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Corporate Boards and Performance
Summary and Keywords
In a new era of corporate governance defined by increasing shareholder empowerment, scrutiny from external stakeholders, and governance failures, there has been a movement toward redefining corporate governance models and the roles of boards. As a result, researchers and practitioners are left wondering what it means to be an effective board, and how a board can operate in the best interests of a firm's stakeholders in this current environment. Exploring the expanded roles and demands of directors grounded in shareholder and director primacy debates, as well as reviewing theories and contingencies that link corporate boards to task, group, firm, and enterprise-level outcomes, a research agenda is identified that might better identify the parameters of board effectiveness.
Keywords: corporate governance, boards of directors, shareholder primacy, shareholder empowerment, stakeholders
Boards of directors are an important part of a company's structure—responsible for both monitoring and advising functions under a duty of loyalty and a duty of care to their shareholders. In fact, since the evolution of the modern corporation and the separation of ownership and control that has accompanied Anglo American institutions (Berle & Means, 1932), boards of directors have become the primary internal governance mechanism to ensure that managers in firms operate in the best interests of the firm's stakeholders, and in particular, the firm's shareholders.
In recent years, however, boards of directors have faced challenges on several fronts. First, in a new era of shareholder empowerment (Goranova & Ryan, 2015), corporate boards have been forced to expand their roles in response to the shift in power from corporate officers and directors to shareholders. While the traditional roles of boards have included advising, providing resources, and monitoring the actions of corporate executives (Finkelstein, Hambrick, & Cannella, 2009; Forbes & Milliken, 1999; Hillman & Dalziel, 2003; Hillman, Nicholson, & Shropshire, 2008), the roles and tasks of board members have expanded with the shareholder empowerment movement. Several factors have contributed to this including (1) a concentration of ownership and consolidation of equity holdings (Ryan, Buchholtz, & Kolb, 2010), (2) an increase in shareholder activism (Cuñat, Gine, & Guadalupe, 2012), and (3) the advent of proxy advisors (Campbell, Campbell, Sirmon, Bierman, & Tuggle, 2012; Coffee & Palia, 2016). Combined, these factors have led corporate boards to understand that managerial accountability is at the forefront of shareholder concerns (Adams, Licht, & Sagiv, 2011). However, as we discuss below, there is much debate about how reasonable it is for boards to continue their oversight role, as they face growing constraints stemming from information processing and other challenges in this new era (Boivie et al., 2016; Starbuck, 2014).
Second, boards of directors are increasingly subject to scrutiny from a host of other, powerful stakeholders beyond shareholders. Recent research highlights that beyond capital market participants, there are other arbiters of a board's legitimacy—like customers (Krause, Filatotchev, & Bruton, 2016), regulatory institutions (Lan & Heracleous, 2010), the media (Bednar, 2012; Bednar, Boivie, & Prince, 2013; Waldron, Navis, & Fisher, 2013), and even other board members in interlocking directorates (Surroca, Tribó, & Zahra, 2013; Zona, Gomez-Mejia, & Withers, 2015). Of course, additional scrutiny often follows on the heels of corporate governance scandals, which continue to proliferate at executive levels in firms (Withers, Hillman, & Cannella, 2012), despite changes in board composition and structure that should provide safeguards against entrenchment and corruption (Dalton, Daily, Ellstrand, & Johnson, 1998; Fama & Jensen, 1983; Sonnenfeld, 2004). Hence, researchers continue to focus on how and why boards continue to fall short in their responsibilities.
Given the continuance of governance failures (Monks & Minow, 2011), there has been a movement toward redefining corporate governance and the roles of boards in general (Withers et al., 2012). Many question the function of directors as autonomous fiduciaries (Blair & Stout, 1999; Lan & Heracleous, 2010) who are called to balance competing claims of various stakeholders, but with limited consequences for the directors and managers themselves (Zeitoun, Osterloh, & Frey, 2014). Additionally, some question the epistemological shortcomings in the existing models of corporate governance that ignore any of the normative implications of agency theory (the core theory of corporate governance) behind "a veil of presumed positivism" (Donaldson, 2012, p. 264).
This article begins by identifying what it means to be an effective board, given some of the expanded roles and challenges identified above. To answer this question requires exploring these roles and the demands placed on directors grounded in shareholder and director primacy debates, behavioral theories, and contingencies that link corporate boards to task, firm, and enterprise-level outcomes. We then explore changes in corporate board-performance linkages that have led to expanded measures of board effectiveness, including stakeholder management, CSR practices, enterprise-level accomplishments, and board process outcomes.
Much of corporate governance research today continues to focus on board structure, composition, and firm financial performance; however, this article identifies additional contingencies and theories that open the door to explore the rational and behavioral influences on directors in the link between boards and firm performance.
Boards and Performance: What Does it Mean to be Effective?
