Chief Executive Officers, Top Management Teams, and Boards of Directors: Congruent or Countervailing Forces?

Chief Executive Officers, Top Management Teams, and Boards of Directors: Congruent or Countervailing Forces?

Catherine M. Daily

Conceptualization and research have addressed the homogeneity/ heterogeneity of top management teams and, independently, the effectiveness of alternative corporate governance structures. Those studies which do concurrently consider directors and management focus largely on the board’s monitoring of the CEO. The interdependencies which exist among chief executive officers, top management teams, and boards of directors necessitate an integrative approach which simultaneously considers these groups of strategic leaders. In this paper, we provide a rationale whereby a firm might elect a CEO or board dominance structure as compared to more balanced governance structures. We suggest that the efficacy of such choices may depend on several attendant conditions including the portfolio exposure and globalization of the firm, its ownership patterns (e.g., five percent owners, institutional investors, positions held by other corporations), and resource dependence and information requirements.

After nearly two decades of relative inattention to the role of senior executives in corporate outcomes, researchers have once again begun addressing these potential relationships (Hambrick, 1989). Hambrick suggested that this revitalization was “inevitable,” primarily because strategic leaders “account for what happens to the organization” (1989, P. 5). Table 1 provides some demonstration of the renewed interest in strategic leadership (Hambrick, 1987) or an upper echelons perspective (Hambrick & Mason, 1984). The concept of strategic leadership would include the roles of CEOs, groups of highly ranked members of the corporation more widely defined as top management teams (TMTs), and boards of directors (Hambrick, 1987). We recognize that others are evidently less optimistic about the promise of this line of inquiry (e.g., Davis-Blake & Pfeffer, 1989; Meindl & Ehrlich, 1987); still, considerable evidence would support the view that strategic leadership “does matter” (cf., Day & Lord, 1988; Hambrick & Mason, 1 984; Thomas, 1988).

Our review of the extant literature led us to conclude that the resurgence in strategic leadership research has largely been conducted in parallel. This research rarely addresses whether certain aspects of the CEO role, TMTs, and board governance structures are complementary or otherwise (see Johnson, Hoskisson & Hitt, 1993 and Walsh & Seward, 1990 for notable exceptions). Those studies which do examine intersections among these groups of strategic leaders focus primarily on the relationship between the CEO and board of directors (e.g., Finkelstein & D’Aveni, 1994; Fredrickson, Hambrick & Baumrin, 1988; Mizruchi, 1983; Pearce & Zahra, 1991; Zald, 1969). Furthermore, these studies largely address directors’ monitoring of CEOs as manifest in succession and compensation practices (e.g., Alexander, Fennell & Halpern, 1993; Hermalin & Weisbach, 1988; Kerr & Bettis, 1987; O’Reilly, Main & Crystal, 1988). Research has also addressed the propensity of boards to approve managerial entrenchment mechanisms such as gold en parachutes (Cochran, Wood & Jones, 1985; Wade, O’Reilly & Chandratat, 1990), greenmail (Kosnik, 1987) and poison pills (Mallette & Fowler, 1992).

We propose an extension of this literature which would simultaneously consider TMT homogeneity/heterogeneity and board composition, as well as board leadership structure. The election of alternative management and board structures results in either a balanced or dominant governance configuration. For example, these choices could be congruent with a CEO control structure comprised of (1) a joint CEO/chairperson, (2) an insider dominated board, and (3) a homogeneous top management team. An alternative congruent structure would be board dominated with (1) the positions of CEO and board chairperson held by separate individuals, (2) a board comprised largely of outside members, and (3) a heterogeneous top management team. Notice that both of these approaches, while congruent, result in an asymmetrical allocation of influence either to the CEO or the board of directors (see Table 2). Alternative configurations would result in countervailing structures where management and board powers would balance each other (see Table 3).

The distribution of power among CEOs, TMTs, and boards of directors has been the subject of previous conceptualization (e.g., Mizruchi, 1983; Fredrickson, Hambrick & Baumrin, 1988). Pearce and Zahra (1991, p. 135) have suggested that “most [corporate governance] reform efforts have been based on the premise that a healthy balance between CEO and board powers is required to ensure effective company performance.” Accordingly, configurations of CEO/board structures, board composition, and TMTs would be selected to provide such countervailing influences. We suggest that the efficacy of these choices may be accompanied by several attendant conditions including the diversification of firms’ portfolio (strategic focus) and globalization of the firm, its ownership patterns (e.g., five percent owners, institutional investors), and firms’ resource dependence and information requirements. Even with these conditions, however, the “balance” to which Pearce and Zahra (1991) refer may compromise the effectiveness of firms’ strategic leaders.

In subsequent sections we provide an overview of the rationale for the criticality of TMT homogeneity/heterogeneity, a brief review of bases for prescribing certain board structures over others, and a discussion of preferences concerning the dual versus independent board leadership structure. As will be demonstrated, the rationales for prescribing one configuration or another of TMTs and boards of directors are grounded in similar theory. Following development of these attendant conditions, we provide a discussion of dominant and balanced governance configurations and the conditions under which each may be expected to operate.

