Top Management Team Tenure and Corporate Illegal Activity: The Moderating Influence of Board Size

A significant body of research has focused on the link between the size and composition of firms' boards of directors and various organizational outcomes (Cascio, 2004; Sonnenfeld, 2004). In particular, the effect of board size on both firm performance and on the balance of power between the firm's board and its top management team (TMT) have been examined (e.g., Ocasio, 1994; Pearce and Zahra, 1992; Zahra and Pearce, 1989). In recent years, many researchers have moved beyond studying the effect that board size has on firm performance and, instead, have turned their attention to studying such board attributes as insiders versus outsiders and board member diversity to name a few. While we agree that the study of these board attributes is important, we argue that the effects of board size on certain organizational outcomes have never been fully resolved. Some might take exception to our premise; however, we feel that some additional, exploratory research into how board size affects organizations is warranted (see Dalton et al., 1999). We are particularly interested in the role that board size might play in the board's ability to monitor a firm. BACKGROUND Boards may vary significantly in size, from small (five or six members) to very large (30 or more members). Yet there is no consensus as to whether larger or smaller boards are better with respect to their impact on firm performance. With respect to firm performance, resource dependence theory asserts that larger boards are preferred, since they enhance a firm's ability to establish linkages with other firms and secure essential resources (Daily et al., 2002; Dalton et al., 1999; Goodstein et al., 1994; Hillman and Dalziel, 2003; Pfeffer, 1972; Pfeffer and Salancik, 1978; Provan, 1980). Larger boards increase the possibilities for interlocking directorates among board members and other firms, and can greatly assist a firm in its efforts to secure vital resources (Bazerman and Schoorman, 1983; Burt, 1980, 1983; Stearns and Mizruchi, 1993). As to the balance of power issue, board size has been cited as an indicator of the extent to which the board can dominate and control a firm's TMT (Johnson et al., 1996; Pearce and Zahra, 1992). Recently, this oversight function has become increasingly important due to numerous cases of corporate misconduct such as those at Worldcom and Enron (Daboub et al., 1995; Davidson and Worrell, 1988; Davidson et al., 2004). Undoubtedly, board oversight is an essential element in reducing the incidence of illegal activity committed within a firm. This study will focus on corporate misconduct, and will examine the role that board size might play in moderating the level of such misconduct. We will briefly examine a few major studies that have focused on why managers are inclined to commit illegal acts. Next, we examine the role TMT tenure plays in creating a type of lethargic mindset among managers, and how this mindset might contribute to misconduct. We then focus on an often overlooked variable, namely board size, and how the number of directors might interact with TMT tenure to influence managerial behavior. THEORY AND HYPOTHESES Corporate Illegal Activity Several studies have examined the impact of corporate illegal activity on firm performance (e.g., Baucus and Baucus, 1997; Baucus and Near, 1991; Daboub et al., 1995; Szwajkowski, 1985). Szwajkowski (1985) made a major contribution by examining some possible motives behind managerial misconduct. According to Szwajkowski, environmental factors such as pressure and/or need may stimulate illegal behavior if the misbehavior provides an estimated benefit that exceeds its estimated cost, if detected. A second factor, an organization's structural complexity, can serve as a breeding ground where managers can commit illegal acts and feel confident that their firm's complex structural design will somehow allow them to avoid detection. …