It is well known that the board of directors has both direct and indirect effects on the executive leadership of an organization and the strategic choices that are made by its executives (Finkelstein et al., 2009). However, a measure of an effective board now goes beyond outcome measures of firm-level financial performance. At the (individual and group) task level, an effective board must provide advice to senior executives, monitor the CEO and other top executives, provide adequate and fair compensation to the CEO and executives, and leverage their individual and collective human and social capital for the firm (Forbes & Milliken, 1999; Hillman & Dalziel, 2003; Kor & Sundaramurthy, 2009). At the firm level, the board is responsible for assisting management with making strategic decisions to help with environmental uncertainty (Conger, Lawler, & Finegold, 2001; Hendry & Kiel, 2004; Rindova, 1999). This involves providing strategic control (Baysinger & Hoskisson, 1990), influencing strategic change (Golden & Zajac, 2001), and weighing in on the viability of a firm's strategy (Westphal & Bednar, 2005). The board also assists with stakeholder management (Ayuso, Rodríguez, García-Castro, & Ariño, 2014; Filatotchev & Nakajima, 2014; Freeman & Evan, 1990; Freeman & Reed, 1983; Mason & Simmons, 2014; Tihanyi, Graffin, & George, 2014), providing the opportunity for firm financial and social performance in balancing stakeholder claims and satisfying shareholders (Carroll & Shabana, 2010). At the enterprise (macro-organizational) level, the board is ultimately responsible for the business and society relationship, including philanthropic endeavors and the broader ramifications of the firm's corporate social performance (Hitt, Freeman, & Harrison, 2001).
Perhaps because of these growing challenges, director selection is becoming trickier and more difficult as directors must bring more to the plate to perform their jobs sufficiently. Issues of optimal board diversity (Hillman & Nielsen, 2015), board size (Cheng, 2008; Desai, 2016), director tenure (Brown, Anderson, Salas, & Ward, 2017), director experience (Zhu & Westphal, 2014), and other composition and structure issues continue to challenge researchers in identifying the best ways for boards to identify "good" directors. Additionally, the challenges of smaller pools of qualified directors (Knyazeva, Knyazeva, & Masulis, 2013), and concerns with director entrenchment (Veltrop, Molleman, Hooghiemstra, & van Ees, 2015), and busy boards (Fich & Shivdasani, 2006) foster conversations about the formation of director interlocks and networks that, while offering some resource benefits, may also promote agency costs (Davis, 1991). At issue is who is truly qualified to serve as a director and what the qualifications may be for directors whose roles are expanding in a post-Berle and Means era (Davis, 2010). What does it mean to be a good performing board, given these challenges? To answer this question, it is necessary to understand the expanded roles that board members must now assume.
Board Roles
The roles of board members have been generally defined as encompassing advising (including resource provisioning) and monitoring functions (Hillman & Dalziel, 2003; Hillman, Shropshire, Certo, Dalton, & Dalton, 2011), grounded in resource dependency and agency theories. Finkelstein et al (2009) divide these roles into externally directed and internally focused roles that are "implicit in virtually every theoretical formulation involving boards of directors" (p. 228). The advising and monitoring roles of directors have long been the basis for determining board members' effectiveness as they are tasked with bringing resources to the firm, providing advice and counsel, aiding in the formulation of strategy, monitoring the CEO, planning for succession, and evaluating and rewarding the CEO, among other activities. Yet, recent research has identified that it is not clear that individual directors fulfill one or the other role separately (Kim, Mauldin, & Patro, 2014).
More recently, researchers have acknowledged that the human and social capital that directors bring to a board can influence the collective action of the group and its effectiveness (Hillman & Dalziel, 2003; Johnson, Schnatterly, & Hill, 2013; Kor & Sundaramurthy, 2009; Sundaramurthy, Pukthuanthong, & Kor, 2014). Directors bring unique sets of knowledge and skills developed through various experiences that allow them to connect to other directors and executives and develop both firm-specific and external knowledge (Becker, 1993; Burt, 1992). A "common language" is formed (Kor & Sundaramurthy, 2009, p. 986) through the social or relational capital that comes from an individual's ability to access resources through relationships. Directors embrace the role of building social and human capital skills through networking, which can also complement their monitoring, advising, and strategic decision making capabilities (Haynes & Hillman, 2010).
Boivie, Bednar, Aguilera, and Andrus (2016) recently identified the "punctuated events role" of board members. This role occurs when board members are required to participate in events like mergers and acquisitions (MandA), CEO replacement, financial restatements, and other events that occur intermittently and create uncertainty for the firm. In this role, directors are expected to "marshal their limited time and cognitive resources" to address the relatively rare events that occur over a short period of time (Boivie et al., 2016, p. 328). While this role is said to cause directors to face greater scrutiny from external observers, it is also noted to be one that should allow directors to truly exercise control (Mizruchi, 1983), and reduce some of the barriers that boards face in their monitoring function.
Recent research has also noted that board members serve as reputational markers for their firms as an outgrowth of their role in resource provisioning (Hambrick, Misangyi, & Park, 2015). In this role, the board's collective prestige, and the status and prestige of the individual directors helps to signal a firm's own stature and reputation (Acharya & Pollock, 2013; Certo, 2003; Chen, Hambrick, & Pollock, 2008; Pollock, Chen, Jackson, & Hambrick, 2010). The prestige factor of board members is also important to the legitimizing role that board members serve for their organization (Arthaud-Day, Certo, Dalton, & Dalton, 2006), and even to the cultural-cognitive expectations of customers outside of a firm's home country (Krause et al., 2016).
A newer role for directors in this environment is to operate as a liaison to shareholders as part of a broader shareholder engagement strategy. The recent formation of the Shareholder-Director Exchange (SDX) in the United States by directors and representatives of the world's largest institutional investors is evidence of this trend (Burke & Clark, 2015). Researchers and practitioners see value in regularly communicating the company's long-term strategy with shareholders to alleviate the pressure to maximize short-term returns and stock prices (Barton & Wiseman, 2015). Although some argue that directors may not have enough time or even sufficient knowledge to effectively engage with shareholders (Fairfax, 2013), there is evidence to suggest that engagement between firms and shareholders on controversial governance issues like board diversity may lead to early resolutions (Goodman, Louche, Van Cranenburgh, & Arenas, 2014).