Top Management Teams (TMTs)

The rationale for the superior influence of the TMT is straightforward (see Hambrick, 1987, 1989 for an expanded discussion). As there is much information and many options available to the CEO, delegation and collaboration must occur between the CEO and top management. Evidence has suggested that certain factors, values, and changes shared among TMT members are better predictors of organizational outcomes than those elements in CEOs considered singularly (e.g., Bantel & Jackson, 1989; Gupta, 1988; Hage & Dewar, 1973; Wiersema & Bantel, 1992). Another foundation for the TMT perspective has been referred to as organizational demography–“the composition, in terms of basic attributes such as age, sex, educational level, length of service or residence, race and so forth of the social entity under study” (Pfeffer, 1983, p. 303). Pfeffer argues that the demography of organizations “is an important, causal variable that affects…a number of organizational outcomes” (1983, p- 350). The application of this rationale to the TMT is persuasively captured by Hambrick and Mason:

If the concept of demography can be applied to a total organization, it can also be applied to the organization’s dominant coalition (1984, p. 202).

The relevant discussion and research concerning TMT demographics and factors is diverse in its objectives. D’Aveni (1990) and Hambrick and D’Aveni (1992), for example, included TMT considerations in their examinations of firms’ bankruptcy. Variations in decision processes have also been addressed (Bourgeois & Eisenhardt, 1988; Eisenhardt, 1989). Organizational renewal, growth, innovation and strategic change, too, have been examined (Bantel & Jackson, 1989; Eisenhardt & Schoonhoven, 1990; Wiersema & Bantel, 1992). Corporate performance and TMT factors have been the subject of investigation as well (Bourgeois, 1980b; Dess, 1987; Grinyer & Norburn, 1975; Michel & Hambrick, 1992; Murray, 1989; Shanley & Correa, 1992).

One important theme in this body of research involves the homogeneity/heterogeneity of the TMT and its impact on corporate outcomes. Simply stated, the issue is whether firms managed by TMTs with similar demographic backgrounds and values have superior outcomes (e.g., financial performance, growth, innovation) as compared to their counterpart firms with more diverse TMTs. While we believe that the issue is fairly stated here, there is certainly no consensus on whether homogeneity or heterogeneity will lead to the superior outcomes. In fact, there is a stream of argument and research which sets forth some evidence for the superiority of homogeneity (Dess, 1987; Hrebiniak & Snow, 1982; Michel & Hambrick, 1992; O’Reilly, Caldwell & Barnett, 1989; O’Reilly & Flatt, 1989), heterogeneity (Bantel & Jackson, 1989; Bourgeois & Eisenhardt, 1988; Eisenhardt, 1989; Eisenhardt & Schoonhoven, 1990; Grinyer & Norburn, 1975), and a contingency perspective (Dess & Origer, 1987; Murray, 1989; Priem, 1990; Wiersema & Bantel, 1 992).

Thus, this research has produced conflicting results. Several conclusions can be drawn from these findings, however. TMT heterogeneity tends to be associated with a diversity of views. Disagreement may help ensure more thorough analysis and more effective strategy formulation (Bourgeois, 1985): TMT homogeneity is typically associated with consensus. Proponents of this view have suggested that organizations cannot effectively pursue more than one strategy at a time and that effectively pursuing a given strategy requires a unified strategic focus provided by a homogeneous TMT (Dess, 1987).

TMT heterogeneity may be related to the overall size of the team (Bantel & Jackson, 1989); however, homogeneity is certainly possible in a focused group of top executives, irrespective of team size. As will be developed in subsequent sections, TMT heterogeneity/homogeneity may be largely dependent upon the strategic focus of the organization and the extent to which the firm operates in global markets. This line of reasoning is consistent with past research which has found that diversification and TMT size are positively related to firm size (e.g., Eisenhardt & Schoonhoven, 1990; Grinyer & Yasai-Ardekani, 1981; Wiersema & Bantel, 1992).

It is interesting, and a principal factor propelling our interest in this research, that the various explanations for the superiority of one TMT configuration over another parallel those driving similar debates over the structure of boards of directors.

Boards of Directors

There is a distinguished tradition of thought and research which argues that boards of directors can influence the corporation. Two aspects of board configuration have dominated the extant research: the composition of the board, typically operationalized as the proportion of outside members on the board (e.g., Baysinger & Butler, 1985; Dalton & Kesner, 1987; Kesner, Victor & Lamont, 1986), and CEO duality, the same person serving simultaneously as CEO and chairperson of the board.

Board Composition

The composition of the board of directors is perhaps the most widely studied variable in governance research (Judge & Zeithaml, 1992). The rationale for board of directors’ efficacy based on their composition is similar to that for TMT effectiveness. At issue is the relative advantage of an outsider dominated board compared to those boards which are insider dominated. The insider dominated board, due to the predominance of managerial perspectives, may be framed as the functional equivalent of a homogeneous TMT; the outsider dominated board, due to the diversity of its membership, may be viewed as the functional equivalent of a heterogeneous TMT. A number of researchers have addressed the heterogeneity which may exist among outside directors (e.g., Baysinger & Butler, 1985; Daily & Dalton, 1994; Kesner, 1988; Kosnik, 1987; Rosenstein & Wyatt, 1990).

As with TMT research, examinations of board composition have been conducted across a variety of salient corporate outcomes (e.g., corporate crime, Gautschi & Jones, 1987; incidence of golden parachutes, Cochran et al., 1985; severance agreements, Dalton & Rechner, 1989; greenmail, Kosnik, 1987; poison pills, Mallette & Fowler, 1992; international comparisons, Dalton & Kesner, 1987, Dalton, Kesner & Rechner, 1988; incidence of shareholder lawsuits, Kesner & Johnson, 1990; R&D, Baysinger, Kosnik & Turk, 1991; equity holdings, Kesner, 1987; Oswald & Jahera, 1991; and top management compensation, Kerr & Bettis, 1987). A substantial amount of activity is also evident in the area of board composition and financial performance (e.g., Baysinger & Butler, 1985; Chaganti, Mahajan & Sharma, 1985; Hill & Snell, 1988; Schellenger, Wood & Tashakori, 1989). Indeed it is largely on this dimension that the importance of the outside director has been recognized and accompanied by an emphasis on increasing the effectiveness of boards through corporate board reform (e.g., Baldwin, 1984; Kesner et al., 1986; Mintzberg, 1983).

