Power in the Corporate Boardroom: A New Dimension in Measuring Board Power (2012)

AbstractThis study focused on the development of a new measure of board of director power. Many studies have been conducted on the individual elements of board power. However, the empirical results have been inconsistent and mixed. The fundamental perspective of this paper is that individual elements of board power do not adequately explain the relationship between board power and outcome variables such as firm performance. In this study, multiple elements of board power were combined to form an index. The results indicated that the board power index was comprised of board size, board member composition, non-duality, lead director, board member ownership, and large investor ownership. Board member composition,Key Words: Board member composition, Board member ownership and corporate powerJEL Classification: M00, M1IntroductionCorporate boards of directors have been the subject of much interest in the governance literature. One important question has focused on the board's ability to influence positively the CEO and, ultimately, the firm's financial performance. The ability to influence has been discussed as the use of power between the board and the CEO. It is generally believed that a stronger, more powerful board is more effective than a weaker, less powerful board. That is, good governance flows from a powerful board of directors. The focus of this study was to discover a measure that better defines board power.The use of power is an important element in the board-CEO relationship (Davis, Schoorman, & Donaldson, 1997). Conflicts between the board and the CEO are typically resolved through the use of power (Finkelstein & Hambrick, 1996). According to Finkelstein and Hambrick (1996), the basis of agency theory is power and the distribution of power between boards and CEOs is a critical aspect of agency theory. Dalton, Daily, Ellstrand, & Johnson (1998) suggested that the basis of stewardship theory is also power/control but, contrary to agency theory, the distribution and use of power favors the CEO. A review of the literature revealed the following board power variables: board size, board composition, average board tenure, CEO non-duality, lead directors, and board member ownership (e.g., Allan & Widman, 2000; Khanchel, 2007; Lam & Lee, 2008; Ning, Davidson, & Zhong, 2007; Sundaramurthy, Rhoades, & Rechner, 2005).Background of the StudyElements of Board PowerBoard size. Board size has been the subject of corporate governance research for several decades (e.g., Alexander, Fennell, & Halpern, 1993; Dalton, Daily, Johnson, & Ellstrand, 1999; Goodstein, Gautam, & Boeker, 1994; Mintzberg, 1983b; Ning et al., 2007; Pfeffer, 1972, 1973; Pfeffer & Salancik, 1978; Provan, 1980; Webb, 2006). Numerous studies have attempted to discover a relationship between board size and firm performance (Barnhart & Rosenstein, 1998; Chiang, 2005; Dalton et al., 1999; Mclntyre, Murphy, & Mitchell, 2007; Mir & Seboui, 2008; Yermack, 1996). However, there has been little consensus on the relationship between board size and firm performance (Mir & Seboui; Williams, Fadil, & Armstrong, 2005). Two of the more frequently cited studies regarding board size and firm performance are Dalton et al. (1999) and Yermack (1996). The Dalton et al. (1999) meta-analysis, consisting of 27 studies, found support for the positive relationship between board size and firm performance. Further analysis revealed that the effect was greater for small firms than large firms (Dalton et al, 1999). Additionally, board composition (the percentage of outside directors) was found not to moderate the relationship between board size and firm performance (Dalton et al., 1999). On the other hand, the Yermack study supported an inverse relationship between board size and firm financial performance. In other words, firm performance increases as board size decreases. …