Behavioral Theory
In sum, in this new era of shareholder empowerment, engagement, and external scrutiny, the effectiveness of board members is contingent on their ability to fulfill many, newly expanded roles that are no longer fully explained by traditional agency and resource dependence rubrics. In part to address these newer concerns, researchers Westphal and Zajac (2013) propose a behavioral theory of corporate governance that explicates the mechanisms of "socially situated and socially constituted agency" as an alternative to "undersocialized" governance theories like agency theory. The behavioral theory of governance focuses on social influences among corporate leaders that take into account ingratiation behaviors, flattery, and impression management among other sociopolitical processes (Westphal, 1999; Westphal & Bednar, 2008; Westphal et al., 2012; Westphal & Graebner, 2010; Westphal & Shani, 2016; Westphal & Stern, 2006, 2007). Other researchers, like Huse (2005) and Desai (2016), have applied behavioral theory successfully to understand how board members use their influence to force compromise and reconsider changes, particularly when performance drops.
Corporate governance researchers are integrating theories in an attempt to provide a more nuanced understanding of board roles and, particularly, board behaviors. As an example, recent work by Joseph, Ocasio, and McDonnell (2014) explores the structural elaboration story of board independence when the CEO is the only insider on the board (a.k.a. CEO-only). Integrating structural elaboration, agency, and institutional logics theories under a sociopolitical framework, they show how the adoption of a CEO-only structure appears to conform to agency theory and shareholder value logics, but in reality works in practice to enrich and entrench the CEO.
In another example, Brown et al. (2017) integrate executive cognition, and human and social capital theories to explain the curvilinear relationship between director tenure and shareholder value. They identify a prime tenure period for directors to serve on boards, and then test it in the realm of executive compensation. They provide evidence that directors in their prime tenure period are better at aligning CEO pay to performance than directors outside of the prime period.
In an era of additional board scrutiny, integrating theories and examining boards with more of a behavioral lens may be important to responding to the queries of activists and external stakeholders who do not understand the governance failures of seemingly well-structured and composed boards. Westphal and Zajac (2013, p. 650) suggest that more work in this area may push researchers to understand how governance actors enact, rather than react to, their social situations. Acknowledging the behavioral aspects of directors' roles in the context of the newer demands placed on directors may be a good first step in understanding what it means to be an effective board.
Shareholder Primacy Versus Director Primacy
Along with expanded roles of board members, there has been a shift in the traditional Anglo American model of corporate governance from one where maximizing shareholder value is the ultimate firm goal to one where broader stakeholder management is considered—again, affecting the ways we might measure board effectiveness. This has paralleled a shift from a shareholder-primacy model, where shareholders are considered to be of primary importance to a director primacy model of corporate governance, where board members are the ultimate decision makers (Bainbridge, 2006; Blair & Stout, 1999; Lan & Heracleous, 2010). This director primacy model is based on the idea that a corporation is not owned, but instead is an independent legal entity; therefore, the balance of power in corporate governance should belong to the "meditating hierarchs" on the board who must balance competing interests of various stakeholders (Stout, 2012). Rather than a principal-agent based model of corporate governance, the director primacy model is based on a team production model of corporate governance (Kaufman & Englander, 2005) and is largely supported by legal arguments that shareholders only own stock in the firm, but have no legal right to control the firm.
It is easy to see how the concept of director primacy might be at odds with the shareholder empowerment movement, which we noted at the beginning of this article to be growing in conjunction with shareholder activism. Proponents of shareholder primacy, supported by the principles of agency theory, argue that since shareholders own the corporation they are the claimants with primacy over other stakeholders (Jensen & Chew, 2000; Jensen & Meckling, 1976). Shareholder empowerment advocates support this by arguing that shareholders have a moral right to more influence . . . and they also argue that shareholder primacy improves firm value (Bebchuk, 2002, 2007, 2013; Bebchuk, Coates, & Subramanian, 2002; Bebchuk & Cohen, 2005; Bebchuk, Cohen, & Ferrell, 2008; Bebchuk & Weisbach, 2010). Proponents of the director primacy model suggest that the board serves shareholders best because boards have the autonomy to do what is in the long-term interests of the corporation (Stout, 2012), rather than the short-termism implicit in a shareholder value model. Additionally, these proponents argue that there is uncertainty as to how shareholders might be held accountable for their decision making influences (Stout, 1995, 2007, 2010).
While philosophical and legal debates continue, researchers continue to search for proxies and outcome measures of shareholder primacy and director primacy effects. For example, classified or "staggered" boards, where one-third of the directors are elected in a single year, have been highlighted as a key empirical measure of the balance between board and shareholder power in a firm, with equivocal findings on the impact on firm value (e.g., Buchholtz & Brown, 2015). Hedge fund activism has been used as a proxy for shareholder primacy (Briggs, 2006; Schneider, 2015), while examples of U.S. state chartering competition (Brown, Anderson, & Gupta, 2015), executive pay (Clarke, 2016), anti-takeover measures (Jones & Keevil, 2015), and even political spending disclosures (Bebchuk & Jackson, 2013; Guttentag, 2014) have been used as proxies to study primacy debates.