Here, as in the TMT research, there is little consensus. Some work-has reported that higher proportions of outside board members were associated with poorer performance (Vance, 1968, 1978). Pfeffer (1972) noted a curvilinear relationship. Other research concluded that boards with greater outsider representation were associated with higher financial performance (Baysinger & Butler, 1985). Additional examinations provided no evidence of systematic relationships between board composition and corporate financial performance (Chaganti et al., 1985; Kesner et al., 1986). While it seems clear that there is no consistent empirical evidence lending credence to one view over another, an insistence on having a majority of outsiders serve on boards of directors has continued to be one of the most extensively discussed board reforms (Zahra & Pearce, 1989).

Agency theory and resource dependence theory provide some guidance on the superiority of outside directors (e.g., Fama & Jensen, 1983; Pfeffer & Salancik, 1978; see also Zahra & Pearce, 1989). Agency theory addresses concerns surrounding what is perhaps the most important function of the board–monitoring the firm’s management (Fleischer, Hazard & Klipper, 1988; Mintzberg, 1983; Waldo, 1985). Simply stated, the issue is the extent to which inside directors, members of management, can avoid conflicts which are likely to arise in attempting to maintain loyalty to their superiors (i.e., CEOs) while at the same time serving the interests of the shareholders (Baysinger & Hoskisson, 1990; Fama, 1980; Fama & Jensen, 1983).

The resource dependence framework (Pfeffer & Salancik, 1978; Selznick, 1949) suggests that the selection of outside board members can be viewed as a strategy for dealing with the organization’s relationships with its environments. In order to be effective, boards must be comprised of individuals best able to acquire necessary resources from the external environment (Pfeffer, 1981). Some support has been found for the effectiveness of outside directors as resource acquisition agents (Bazerman & Schoorman, 1983; Boeker & Goodstein, 1991; Pfeffer, 1973; Provan, 1980; Zald, 1967).

Outside directors may also fulfill the resource role by enhancing the reputation and credibility of the organization (Hambrick & D’Aveni, 1992; Mintzberg, 1983). Beyond control considerations, a board dominated structure may ensure the continued operation of the firm through access to valued information and resources, facilitation of interfirm commitments, and establishing and maintaining firms’ legitimacy (e.g., Bazerman & Schoorman, 1983; Pfeffer & Salancik, 1978; Provan, 1980). An additional benefit of the outside director is the ability to provide a quality of advice and counsel to the CEO unavailable from inside directors (Alibrandi, 1985; Anderson & Anthony, 1986; Waldo, 1985). CEOs evidently appreciate the perspective of the outside director as they are “glad, at least on occasion, to have someone to whom they could turn for advice” (Stewart, 1991, p. 519).

While there is considerable support for the superiority of outside directors, Baysinger and Hoskisson (1990) have provided some rationale for the benefits of inside directors. They have suggested that an exclusive reliance on outside directors may lead to executive-level evaluations which are based on short-term financial measures, rather than evaluations which account for the quality of the decisions made and the potential for long-term benefits as a result of those decisions. Inside directors, by virtue of their involvement in firms’ decision-making processes, are able to provide higher quality information concerning executives’ performance. Consequently, with respect to information gathering, inside, not outside, directors may be preferred. We would note, however, that this concern may easily be obviated by requesting this information of TMT members, regardless of their service on the board.

CEO Duality

Selection of alternative board leadership structures may also be consistent with homogeneity/heterogeneity arguments. Multiple perspectives have informed conceptualization and empirical tests of effective means for achieving a productive balance between executive and board powers (e.g., D’Aveni, 1989; Finkelstein & D’Aveni, 1994; Judge & Zeithaml, 1992; Harrison, Torres & Kukalis, 1988; Herman, 1981; Mallette & Fowler, 1992; Zahra & Pearce, 1989). Board leadership structure provides one indicator of where the balance of power lies. For approximately eighty percent of large firms, the CEO serves simultaneously as chairperson of the board (Dalton & Kesner, 1987; Lorsch & MacIver, 1989; Rechner & Dalton, 1991). Similar numbers are found in small firms (Daily & Dalton, 1992b, 1993). While this arrangement has been subjected to continuing controversy (Anderson & Anthony, 1986; Chaganti et al, 1985; Dalton & Kesner, 1987; Dalton et al., 1988; Mallette & Fowler, 1992; Rechner & Dalton, 1989, 1991), some support has been found for both board leadership structures (Finkelstein & D’Aveni, 1994).

A primary issue is the extent to which having the CEO serve as the designated leader of both top management and directors charged with evaluating firms’ management leads to excesses and/or abuses which are damaging to shareholders. The dual structure continues to be harshly criticized.

There are those who argue that this dual role represents a prima facie case of conflict of interests. Given that one of the board’s prime charters is to monitor the performance of management, there is some question as to whether a CEO/chairperson can exercise the necessary independence of judgement for such self-evaluation (Rechner & Dalton, 1989, p. 141).

As further support for the independent leadership structure, Zahra and Pearce (1989) have suggested that such a configuration may facilitate more active discussion and debate between the board and executive components. This board leadership structure, then, may be analogous to the diversity of views achieved through heterogeneity.

