The Effects of Top Management Team External Ties and Board Composition on the Strategic Choice of Late Movers

Abstract

IntroductionEver since Berle <lnd Means (1932) discussed the sep.aration of ownership and management in the ~modem corporation,M it has been accepted that the role of the board of dieMors is to act as fiduciaries for the owners. As such. shareholders have entrusted the board to monitor and control managers to minimize agency problems. Arguably, that trustwas misplaced. After the problems of misleading financial disclosures which erupted in the late 19905 and earty 2000s (Winreki. 2007). and following arguments that have long been made in the governance literarure (Fam<l. 1980: F.lma JndJensel1, 1983: Jensen .lnd MC',kling, 1976. there were calls by stock~e)(change offidals to increase the Rumberof outsiders on bo.lrds and to s~parat~ th~ rol~s of CEO and chairman. Despit~ th~ soundness of the theoretical argum~nts which link both of thos~ actions with improved d~cision-tTh1king and cons~qu~nt firm perrormanc~, empirical r~search has not produced clear suppOrt for eith~r (D.ll ton er .11.. 1998: Golden and Z.ljac. 2001; Lmgevoon. 2001). Methodological issu~s aside, t hatoutcom~ lik~ly refl~crs the fact that the res~arch has focused on main effects, rather than digging more deeply into behavioral and interactive effects between the board and tOP managers (D.lily et al.. 2003).Judge ,lnd Zeirhaml (1992) found that boards could be involved in th~ process of formulating strategic decisions, and Westphal (1999) showed how boards couki influenc~ SlTategic decision-making through advice-giving interactions with CEOs (please also s~e O'Neal ,llid Thom,n, 1999; Westph,ll and Fredrickson, 2001: Wn. 2008~ Mort re<~n{ research has focused on the idea of collaboration berween the board ;lRd manag~ment in decidi ng strat~gy {e.g" Hemlry er at. 2010; Zh.1llg cot.1l., 20 II ).In many r~spects, that thinking blurs the line between agent and fiduciary. In other research on governance, it has been assum~d -either implicitly or explicitly -that boards exercise r~latively little independent influence over the flrm's strategic dire<tion (Li,lysinger .ltld Hoskis~on. 1990; Johnson et .11 .. 1996; ?..lhr.1 .1Od l'eJrce. 1989). Rath~r than directing strategic d~cisions, outside directors art thought to support managers by co-opting finandal institutions, helping to avoid hostile takeov~rs, and perhaps provkl.ing information and expertis~ which aids in th~ implementation of management's strategy, without determining the str.1.tegy itself (e.g~ Davis et .11 .. 1994; Mizruchi, 1996). III reviewing this literatur~, Finkelstein and Hambrick (1996) noted that behavioral perspectives on boards have been ~virtua lly uniform~ in their assumption that "boards of directors ar~ not involved in strategy formulation. HClearly, some boards get involved in slTategy making. but the preponderance of evidence supports the position of Fin· kelsteln and Hambrick. Thus. if the board's role is primarily one of monitoring and control, and direct beneficial effects on strategy are unconfirmed, then the question remains: do interaction effects berween the b...

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