Realizing that boards vary in their effectiveness, the quest to understand the relative power of board members and shareholders is an important one, both theoretically and methodologically. Both shareholder primacy and director primacy advocates claim that their governance model offers the greatest opportunity for enhanced firm performance. While the research findings are nebulous, part of the problem may be the underlying assumption behind ownership that all shareholders want financial performance above all other metrics (Sikavica & Hillman, 2015). With this in mind, it is important to explore the board-performance link and research that attempts to chip away at this "black box" of causality, while also introducing alternative measures of performance.
The Board-Performance Link
It is no surprise that the meta-analyses by Dalton, Daily, Ellstrand, and Johnson (1998) continue to be one of the most widely cited articles in discussions about the nebulous link between board composition, leadership structure, and firm financial performance. Yet, researchers continue to explore this link, primarily drawing on agency issues that portray board members as representatives of shareholder interests, but with potential conflicts of interest in the battle for control between management and the board (e.g., Shleifer & Vishny, 1997; Sundaramurthy & Lewis, 2003; Walsh & Seward, 1990).
Governance researchers have explored the board-performance link with other theories including, but not limited to a stewardship theory perspective, with a focus on empowering governance structures, like the shared roles of CEO and Chairman of the Board (Davis, Schoorman, & Donaldson, 1997; Donaldson & Davis, 1991; Muth & Donaldson, 1998); circulation of power theory regarding CEO-board relationships (Ocasio, 1994); social network theory discussing the realm of CEO-board social ties (Wade, O'Reilly, & Chandratat, 1990; Westphal, 1999); institutional theory influences on board composition and structure (Luoma & Goodstein, 1999); signaling theory and the ability to influence investors with board structures (Certo, 2003); and sociopolitical theories of power relationships between the CEO and the board (e.g., Carpenter & Westphal, 2001; Westphal, 1999; Westphal & Graebner, 2010). Additionally, as we noted above, newer frameworks under a behavioral theory of governance (Westphal & Zajac, 2013), span macro- and micro- levels and include sociopolitical, socio-cognitive, social support, social learning, social distancing, social identification, and reciprocity issues, among others. Of course, most of these perspectives continue to focus on firm financial performance as the primary outcome measure of board decision making.
More recently, corporate governance researchers have been pushed to move beyond these approaches in several areas. First, many have gone beyond board composition and structural antecedents to explore board processes, including socio-cognitive elements of the board decision making process. Second, researchers have begun to identify better ways to deal with endogeneity issues in testing the board-performance relationship.
Board Processes
In 1992, Pettigrew called for researchers to explore the neglected areas of social science research and study the processes by which managerial elites and board members actually make decisions that affect performance. Subsequently, Forbes and Milliken (1999) offered a model of board effectiveness as the outcome of board roles, behaviors, and processes that allow board members to perform their control and service tasks for better firm performance. Launching off upper echelons and strategic choice theories (Child, 1972; Hambrick & Mason, 1984), Forbes and Milliken identified the socio-cognitive elements of board processes that are important to board decision making.
Subsequent research has tested some of these socio-cognitive elements. Drawing on the board's perception of performance and additional socio-cognitive elements, Haleblian and Rajagopalan (2006) proposed that a board's perception of performance, its attributions of performance, and effective assessment of the CEO surrounds the link between managerial cognition and strategic actions. Exploring board roles of service, monitoring, and networking, Zona and Zattoni (2007) found that board processes have a different impact on each specific board task. Utilizing survey data from board members and CEOs of 2000 Italian manufacturing firms, they found that board internal processes, and particularly effort norms and use of knowledge and skills, significantly influences board task performance. In later studies, Minichilli, Zattoni, and Zona (2009) and Minichilli, Zattoni, Nielsen, and Huse (2012) found that antecedents to board service and control tasks included background diversity, cognitive conflicts, and critical debate among directors, as well as the commitment of directors to each phase of the strategic decision making process.
Westphal and colleagues have pursued several articles linking board cognitions to composition and power relationships (Park, Westphal, & Stern, 2011; Westphal, 1999; Westphal & Shani, 2016) and ingroup versus outgroup identifications by individual board members (Carpenter & Westphal, 2001; McDonald & Westphal, 2003). More recently, Brown, Buchholtz, Butts, and Ward (2016) found that socio-cognitive elements of board authority, CEO power, affective conflict, and cohesiveness underlie board task performance in a post-Sarbanes-Oxley, new era of accountability. The growth of research in this area suggests that there is a shift from normative/structural approaches to understanding board performance to more behavioral and cognitive approaches (Pugliese et al., 2009).
While the pursuit of understanding board processes is important to assessing the link between board decision making and firm performance, process research is acknowledged to be paradigmatically diverse and empirically complex (Pettigrew, 1992, p. 5; Van de Ven, 1992). Additionally, there are significant challenges in getting access to board members for primary data. However, researchers continue to push for qualitative research that can challenge some of the existing assumptions about how governance actors and institutions actually function (Bezemer, Nicholson, & Pugliese, 2014; McNulty, Zattoni, & Douglas, 2013). Hence, researchers pursue alternative research designs as they try to unearth the many process variables that factor into effective board group decision making. This becomes particularly important at a time when shareholder activists and other stakeholders are asking where and why "boards fall short" and "underemphasize" long-term value creation (Barton & Wiseman, 2015).