Support for the independent structure is by no means universal. The dual structure has been strongly advocated as well.

The reason that positions of chairman and CEO are usually combined is that this provides a single focal point for company leadership. There is never any question about who is boss or who is responsible. This is an important issue…[otherwise]…this is guaranteed to produce chaos both within the organization and in relationships with the board (Anderson & Anthony, 1986, p. 54).

This unity of command clearly facilitates the perspective and discretion of the CEO, and arguably management (Alexander et al., 1993; Finkelstein & D’Aveni, 1994; Lorsch & MacIver, 1989). Moreover, the dual structure may indicate that the firm is guided by a strong leader with a clear sense of direction (Salancik & Meindl, 1984). Notice also that this unified vision is similar to the notion of consensus achieved through homogeneity.

The tradeoff, here, is one of greater independence between the executive and director branches of the firm as compared to a central locus of power in the firm. The election of the dual leadership structure tilts the balance of power toward the executive office whereas separation of the positions of CEO and board chairperson favors a powerful board of directors (independent board leadership structure).

A Model of Corporate Structure

As illustrated in the preceding sections, there is some divergence of opinion regarding the appropriate reliance on homogeneous/heterogeneous TMTs, board composition, and CEO/board chairperson structures. It may be that some of the disparity noted in the extant literature is in part related to the conditions under which the subject firms operate. No systematic approach for recommending appropriate configurations has been offered. A common underlying theme, however, is a balance between executive and board powers.

The efficacy of a dominant or balanced structure may be dependent upon several “attendant conditions.” These conditions include ownership concentration (institutional ownership, five percent equity holders), portfolio exposure (strategic focus and globalization), and resource dependence and information requirements (see Figure 1). As will be demonstrated, the board of directors may be most salient with respect to ownership concentration and resource dependence requirements. Top management may be most critical for portfolio exposure and information requirements.

The following section is organized into three parts. In the first we provide a brief overview of the attendant conditions. Next, we describe “dominant” governance structure configurations and those conditions under which they may be most effective. Lastly, we address those configurations which we describe as “balanced.” As will be evident, the political or compromising nature of the balanced structures may render them less effective under any conditions.

Attendant Conditions

Ownership concentration has been extensively researched in the governance literature (e.g., Baysinger et al., 1991; Daily & Dalton, 1992a; Hill & Snell, 1988; Kesner, 1987; Wade et al., 1990; see also Bethel & Liebeskind, 1993; Hoskisson, Johnson & Moesel, 1994). Institutional and large block holders have been increasingly active in their advocacy for specific governance structures (Fromson, 1990; Salwen & Lublin, 1992). These groups have both the incentive and power to monitor and discipline ineffective managers (Bethel & Liebeskind, 1993; Demsetz, 1983).

Among the most commonly sought actions are increasing the proportion of outside directors and separating the positions of CEO and board chairperson. Movement toward these structures is intended to increase firms’ value as a result of enhanced monitoring of management. Large investor groups contend that board composition and leadership structure directly and significantly impact firm performance (Fromson, 1990; Kim. 1992; Schellhardt, 1991). Owners of significant amounts of corporate equity have considerable incentive to create change within the organization since selling large blocks of stock is often difficult and costly (Pound, 1992). As evidence, institutions and large blockholders have been found to significantly impact corporate strategy (Bethel & Liebeskind, 1993; Hoskisson et al., 1994). Institutional investors, for example, were found to be negatively related to firm diversification (Hoskisson et al., 1994). This same level of activism with respect to initiating TMT changes has not been evident among large investor groups.

Resource dependence requirements are also central to discussions of governing structure. Outside directors may contribute superior service in the provision of resources, particularly when accompanied by the independent board leadership structure. Outside directors representing important external constituencies provide the firm with resources otherwise unavailable from firm management (e.g., Bazerman & Schoorman, 1983; Boeker & Goodstein, 1991). Linkages with critical external constituents serve as a buffer between the organization and its operating environment (e.g., Provan, 1980; Zald, 1969). Outside directors, in effect, serve as a means for overcoming increased environmental uncertainty. Following a performance downturn, outside directors are more likely to join the board when the firm initiates major strategic changes and needs to re-establish external contacts (Hermalin & Weisbach, 1988). This is also consistent with Hambrick and D’Aveni’s (1992) finding that outside directors tend to leave the declinin g firm, and not be replaced, in the years immediately preceding bankruptcy.

The portfolio exposure of the firm has also received considerable attention (e.g., Alexander, 1991; Baysinger & Hoskisson, 1990; Lubatkin & Chatterjee, 1994; Michel & Hambrick, 1992). Diversification (strategic focus) and global exposure may be more directly related to the TMT than the board of directors. Managers have been found to demonstrate preferences in the level and mix of diversification (Baysinger & Hoskisson, 1990; Bourgeois, 1980a; Lubatkin & Chatterjee, 1994). These preferences reflect managers’ attempts to control the risks associated with operating in limited domains (Baysinger & Hoskisson, 1990; Lubatkin & Chatterjee, 1994). Outside directors, however, may demonstrate fewer preferences in these areas because they do not bear the same level of risk as management with respect to the performance implications of diversification strategies (e.g., Hill & Snell, 1988).

Still, we acknowledge that outside directors are not without preferences, as they are ultimately held accountable for firm outcomes. Outside directors’ reputations may be dramatically affected, for example, when charged with shareholder liability suits (e.g., Kesner & Johnson, 1990; see also Fama & Jensen, 1983) or in the case of firm failure (e.g., Sutton & Callahan, 1987). We would note, however, that these are relatively rare events and consequently potential reputational effects, may not always be salient for directors.

