Intersection of Upper Echelons and Corporate Governance: Ramifications for Market Response to Acquisition Announcements

Upper echelons theory states that prominent organizational members affect corporate outcomes, and firms are reflections of key decision-makers' mental constructs and propensities (Geletkanycz and Black, 2001; Hambrick and Mason, 1984). Demographic factors serve as proxies for mental constructs driving human propensities and firm outcomes. The impact of incentives, largely ignored in upper echelons theory, is addressed in agency theory (Hambrick and Jackson, 2000; Ryan and Wiggins, 2004). Top executives may choose firm strategies for personal benefits at a cost to shareholder wealth. Governance mechanisms limiting such abuse include managerial incentives and director incentives to monitor actively (Byrd and Hickman, 1992; Chang, 2003). Both agency and upper echelons perspectives are informative regarding the influences of directors and executives, each with a different focus. The upper echelons view is that decision-makers affect outcomes and they matter both for good and for ill. "Executives make decisions and engage in behaviors that affect the health, wealth, and welfare of others--but they do so as flawed human beings" (Hambrick, 2007: 341). Whereas upper echelons theory is silent on the issue of incentives, agency theorists argue that ownership incentives help align CEO and shareholder interests (Chang, 2003; Kroll et al., 1997; Wright et al., 2002b), motivate directors to monitor (Hambrick and Jackson, 2000; Ryan and Wiggins, 2004), and offer advice (Demb and Neubauer, 1992; Lorsch and MacIver, 1989). These key players influence acquisition quality, which has significant shareholder consequences (Andradade et al., 2001; Wright et al., 2002b). Theory and Hypotheses This study examines the interaction of experiences and incentives of two powerful corporate players: blockholder-directors and owner-CEOs. Pitcher and Smith (2001) recommend studying the impact of the dispositions and propensities of powerful individuals on corporate behavior and outcomes. Hambrick argues that if it is worthy to comprehend why enterprises behave or perform the way they do, "we must consider the dispositions of their most powerful actors ..." (2007: 334). Blocldaolder-directors are prominent because of their monitoring or advising roles as outsiders, as well as their control of five percent or more of a firm's outstanding equity stakes. Owner-CEOs are likewise influential because of their position of authority and significant shareholdings. The premise is that investment in incentives to manage or monitor and counsel can be efficient. CEO ownership captures investments in managerial incentives. Blockholder-director ownership captures investments in director monitoring and counsel. To address director or managerial propensity the present focus is on CEO and director experience. Experience gained in professional activities and via connections with others such as business-related networks (e.g., Collins and Clark, 2003; Geletkanycz and Hambrick, 1997), or external involvement such as international involvement (e.g., Kor, 2003; Reuber and Fischer, 1997; Sambharya, 1996), is an important indicator of mental constructs driving director or executive propensity. Good and bad experiences, however, differ in their consequences. The present proposition is that executives and directors who have served with value-creating enterprises are endowed with good experiences, whereas those who have served with value-destroying firms have gained bad experiences. Experiences gained through prior acquisitions or experiences related to a target firm's industry can affect acquisitions. Good versus bad prior experiences may be consequential as to whether directors or CEOs matter positively or negatively. This conjecture modifies the proposal of Hambrick (2007), but is compatible with his notion that key organizational players matter for good or for ill. Whereas previous good experiences with desirable results may be resorted to repeatedly, prior bad experiences with unfavorable consequences may also be repeated. …