Endogeneity Issues
Some of the challenges associated with exploring the board-performance relationship and particularly the effects of board structure on firm performance have been problems with endogeneity in testing (Denis, 2001; Hermalin & Weisbach, 1998; Wintoki, Linck, & Netter, 2012). Endogeneity occurs when one or more independent variables included in a model are correlated with error terms, leading to questions about the exogeneity of an explanatory variable. Sources of endogeneity include reverse causality, simultaneous causality, and omitted variables (Echambadi, Campbell, & Agarwal, 2006). Researchers have made progress in utilizing econometric models and methods aimed at addressing these concerns through Hausman tests for endogeneity, instrumental variables, difference-in-difference estimators, matching methods, and higher orders moments estimators (Aguilera, Florackis, & Kim, 2016; Roberts & Whited, 2012). However, analyzing the board-performance relationship is particularly challenging because of joint endogeneity of many of the variables; additionally, many governance variables are a function of past firm performance (Wintoki et al., 2012). Hence, it is often difficult to identify instrumental variables to solve the joint endogeneity, while also controlling for the dynamic nature of the governance-performance relationship (Adams, Hermalin, & Weisbach, 2010).
Nevertheless, researchers have recently begun to address this challenge with analysis that is more rigorous and experimental research that might circumvent, or at least control for, endogeneity problems. For example, Bromiley and Zhang (2016) examine the relationship between director employment and firm performance using treatment model analysis, which extracts experimental-style causal effects from observational data. Quigley and Hambrick (2012), in examining what happens to a new CEO's discretion when the former CEO stays on as board chair, employed a Heckman two-stage model to correct for unobserved heterogeneity and calculated the inverse Mills ratio to confirm that bias was accounted for by the chosen instrumental variables. Other researchers use event studies to assess shareholder opinions of board effectiveness and avoid endogeneity issues with samples of unexpected director and/or CEO deaths as a natural experiment (e.g., Brown et al., 2017; Combs & Skill, 2003; Nguyen-Dang & Nielsen, 2010).
The importance of rigor in testing the board-performance relationship is particularly important in light of the additional scrutiny of board members by shareholders and activists. As researchers pursue why and how boards fall short in their monitoring efforts (Hambrick et al., 2015), and researchers, regulators, and practitioners alike look for compositional and structural adjustments to enhance director accountability (Dowell, Shackell, & Stuart, 2011), addressing endogeneity issues becomes more than a methods exercise in governance research. Rather, it becomes important to understanding and addressing the governance failures that continue to plague stakeholders.
Roles and Tasks
Nicholson and Kiel (2004) noted that many frameworks for diagnosing board effectiveness at the time failed to view the board-performance relationship with a systems view, including looking at the roles of the directors that vary with context and evolution (p. 454). With the expansion of governance theories beyond agency theory, and in this new era of shareholder empowerment and accountability, the board-performance link is one that traverses individual and group tasks, firm and enterprise levels, as well as measures beyond short and long-term firm financial performance. This section begins with a discussion of some of the outcome measures of boards and the tasks in their newly expanded roles. Then, a discussion of alternative social performance, stakeholder management, and enterprise-level outcomes of board effectiveness are discussed.
Board members have been responsible for monitoring top management on behalf of shareholders since the separation of ownership and control (Berle & Means, 1932; Jensen & Meckling, 1976). Monitoring, evaluating, and rewarding the CEO are some of the tasks that boards perform to ensure that the CEO is acting in the best interests of shareholders (Kroll, Walters, & Wright, 2008). Additionally, the ratification of major decisions, the threat of replacement of top management team members, performance sensitivity of CEO turnover, and the implementation of policies to limit agents' decision making are other ways that boards may monitor management (Faleye, Hoitash, & Hoitash, 2011; Hermalin, 2005; Ward, Brown, & Rodriguez, 2009).
An independent board, made up of a majority of outsiders, has been the traditional measure of effective board monitoring (Hambrick & Jackson, 2000; Wright, Kroll, & Elenkov, 2002). Board independence suggests that the board that has not been co-opted by management and can effectively represent shareholder interests when managers' interests potentially conflict with stockholders (Fama, 1980; Fama & Jensen, 1983; Joseph et al., 2014; Tuggle, Sirmon, Reutzel, & Bierman, 2010). Of course, as we noted earlier, recent research using structural elaboration theory has pointed out some of the limitations in using board independence as a measure of effective board monitoring, particularly when a powerful CEO is the only insider and can manipulate the board (Joseph et al., 2014).
Closely related to the monitoring role is the implementation of control mechanisms to align the interests of CEOs and shareholders (Rutherford, Buchholtz, & Brown, 2007; Walsh & Seward, 1990). From a shareholder's perspective, the alignment of CEO pay to performance is a direct and powerful mechanism that boards have to protect shareholder interests (Lorsch & MacIver, 1989). Compensation packages that offer equity ownership align the goals of managers with those of shareholders so they share a common goal in the performance of the firm (Conyon & Peck, 1998; Eisenhardt, 1989; Jensen & Murphy, 1990). Equity compensation packages are commonly used to curb CEO opportunism (e.g., Devers, Cannella, Reilly, & Yoder, 2007). Accordingly, the degree of alignment of CEO pay to firm performance is a widely used measure of board effectiveness (Boyd, 1994; Hill & Phan, 1991; Sauerwald, Lin, & Peng, 2014; Zhu, 2013).
While board monitoring and control has received much attention by corporate governance researchers, there is much work to be done in determining optimal levels of each and how these are implemented in practice. For example, Faleye et al. (2011) found that while monitoring quality improves with a majority of independent directors serving on at least two of the three principal monitoring committees, this came at the cost of weaker strategic advising and greater managerial myopia. Tuggle et al. (2010) found that board members do not maintain constant levels of attention toward monitoring; rather, their attention fluctuated with prior performance and CEO duality.