Firms which are more heavily diversified and have market exposure m global markets may have vastly different strategic leadership needs than those firms with little diversification and global exposure. Highly diversified firms and those operating in global markets, for example, will face a more complex operating environment which necessitates timely information (Alexander, 1991). A heterogeneous TMT, therefore, may help organizations manage interdependencies resulting from diversified portfolios (Michel & Hambrick, 1992).

Consequently, the composition of the TMT (heterogeneous/homogeneous) may be most closely related to firms’ information requirements (e.g., Michel & Hambrick., 1992). Alexander et al. (1993, p. 92) have noted the centrality of information in this domain, noting in particular the need to “acquire, control or coordinate the flow of information” between the executives and directors. Corporate insiders, as a function of their day-to-day involvement in firm operations, have superior levels of information as compared to those outside the firm (e.g. Baysinger & Hoskisson, 1990). Careful coordination of information between management and outside directors, however, is often dependent on the willingness of the CEO to share internal information with directors in an accurate and timely manner (e.g., Wade et al., 1990; Zald, 1969). The quality and timeliness of sharing information with outside directors may dramatically impact the quality of outside director monitoring by affecting their ability to thoroughly process rel evant information. These interdependencies provide the impetus for simultaneously considering CEOs, TMTs, and directors. The relationship between these attendant conditions and alternative governance configurations follows.

Dominant Governance Configurations

The dominant and balanced governance structure configurations will be discussed in turn; however, the discussion of the CEO dominance structures will be somewhat extended as we establish each attendant condition. Accordingly, subsequent discussion of the remaining configurations (board dominance and balanced) can proceed more succinctly (see Table 2).

CEO Dominance. The CEO dominance configuration is characterized by the joint CEO/board chairperson structure and an insider dominated board. Whether accompanied by a homogeneous or heterogeneous TMT, we would anticipate such structures to be accompanied by low institutional holdings and a limited number of large blockholders. Consistent with agency theory arguments, the potential for management to behave opportunistically, at shareholders’ expense, is enhanced with this governance configuration (Eisenhardt, 1989; Fama & Jensen, 1983; Weisbach, 1988). It is clear that a recent series of institutional holder activism is driven in part by demands for changes opposite those governance structures represented here (Foust & Schine, 1990; Fromson, 1990; Norton, 1991). Moreover, we suspect that most five percent owners and corporations holding substantial equity interests would have little long-term confidence in firms configured in this manner.

We would also expect the CEO dominance structures to have relatively few resource dependence requirements, as this configuration largely substitutes inside officers of the corporation for outside board members. While inside directors, as high ranking officers of the corporation, would be expected to have superior knowledge about firm operations (Baysinger & Hoskisson, 1990), it is outside board members who have traditionally been relied on for resource dependence functions (Bazerman & Schoorman, 1983; Boeker & Goodstein, 1991; Pfeffer & Salancik, 1978).

While power is clearly concentrated in favor of the CEO for this configuration, there may be situations in which this choice is well advised. Periods of organizational change or transition may require the centralization of authority provided by the CEO dominance configuration. Venture capitalists, for example, have recognized the benefits of a visionary CEO/founder with intense centralization of authority and discretion (see e.g., Beam & Carey, 1989; Churchill & Lewis, 1983;. Dyer, 1989). A primary consideration in venture capitalists’ support of a new venture is the skill and capability of the founder/CEO seeking financial assistance (MacMillan, Siegel & Narasimha, 1985). This profile is not considered to be a permanent state, however, as the entrepreneurship literature also reflects the importance of a transition from the founder/CEO to a more decentralized form (Barnes & Hershon, 1989; Flamholtz, 1986; Tashakori, 1980).

Similar arguments could be marshalled for a firm in crisis. The turnaround literature, as well as that of organizational decline, often notes the necessity of replacing CEOs and empowering their successors with centralized autonomy (Bibeault, 1982; Hofer, 1980; Harrison et al., 1988; O’Neill, 1986). A centralized leadership structure may engender confidence among firms’ stakeholders that the firm is not “headless” (Miller, 1977, p. 48). Once again, we would not suggest that this arrangement is advantageous in the longer term. In the shorter term, however, the expediency and control provided by such means may be indispensable.

In a pattern that will recur across both the dominant and balanced governance structures, the distinction between homogeneous/heterogeneous TMTs is a function of information requirements. Firms with modest portfolios, low globalization, and generally low information requirements may be reasonably served by homogeneous TMTs. Firms with more extensive portfolios, higher globalization, and higher information requirements will prefer heterogeneous TMTs.

CEO dominance configurations can be differentiated by the nature of the TMT. Homogeneous TMTs would only be indicated for firms with a relatively narrow strategic focus, low globalization, and generally low information requirements. There is an extensive literature suggesting that both corporate portfolio management (Grant, 1987; Hill & Hoskisson, 1987; Hoskisson & Hitt, 1990; Hoskisson & Turk, 1990; Johnson et al., 1993; Keats & Hitt, 1988; Michel & Hambrick, 1992; Prahalad & Bettis, 1986) and globalization (Ghoshal & Bartlett, 1990; Ghoshal & Nohria, 1989; Ramanujam & Varadarajan, 1989; Ricks, Toyne & Martinez, 1990; Sundaram & Black, 1992) greatly increase the complexity of the firm and its information requirements. It would seem that reliance on a homogeneous TMT under these circumstances would be less than judicious. Conversely, the heterogeneous TMT would provide organizations in those environments with a higher quality of the specialized knowledge necessary for extensive diversification, high globaliz ation, or both (Dess & Origer, 1987; Thomas & McDaniel, 1990; Wiersema & Bantel, 1992).

