maly, 2007; Ravasi & Zattoni, 2006), our

understanding of the nature, extent, and consequences of

board involvement in strategy remains elusive (Golden &

Zajac, 2001; Judge & Zeithaml, 1992; Zahra, 1990). Recent

global economic crises and disastrous governance events

provide an impetus for boards to adopt a strategic control

role by becoming directly involved in “shaping the

context, conduct, and content of strategy” (McNulty & Pet-

tigrew, 1999:62). We extend this assertion by theorizing that

a board’s strategic control role is manifested in multiple

forms and that these forms differentially impact the strategic

action capabilities of top management teams (TMTs). Strate-

gic action capabilities are strategy formulation and imple-

mentation processes that TMTs draw upon when they

interact with competitors, suppliers, complementors, and

non-market players in an effort to build competitive advan-

tages (Derfus, Maggitti, Grimm, & Smith, 2008). Specif‌ically,

we assert that board involvement in strategy can either

enhance or inhibit the speed and breadth of TMT strategic

action capabilities, thereby directly impacting f‌irm perfor-

mance. The speed of strategic action refers to the average

*Address for correspondence: Ewha Womans University, College of Business

Administration, 11-1 Daehyun-dong, Seodaemun-gu, Seoul, 120-750, Korea. E-mail:

bkim432@ewha.ac.kr

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Corporate Governance: An International Review, 2009, 17(6): 728–743

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00775.x

amount of time spent to form and implement strategic

maneuvers or responses (Chen & Hambrick, 1995; Dooley,

Fryxell, & Judge, 2000; Eisenhardt, 1989; Schmidt & Brauer,

2006). The breadth of strategic action refers to the range or

repertoire of strategic behaviors relative to competitors.

While both the speed and breadth of strategic action have

been found to positively inf‌luence f‌irm performance (Baum

& Wally, 2003; Miller & Chen, 1996), the role of the board of

directors in shaping the strategic action capabilities of TMTs

has received limited attention.

Although research on the contribution of corporate

boards to strategy has developed rapidly over the last few

decades, it is a widely debated topic. (Pugliese, Bezemer,

Zattoni, Huse, Van den Bosch, & Volberda, 2009). More

importantly, there is a large and growing literature sug-

gesting that most boards have a fairly limited understand-

ing of and involvement in corporate strategy (Conger,

Lawler, & Finegold, 2001; Deutsch, 2005; Hendry & Kiel,

2004; Johnson, Daily, & Ellstrand, 1996; Judge & Zeithaml,

1992) and the desirability of a strategically involved

board is a topic of lively debate (Daily, Dalton, & Cannella,

2003).

We join the debate by proposing a model of strategically

involved boards that is focused in three ways. First, we

focus on boards that adopt a strategic control role (Corn-

forth & Edwards, 1999; Hendry & Kiel, 2004). Although

involvement in strategy is considered a key aspect of board

responsibility, little consensus exists regarding the nature of

this role (Ingley & Van der Walt, 2001). If one argues that

the board should act as a co-equal partner with manage-

ment (Dimma, 1997), boards run the risk of stepping into

what should be management’s responsibility (Helmer,

1996). Our purpose is not to resolve the debate between the

minimalist (passive) versus strategic (active) perspectives,

but rather to theorize how strategically involved boards

impact the strategic action capabilities of TMTs. Indeed,

research indicates that not all boards are continuously

involved in strategy, but rather they move along a “con-

tinuum” of strategic involvement as the situation warrants

(Rindova, 1999). Given this potential for variance in

involvement, our conjecturing is focused on governing

boards that are strategically engaged. Second, we focus on

the speed and breadth of strategic actions, two central

constructs in the competitive dynamics literature (Smith,

Grimm, Wally, & Young, 1997) that are applicable across

national boundaries and communitarian, Anglo-Saxon, and

emerging market business systems (i.e., Milar, Eldomiaty,

Choi, & Hilton, 2005). Third, we focus on two universally

salient board characteristics – diversity and leadership.

Board diversity refers to combinations of individual direc-

tor attributes, characteristics, and experiences (Milliken &

Martins, 1996). Board leadership concerns whether the

leadership structure of a board is concentrated or diffused

(Rechner & Dalton, 1991). Board leadership and board

diversity are broad constructs that can be applied and

assessed across national boundaries and business systems.

Not only have these structural constructs garnered

increased attention in corporate governance research (e.g.,

Dalton, Daily, Ellstrand, & Johnson, 1998), they also inf‌lu-

ence board processes (Richard, Murthi, & Ismail, 2007) and

strategic action capabilities (Westphal & Fredrickson, 2001).

Wedevelop a typology of four board conf‌igurations based

on board diversity and leadership structure. We propose

that each distinct board conf‌iguration promotes different

levels of speed and breadth in a TMT’s strategic action capa-

bilities. Furthermore, we adopt a perspective in which the

effectiveness of a particular conf‌iguration is inf‌luenced by a

f‌irm’s competitive environment (Kang, 2006). We identify

two key environmental factors that inf‌luence the perfor-

mance implications of each conf‌iguration: dynamism, which

inf‌luences the need for strategic speed; and complexity,

which determines the appropriate level of strategic variety.

In doing so, we contribute to board research by conceptual-

izing a set of propositions at the nexus of strategically

involved boards, TMT strategic action capabilities, environ-

mental conditions, and f‌irm performance (Hendry & Kiel,

2004).

Our model contributes to the governance literature in

several ways. First, we join the growing interest in the

board’s strategicrole by proposing how TMT strategic action

capabilities are affected when directors become engaged in

strategy. Second, we propose the joint inf‌luence of board

diversity and leadership on TMT strategic action capabili-

ties. To the extent that board outcomes are inf‌luenced by

structural arrangements (Daily & Dalton, 1994), a conf‌igura-

tional approach underscores the need to shift from the

inspection of individual board characteristics in isolation

toward a more holistic view of board structures (Hillman,

Cannella, & Harris, 2002).

Lastly, we provide a potential explanation for the mixed

empirical f‌indings regarding the relationship between

boards and f‌irm performance (Dalton et al., 1998) by advanc-

ing a perspective whereby the effectiveness of a particular

board conf‌iguration is contingent upon a f‌irm’s competitive

environment (Boyd, 1995; Kang, 2006). Our approach asserts

that superior f‌irm performance is more likely when strate-

gically engaged boards enhance the strategic action capabili-

ties of TMTs in a way that f‌its the nature (dynamism and

complexity) of the f‌irm’s competitive environment (Stevens,

Steensma, Harrison, & Cochran, 2005). Our propositions are

designed in a way that lends them to empirical testing. This

is important because both the theoretical and empirical rela-

tionship between a board’s strategic role and f‌irm perfor-

mance is a major gap in the literature.

BOARDS OF DIRECTORS’ STRATEGIC

INVOLVEMENT

A variety of theoretical perspectives regarding the board’s

responsibility for strategy exist. Managerial hegemony

theory (Mace, 1971) argues that strategy is the province of

TMTs, and boards only play a review and ratif‌ication role in

strategy. This view is in line with agency theory (Jensen &

Meckling, 1976) which distinguishes decision management

from decision control. According to these perspectives,

TMTs are expected to formulate and execute strategies while

boards are expected to ratify and monitor strategic actions.

Alternatively, resource dependence theory suggests that

boards are in a prime position to contribute to the strategic

decision making process by providing links with external

environments and access to valuable resources (Hillman &

THE BOARD’S STRATEGIC ROLE 729

Volume 17 Number 6 November 2009© 2009 Blackwell Publishing Ltd