Perhaps most controversial, researchers have begun to question whether in this era of information-processing demands, directors can actually be effective in their monitoring roles (Boivie et al., 2016). Highlighting the potential mismatch between theory and measures with regard to monitoring, Boivie and colleagues suggest that effective board monitoring is "implausible" with the variation in information-processing demands at the director, board, and firm levels (Boivie et al., 2016). With similar critique of the board's ability to monitor, Hambrick et al. (2015) identify four characteristics of the "ideal" board monitor in their "quad model" theoretical framework. These characteristics include independence, expertise, bandwidth, and motivation. However, they build a set of propositions based on the probability of reducing governance failures, rather than testing a more positive outcome of better firm governance. They note that few directors possess all of the qualities necessary for effective monitoring, but they argue that just one quad-qualified director will be more predictive of board efficacy than any other typical board descriptors.
These issues and contingencies that define a board's ability to monitor become particularly important as activists and discontented shareholders view monitoring and control incentives like executive compensation as a "thorny issue" (Goranova & Ryan, 2015, p. 4). Researchers debate whether executive pay strategies really work to align managers and shareholders (Bebchuk, Cohen, & Spamann, 2010; Devers et al., 2007; Hou, Priem, & Goranova, 2017). As newer research addresses some of the "theoretical cogs and wheels" of board-level governance (Hambrick et al., 2015, p. 650), the barriers and bridges of the monitoring function continue to offer research opportunities.
Resource Providers/Strategic Advisors
When directors serve on a board, they bring with them the experience, expertise, and network ties to other firms that are valuable to shareholders—otherwise known as board capital (Hillman et al., 2011). Board capital consists of both human and relational capital that directors use to provide advice and counsel to management, as well as the provisioning of resources to the firm (Hillman & Dalziel, 2003). While the theoretical framework for this role is based on Pfeffer and Salancik's (1978) work on resource dependency, Hillman and Dalziel (2003) effectively linked this to the advice and counsel/strategic involvement of directors introduced by Zahra and Pearce (1989). Board effectiveness in this role involves facilitating candid discussions on critical strategic issues and allowing different perspectives to emerge in the boardroom (Kor & Sundaramurthy, 2009).
There is considerable debate as to whether directors actually realize their potential to change an organization, or whether they are passive participants. Golden and Zajac (2001) found that strategic change is significantly affected by board demography and board processes, and most strongly in situations where boards are more powerful. Judge and Zeithaml (1992) found that boards are sometimes, but not always, involved in formulating strategic decisions, and Westphal (1999) found that boards could influence strategic decision making through advice-giving interactions with the CEO. Again, under behavioral governance theory and some of the micro-social processes that manage resource dependence, there is much work to be done in exploring the provisioning and advising functions.
However, the theme of prior board experience runs strong in linking board tasks of providing strategic advice and fostering strategic change—and this is particularly relevant in the shareholder empowerment era where shareholders are becoming more involved in the director nomination process. For example, Carpenter and Westphal (2001) found that directors were likely to provide strategic advice to managers when they had relevant prior strategic experience with board appointments at other firms, which was beneficial for subsequent firm performance. More recently, Oehmichen, Schrapp, and Wolff (2016) found that industry experience by board members, in particular, could facilitate corporate strategic change. These findings align with Westphal and Fredrickson's earlier (2001) study that found that board members formulate strategies that are consistent with their home firm experience and choose a new CEO with similar strategy experience to facilitate implementation.
In sum, these findings point to the false assumption, noted by Westphal and Fredrickson (2001), that boards solely promote the economic interests of their shareholders, as board members' strategic preferences are seemingly more influenced by their beliefs and prior experiences. With boards under considerable pressure from institutional investors, regulators, and other external stakeholders to increase the board's role in strategy formulation (Johnson, Daily, & Ellstrand, 1996; McDonnell, 2015), and the knowledge that board members are strongly influenced by their prior experiences, it will be important to understand the director selection process and the extent to which directors might rely on their personal experiences to guide their strategic choices.
Strategic Decision Makers of Punctuated Events
We noted above that in the punctuated events role, directors are expected to "marshal their limited time and cognitive resources" to address the relatively rare events that occur over a short period of time like mergers and acquisitions (MandA), executive replacement, CEO replacement, and financial restatements (Boivie et al., 2016, p. 328). There has been much research in this area linking board composition and structure to these event outcomes. Effective board behaviors in this realm fall into the category of providing value added and growth opportunities for shareholders—or reversing prior poor performance outcomes.
Once again, explanations linking board decision making to such events has almost exclusively been analyzed under the agency rubric. Because directors face greater scrutiny from external observers, and have clear influence on firm outcomes, it is the area where boards may exercise the most control (Mizruchi, 1983). As such, Boivie et al. (2016) assert that even with high barriers to effective monitoring, directors should be able to "marshal their cognitive resources" to make optimal decisions. With average CEO tenure down to 7.5 years (Brown et al., 2017), replacing the CEO rises to the top of these punctuated events for governance researchers. Additionally, CEO replacement is a hot-button issue with shareholder activists and external stakeholders who have concerns over issues like CEO duality and CEO succession planning (Cragun, Nyberg, & Wright, 2016).