A series of propositions may be sensibly offered with regard to the CEO dominance governance configurations.

P1: Finns, irrespective of their governance structures, with modest portfolios, low globalization, and low information requirements will have a higher incidence of homogeneous top management teams.

P2: Firms, irrespective of their governance structures, with extensive portfolios, high globalization, and high information requirements have heterogeneous top management teams.

P3: Firms with congruent top management teams matching their portfolio, globalization, and information requirements have higher performance than their incongruent counterparts.

P4: Firms in periods of organizational change or transition have a higher incidence of CEO dominance governance structure.

P5: Firms with low institutional and low outside ownership positions have a higher incidence of CEO dominance governance structure.

P6: Firms with low resource dependence requirements have a higher incidence of CEO dominance governance structure.

P7: Firms in a period of organizational change or transition with a CEO dominance governance structure have higher post-change/transition performance than with alternative governance structures.

Board Dominance. A second dominant configuration is that of board dominance. Here, the CEO and board chairperson roles are held separately. Also, the board is comprised largely of outside members. This is the structure most favored by institutional holders and large blockholders (Foust & Schine, 1990; Fromson, 1990; Margotta, 1989; Salwen & Lublin, 1992). Under this structure, the CEO may have great discretion to manage the affairs of the corporation but has, at all times, the oversight of the board in its service, control, and resource-based roles (Zahra & Pearce, 1989).

As contrasted with the CEO dominance structure, we would expect to find high levels of institutional ownership and five percent blockholders. This governance configuration may be preferred by outside equity holders because it holds greater potential for effective board oversight. As previously noted, institutions and large blockholders have demonstrated a propensity to engage in firm monitoring (e.g., Bethel & Liebeskind, 1993; Hoskisson et al., 1994; Levy, 1993); however, this activity can be costly and time consuming (Pound, 1992). Therefore, these groups would presumably be attracted to firms with boards who attend to this responsibility.

With the board dominance structure, an additional ownership variable may be salient–outside director stockholdings. Institutions and large blockholders’ confidence in the firm may be bolstered when outside directors hold significant portions of firms’ stock (e.g., Baysinger & Butler, 1985; Johnson et al., 1993). Kesner’s (1987) study may illustrate the rationale for increased confidence. She found a positive association between firm financial performance and director stock holdings for firms operating in high growth industries, indicating that ownership interests may enhance directors’ monitoring function arid consequently firm performance. Hoskisson et al. (1994), also reported some support for this position. They found that outside directors with substantial equity interests are associated with faster restructuring periods and higher market performance. Also, outside directors with substantial stock ownership may be able to limit managerial behaviors not isomorphic with the interests of shareholders (e.g. , Hambrick & Finkelstein, 1987). Outside directors with little or no ownership in the firm may be less vigilant (e.g., Johnson et al., 1993; Kosnik, 1990).

There is some disagreement regarding the level or quality of monitoring from outside directors when they hold equity in the firms they serve. Much of the basis for the assertion that outside directors are more efficient monitors, as compared to inside directors, is their independence from firm management. In the instance where outside directors hold substantial amounts of firm stock, independence may be limited. Daily and Dalton (1992a,p. 109) have noted this tension:

If, in fact, board members did have an increased financial interest in the firm, it might be reasonably expected that their interests and those of the shareholders–the group they presumably represent–might converge. At the same time, however, the notion of “outside” direction would be lost. In general, one could hardly expect a director with a large equity stake in the firm to be a dispassionate observer. It might also be difficult to anticipate that a director would be independent of the very management which provided this largess.

Additionally, this structure would presumably provide more access to critical external resources and information based on its preponderance of outside board members. An outsider dominated board may be more likely than one that is insider dominated to reflect a wide degree of heterogeneity. One aspect of outsider diversity is captured in the distinction between affiliated and non-affiliated outside directors (e.g., Baysinger & Butler, 1985; Daily & Dalton, 1994; Johnson et al., 1993; Kosnik, 1987; Zald, 1967). While the character of affiliated and non-affiliated directors dramatically differs, both types of outside directors may be especially useful in the resource acquisition role.

Non-affiliated directors include outside directors who are truly independent of firm management. Examples of individuals who would be included as non-affiliated outsiders are public and professional directors, independent executives from other firms, representatives of non-profit agencies, and university professors (e.g., Baysinger & Butler, 1985; Rosenstein & Wyatt, 1990).

Affiliated directors are outside directors with special ties to the firm. The Securities and Exchange Commission regulation 14A, item 6(b) sets forth specific guidelines for classification of affiliated directors (see Daily & Dalton, 1994). Essentially, any business or personal relationship existing between a director and principal officer of a corporation must be disclosed. The point is that many “outside” directors are something less than independent of the CEO and/or management.

Based on the TMT rationale previously provided, board dominance profiles with modest portfolios, low globalization, and generally low information requirements may be reasonably served by homogeneous TMTs. Firms with more extensive portfolios, higher globalization, and higher information requirements will prefer heterogeneous TMTs. Under this structure, the balance between affiliated/ non-affiliated directors may be a function of the character of the TMT.

