CEO-Board Relationship Evaluation: An Exploratory Investigation of the Influence of Base Rate Factors

Sturdivant (1985) outlined five key roles of the board of directors. These roles are evaluating management's performance, providing for top management succession, assessing the corporate mission and strategies, establishing policies and procedures designed to ensure corporate compliance with the law and assessing the corporation's social impact, and performing special duties. Although these roles seem appropriate, some empirical evidence indicates that they may be more myth than reality (Mace, 1971; Chitayat, 1985). Even so, these roles represent core board functions (Steiner and Steiner, 1985). Among its core duties, the board's evaluative role has received the least research attention. This lack of systematic investigation appears to be due to two factors. First, access to boards is difficult. As Stalnaker notes, what takes place behind boardroom doors "usually remains clouded in dignified privacy and is not easily examined or studied by outsiders" (1986: 1). This is particularly true in an area considered a personal matter to some. Stalnaker indicates that there is great inertia and reluctance by boards to engage in this "awkward and unpleasant" (1986: 21) activity and take effective action affecting the CEO. They are even more reluctant to share the process with outsiders. In addition, the Business Roundtable (1978) suggests that many directors believe that a formal board evaluation process could lead to excessive bureaucratic formalities, a lack of cohesion, and a decline in firm performance. Meyer and Rowan (1977) add that formal evaluation can lead to concerns about legitimacy. Again, aware of potential performance and legitimacy consequences, boards do not readily share information on their evaluation of CEOs. Second, work on the subject reflects the fact that not all researchers agree that the board actually evaluates the CEO's performance (e.g., Allen, 1974; Geneen, 1984). In this view, because board members are often chosen by the CEO, it is believed that the board seldom asks penetrating questions, and the actual power to hire and fire lies with the CEO who can replace board members. According to supporters of this view, the CEO influences the selection and retention of directors. As Lorsch notes: "Because the CEO controls the discussion process, he or she can ignore the toughest kinds of questions . " (1989: 79). Directors are often coopted (Bazerman and Schoorman, 1983). Only those candidates who "can work with" the CEO are initially "handpicked" (Pfeffer, 1972). Once elected, directors owe their allegiance individually to the CEO. Each, in his or her own self-interest or as a form of reciprocity, will do nothing that might lead to dismissal (Allen, 1974). Previous research has focused on the board's evaluation of the CEO only after the CEO-board relationship has been established for some period of time. Succession literature indicates that the board evaluates the CEO only when it is confronted with a need to replace him or her (Kesner and Sebora, 1994). The literature on external pressure also suggests that boards evaluate CEOs only when they are forced to do so by stakeholders, especially in the face of downturns in performance (cf., Daily, 1995). Finally, the literature on CEO compensation often assumes that the board evaluates the performance of the CEO prior to determining his/her annual compensation (e.g., Boyd, 1995). In each of these cases, however, the literature tends to see the evaluation by the board at a specific point in the CEO-board relationship, rather than within the ongoing relationship. For instance, implications of earlier decisions on later evaluations are not considered. This study adopts a perspective that views the CEO-board relationship as exchange. And, in contrast to past research, it looks at the initiation of the board's evaluation of the CEO. EXCHANGE THEORY AND THE HONEYMOON EFFECT Fichman and Levinthal (1991; Levinthal and Fichman, 1988) utilize exchange theory as the theoretical underpinning of their work on honeymoon effects. …