Reputational Markers
Punctuated events like earnings restatements and MandA activity have been seen to be part of a larger "earnings management contagion" that is associated with board interlocks (Chiu, Teoh, & Tian, 2012), suggesting that effectiveness in this role is linked to the board capital, prestige, and social capital that board members also share as reputational markers. In fact, a board member's effectiveness at handling punctuated events may be contingent on the ability of board members to disconnect from their external connectedness and sacrifice the benefits of board social capital for more objectivity in strategic decision making. In this respect, we see that the roles of decision makers of punctuated events and reputational markers converge in the tasks that require them to cooperate with others, either externally (in the market for corporate control, e.g., D'Aveni & Kesner, 1993) or internally (in hiring and/or firing the CEO, (Eisfeldt & Kuhnen, 2013)). Signaling theory (Milgrom & Roberts, 1986; Spence, 1974) becomes an important theory in explaining how, when and why firms use prestigious directors, to signal their worthiness and quality to investors (Acharya & Pollock, 2013; Certo, 2003).
Liaison to Shareholders
There has been a rapid increase in shareholder requests for special meetings with the board to discuss performance and outline the company's long-term strategy (Kim & Schloetzer, 2013). Additionally, the new Shareholder-Director Exchange and its 10-point Protocol provides a set of guidelines for shareholder-director engagement (Sikavica & Hillman, 2015). However, there is a scarcity of research surrounding how directors might liaison with shareholders and the consequences of such interactions in the realm of board effectiveness. While rising shareholder engagement promises to hold corporations and their managers more responsible, skeptical voices equate shareholder engagement with short-termism and conflicting interests (Goranova, Abouk, Nystrom, & Soofi, 2016). Additionally concerns about whether shareholders are sufficiently informed to even weigh in on board decisions leaves many to question why board members should liaison with shareholders (Buchholtz & Brown, 2015). Yet, some see shareholder engagement as a middle approach between giving shareholders as much power as possible and insulating the board from shareholder activism (Mallow & Sethi, 2015). Additionally, many see value as an alternative to a formal vote on shareholder resolutions (Logsdon & Van Buren, 2009), particularly as shareholder resolutions increase in a post-Sarbanes-Oxley era (Grosvold, Rehbein, & Baker, 2015).
Expanded Measures of Board Performance
Enhanced board roles and tasks, and newer governance models in the past few years have also been accompanied a growing focus on alternative measures of performance that go beyond firm financial performance. These include measures of effective stakeholder management and social responsibility that go beyond the firm to broader societal (a.k.a "enterprise") levels of strategy. The purpose of this section is not to conduct a thorough review of studies analyzing the relationship between boards and these constructs, which continue to be controversial in theory and practice because of the "tension between financial and normative/social demands on the firm" (Parmar et al., 2010). Instead, this section highlights how these outcome measures of board effectiveness go beyond firm financial performance have become particularly important in this new era of shareholder empowerment, governance failures and additional scrutiny by stakeholders.
The concept of stakeholder management has been around for decades (Freeman, 1984), as has the concept of corporate social responsibility (Carroll, 1979).These are two distinct, multidimensional, but complementary management models. The stakeholder management model views business as a set of relationships among groups that have a stake in the activities that make up the business (for a review, see Parmar et al., 2010). Executives, including board members, manage the relationships to create as much value as possible for stakeholders and to manage the distribution of value (Freeman, 1984; Freeman, Harrison, & Wicks, 2007; Harrison & Freeman, 1999). Corporate social responsibility (CSR) generally involves the obligations that businesses have to society and encompasses the economic, legal, ethical, and discretionary (philanthropic) expectations that society has of organizations at a given point in time (Carroll, 1979, 1991; Carroll, Brown, & Buchholtz, 2017). Boards of directors are ultimately responsible for CSR strategies, although the motivation behind a board's attention to CSR is an open question for researchers, and it is often lodged in the debate surrounding the nebulous corporate financial/social performance relationship (Griffin & Mahon, 1997; O'Neill, Saunders, & McCarthy, 1989; Waddock & Graves, 1997; Zhao & Murrell, 2016).
Both stakeholder and CSR management concepts help to identify and specify the obligations of business; therefore, measures of board effectiveness look at outcome measures of these obligations. Research on the relationship between the board of directors and CSR or stakeholder management, like other board studies, tends to focus on the structural/compositional antecedents to these constructs. Additionally, with the exception of a few studies that use composite measures of CSR and/or stakeholder management (Arora & Dharwadkar, 2011; Bear, Rahman, & Post, 2010; Berman, Wicks, Kotha, & Jones, 1999; Mattingly & Berman, 2006; Zhang, Zhu, & Ding, 2013), most studies investigate individual components of these multidimensional constructs. For example, investigations into the board's influence on environmental performance, as one indicator of CSR, receive a lot of attention by researchers (Post, Rahman, & Rubow, 2011; Shaukat, Qiu, & Trojanowski, 2016; Walls, Berrone, & Phan, 2012). Another popular area is the investigation of a board's influence on CSR disclosures (Chan, Watson, & Woodliff, 2014; Fernandez-Feijoo, Romero, & Ruiz-Blanco, 2014; Kilic, Kuzey, & Uyar, 2015).
The CSR and stakeholder management constructs become somewhat conflated when measures overlap. For example, Hillman and Keim (2001) look at corporate social performance (CSP) as a broad construct that is comprised of stakeholder management and social issues management, albeit with a focus on shareholder value creation as an outcome measure. They conclude that stakeholder management strategies lead to improved shareholder value, while social issue participation is negatively associated with shareholder value. Other studies theoretically link stakeholders' expectations to board roles (Huse & Rindova, 2001), opening up the door for investigating reciprocity in the board-performance link. Some researchers survey directors for their stakeholder orientations in the hope of understanding the ways that different directors engage different stakeholders (Wang & Dewhirst, 1992) and the ways that they might reconcile conflicting stakeholders (Adam & Shavit, 2009; Greenwood & Van Buren, 2010).