Under conditions of board dominance with a homogeneous TMT structure, non-affiliated outside directors may be the strong preference of outside equity holders. The strong management perspective which may emerge from a homogeneous TMT may be better tempered by independent outside directors, as compared to directors with ties to firm management. Conversely, the diversity associated with a heterogeneous TMT configuration would suggest some representation from affiliated directors (e.g., representatives of major customer or supplier groups) may be appropriate. Institutions and large blackholders may be uncomfortable with a preponderance of affiliated directors, however, as these directors may lack the independence necessary for effective monitoring. The independent board leadership structure which characterizes the board dominance governance configurations provides some safeguards along this dimension.

From these observations, too, a number of propositions can be derived:

P8: Firms not experiencing periods of organizational change or transition have a higher incidence of board dominance’ governance structure.

P9: Firms with high institutional and concentrated outside ownership positions have a higher incidence of board dominance governance structure.

P10: Firms with high resource dependence requirements have a higher incidence of board dominance governance structure.

P11: Firms with the board dominance governance structure and homogeneous TMTs will have greater numbers of non-affiliated directors among the outside director ranks.

P12: Firms not experiencing periods of organizational change or transition with a board dominance governance structure have higher performance than with alternative governance structures.

Balanced Governance Configurations

From the onset we should note that the guidelines for homogeneous/heterogeneous TMTs are as previously described. To reiterate, where firms are characterized with modest portfolios, low globalization, and generally low information requirements, homogeneous TMTs may be preferable. Heterogeneous TMTs would serve better in the opposite conditions (see Table 3).

For the balanced configurations, we expect low institutional ownership, limited outside ownership, and generally low resource dependence. The nature of these attendant conditions may be accounted for by the compromises resulting from the CEO duality/outside directors and the independent board leadership structure/inside directors profiles. It initially appears that these configurations are balanced; e.g., a strong CEO (CEO duality structure) with a strong board (outsider-dominated). Such balance between officers and directors may be interpreted as desirable (e.g., Pearce & Zahra, 1991). An effective balance between these groups, however, would be unusual; more likely in this case the preponderance of outside board members are affiliated directors (Monks & Minow, 1991; Securities and Exchange Commission, 1980). Accordingly, such boards are far more likely to facilitate the power of CEOs rather than the board. However, this dominance is always somewhat tempered by either the presence of a non-executive chairpe rson or non-affiliated outside directors.

Consider the case of CEO duality and a board populated with a host of affiliated directors. Typically affiliated directors are either related to firm management or maintain business relationships with the firm; however, outside director independence may also be compromised if directors feel indebted to the CEO for their board membership. This is increasingly likely in the case of a dominant CEO with the power to appoint directors (see e.g., Wade et al., 1990). Even if the board does not have this character, the governance structure is hybrid in form. It does not provide the CEO dominance which may be indicated under some conditions; also, it does not capture the accountability which a board dominated structure provides.

The alternative board configuration represents a hybrid form as well. In this case, we have a separate CEO/board chairperson structure with an insider dominated board. Here CEOs are favored with insider boards comprised largely of corporate officers who work for them on a day-to-day basis, The only distinction between this form and the CEO dominance structure is that someone else is the chairperson of the board. In such cases the chairperson is almost certainly the founder, past-CEO, or both of the firm. Moreover, because CEOs gain power over time (Fredrickson et al., 1988; Hambrick & Fukutomi, 1991) it is typical that this chairperson personally selected his or her successor. This may be particularly true in the family-controlled firm (Berenbeim, 1990). Once again, this configuration departs from both the CEO dominance and board dominance models.

We speculate that institutional investors and large blockholders would have little interest in such firms based on the inadequacy of the governance structures represented by the balanced configurations. These groups apparently anticipate that firm performance will suffer under these configurations. As previously noted, institutions in particular have been active in the board reform movement. Reforms directed at firms’ strategic leaders have been largely directed toward separating the positions of CEOs and board chairpersons and toward majority representation by independent outsiders.

An alternative argument may be that institutions and large blockholders would maintain high levels of equity holdings and simply choose to actively seek changes in the organization (e.g., Barclay & Holderness, 1991; Bethel & Liebeskind, 1993; Holderness & Sheehan, 1988). Holderness and Sheehan (1988) have found evidence that firms’ market value increases with the purchase of large blocks of firm equity, providing some evidence that investors expect these groups to initiate corrective action in undervalued firms (see also, Bethel & Liebeskind, 1993; Barclay & Holderness, 1991). Also, institutions may elect to hold substantially the same amount of equity in firms with balanced governance configurations due to the costs associated with; withdrawing completely from these firms (e.g., Pound, 1992). Some controversy exists regarding the propensity of institutions and large blockholders to align themselves with managers versus shareholders when the interests of these parties diverge (Bethel & Liebeskind, 1993).

Still, we maintain that the more effective solution for institutions and large blockholders is to maintain ownership interests in firms where outside directors perform the monitoring function. Moreover, institutions and large blockholders have been found to exhibit preferences in board composition. Daily and Dalton (1994), for example, reported a negative association between these groups and affiliated (SEC, 6b) directors. Also, Daily (1995) suggested that large blockholders may be willing to bail out of unprofitable firms based on her findings that large blockholders were associated with a preference for liquidation, as compared to reorganization in Chapter 11 bankruptcy filings.

P13: Firms with balanced governance structures have poorer performance than firms with CEO dominance structures in a period of organizational change and/or transition than firms with board dominance structure.

P14: Firms with balanced governance structures have lower institutional and more limited outside ownership positions as compared to firms with board dominance structure.

P15: Firms with balanced governance structures have lower resource dependence requirements as compared to firms with board dominance structure.