It is easy to see how these investigations are timely, given the shareholder empowerment movement. Large institutional investors, for example, join with religious and other socially oriented investors in support of particular societal issues (Proffitt & Spicer, 2006) and endorse alternative measures of firm performance. While some see activist shareholders as too short-term focused on their companies and financial performance (Mayer, 2013), the evidence is unclear that this is true (Goranova & Ryan, 2015). In fact, shareholder proposals related to social policy issues have exploded in recent years, with activist religious organizations, in particular, as the most prolific filers of shareholder resolutions (Goodman, 2015; Proffitt & Spicer, 2006).
At the enterprise level, boards are ultimately responsible for the business and society relationship, and as a result, they are involved with broad initiatives like corporate philanthropy, global supply chain initiatives, and principles-based mechanisms like the United Nations Global Compact, which fall under the CSR rubric. While there are moral, normative, and instrumental arguments as to why corporate board members should pay attention and be involved with these issues (for a review, see Carroll, Brown, & Buchholtz, 2017), researchers also make the case that this is a new norm and part of the politics of engagement with shareholder activists (O'Rourke, 2003). Additionally, the growth and prevalence of social investing (Kurtz, 2008; Sparkes & Cowton, 2004) has put board performance in addressing these global, societal issues at the forefront of governance issues. While there is some evidence that the market does not appreciate the economic impact of CSR policies, there is some agreement about the "governance effect" attributed to socially responsible firms that pursue a long-term, modern risk model where institutional and social investors can find common ground (Kurtz, 2008; Smith, 2005).
Additional Contingencies and Research Opportunities
This article began by suggesting that in a governance atmosphere of increasing shareholder empowerment, greater external scrutiny and governance failures, boards of directors face significant challenges in fulfilling their expanded roles and tasks. For governance researchers, understanding board effectiveness may seem elusive, with traditional agency and resource dependence explanations of board actions no longer sufficient. However, newer forays into behavioral governance, integrated theories, board processes, endogeneity issues, and additional outcome measures pave the way for a better understanding of the board-performance link, which we have outlined in Figure 1. In this last section, we briefly highlight other contingencies and explorations that might be important to this research area going forward.
Newer research into the increasing evidence of the CEO effect on successor discretion, strategy, and performance (Crossland & Hambrick, 2007; Hambrick & Quigley, 2014; Quigley & Hambrick, 2012, 2015) provide compelling evidence that board effectiveness is largely determined by the directors' relationship with the CEO. Additionally, work on the ingratiation techniques between the CEO and directors (Westphal & Stern, 2006) has been expanded to understanding ingratiation techniques between directors. Westphal and Shani (2016) explain how directors have a pattern of cognition that creates an "ingratiator's dilemma" whereby directors who have relatively high social status tend to be the most difficult to ingratiate successfully. Their study shows how self-regulated cognition by directors in advance of social interaction can help to mitigate this dilemma and promote a process of "good" interpersonal influence that facilitates resource allocation and social benefits. Hence, additional research into the interactions between directors, as well as between directors and the CEO may provide further insight into the socio-cognitive elements of board decision making.
While we have noted that firm performance outcomes related to board composition and structure are ambiguous at best, board diversity continues to be a popular research topic, with practical relevance as boards try to figure out how to best populate their seats in the director selection process. While regulators in different institutional settings across the globe examine issues of term limits, quotas, and transparency in selection to encourage board diversity, Tuggle, Sirmon, Bierman, and Bass (2014) suggest that it is time to move from a "monolithic, compositional view of board diversity to a multi-level approach." They argue that the realization of diversity benefits is dependent on individual and board processes that help transform the potential value of diverse directors into realized board and firm benefits. In a similar vein, Hillman (2015) notes that it is time to "unpeel the onion," with unanswered questions about diverse boards and their relationship to decision making, ethics, and satisfying stakeholder groups, in addition to the implications for firm performance.
As more studies attempt to integrate theories and look at "bundles" of governance mechanisms that support or work against the board's decision making capabilities (Misangyi & Acharya, 2014; Ward, Brown, & Rodriguez, 2009), researchers might be better able to identify the nuances of board effectiveness. Newer theories and methodologies in management, such as "fuzzy set" approaches (e.g., Fiss, 2011) may also help with causal linkages between board decision making and outcomes. Finally, global comparative studies that look at cross-institutional settings can provide insight into board effectiveness in different contexts (Aguilera, Filatotchev, Gospel, & Jackson, 2008; Aguilera & Jackson, 2003), as well as society's conception of the scope of board accountability (Deakin & Hughes, 1997).
This article has explored the expanded roles and demands of directors grounded in shareholder and director primacy debates, as well the theories and contingencies that link corporate boards to task, group, firm, and enterprise-level outcomes. Although much progress has been made in defining what it means to be an effective board, there is more work to be done. Greater emphasis on board processes and behavioral governance theory will be important to understanding the board's decision making capabilities in this environment. Addressing endogeneity issues in the board-performance link will continue to be important, as will adopting expanded measures of board performance that include stakeholder management and CSR measures. Finally, exploring CEO/director relationships, bundles of governance mechanism, and global/institutional contingencies will be the only way that researchers can continue to chip away at the black box of board effectiveness.
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