In this paper, we have developed a number of propositions regarding alternative combinations of TMT and board characteristics which we have termed governance structures. To our knowledge, this is the first paper to conceptually address those conditions which might reasonably be expected to accompany alternative configurations which simultaneously consider the roles of CEOs, TMTs, and boards of directors.

We have suggested that the CEO dominance and board dominance models will, under appropriate circumstances, be associated with greater performance than alternative governance structures. It should be noted, however, that there is some controversy regarding the relative merits of the CEO and board dominance models compared to one another. As described earlier, the preponderance of conceptualization and criticism in these areas reflects a common theme. Effective boards of directors are normally purported to include large proportions of outside directors (see Zahra & Pearce, 1989 for discussion: see also, Lorsch MacIver, 1989; Mizruchi 1983). Similarly, more effective governance structures result when the roles of CEO and board chairperson are separate (e.g., Dalton & Kesner, 1987; Mallette & Fowler, 1992; Zabra & Pearce, 1989). It has been demonstrated, for example, that separate CEO/board chair structures are associated with fewer adoptions of poison pill provisions (Mallette & Fowler, 1992) and improved finan cial performance (Rechner & Dalton, 1991). As has been demonstrated, other observers (e.g., Anthony & Anderson, 1986; Baysinger & Hoskisson, 1990; Baysinger et al., 1991; Hill & Snell, 1988) are not persuaded as there is some discussion and evidence supporting quite the opposite. It may be that future research considering these suggested attendant conditions may provide some convergence to these corporate governance questions.

Another possible advantage of the simultaneous examination of TMT homogeneity/heterogeneity, CEO/board chairperson structures, and board composition options may be informed by another research venue. Some explanation may be lost by examining what may be related strategies in isolation (see, e.g., Dalton & Todor, 1993; Gupta & Jenkins, 1991; Hulin, Roznowski & Hachiya, 1985; Mitra, Jenkins, Douglas & Gupta, 1992; Rosse & Hulin, 1985 for a discussion of this point as regards employee withdrawal/opportunistic behaviors). The relatedness in the case of these governance elements is profound. Clearly, for example, the CEO is a member of the TMT; often the CEO is chairperson of the board; many members of the TMT serve on the board of directors (i.e., these are the “inside” members of the board).

We have suggested that homogeneous TMTs are serviceable under some conditions (relatively modest portfolios, low globalization, and generally low information requirements). Under directly contrasting circumstances, however, the heterogeneous TMT would seem the superior choice. It should be noted, however, that many observers would consider the heterogeneous TMT a preferable option under a much wider range of conditions (e.g., Cosier & Schwenk, 1990; Schwenk, 1988; Tjosvold, 1993). While we have focused on alternative elements for the selection of TMTs, we do not find the recommendations that heterogeneous groups may provide a wider base of experience and views, as well as the potential advantages of a devil’s advocacy process, to be misplaced. Such serve to underscore the efficacy of heterogeneous TMTs under appropriate circumstances and exacerbate the potential error of misaligning TMT selections with the requisite strategic conditions.

The framework and propositions offered in this paper provide a means for integrating the related research addressing CEOs, TMTs, and boards of directors. The propositions, in particular, enable researchers to begin empirically examining the interrelated aspects of these strategic leaders. In order to extend our knowledge of the governance function in organizations, it is imperative that organizational researchers begin examining the interaction of strategic leaders and the conditions under which they operate. We hope that this paper is a first step in that direction.


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Table 1.

Recent Work in Strategic Leadership

CEOs [1] Top Management Teams

Alexander, Fennell & Halpern, Bantel & Jackson, 1989

1993 D’Aveni, 1990

Boeker, 1992 D.Aveni & Kesner, 1993

Boeker & Goodstein, 1993 Eisenhardt & Schoonhoven,

Bonnier & Bruner, 1989 1990

Cox & Cooper, 1989 Finkelstein, 1992

D’Aveni & MacMillan, 1990 Finkelstein & Hambrick, 1990

Davidson, Worrell & Cheng, Hurst, Rush & White, 1989

1990 Michel & Hambrick, 1992

Finkelstein & D’Aveni, Murray, 1989

1994 Priem, 1990

Friedman & Saul, 1991 Shanley & Correa, 1992

Friedman & Singh, 1989 Thomas & McDaniel, 1990

Furtado & Karan, 1990 Wiersema & Bantel, 1992

Goodstein & Boeker, 1991

Greiner & Bhambri, 1989

Hambrick, 1989

Hambrick & Fukutomi, 1991

House, Spangler & Woycke,


Jonas, Fry & Srivasta, 1989

Lubatkin, Chung, Rogers &

Owers, 1989

Miller, 1993

Norburn, 1989

Oswald & Jahera, 1991

Pearce & Zahra, 1991

Puffer & Weintrop, 1991

Rechner & Dalton, 1989

Rechner & Dalton, 1991

Singh & Harianto, 1989

Virany, Tushman & Romanelli


Wade, O’Reilly & Chandratat,


Walsh & Seward, 1990

Worrell, Davidson & Glascock


Zajac, 1990

CEOs [1] Boards of Directors

Alexander, Fennell & Halpern, Alexander, Fennell & Halpern,

1993 1993

Boeker, 1992 Baysinger & Hoskisson, 1990

Boeker & Goodstein, 1993 Baysinger, Kosnik & Turk, 1991

Bonnier & Bruner, 1989 Boeker & Goodstein, 1991, 1993

Cox & Cooper, 1989 Finkelstein & D’Aveni, 1994

D’Aveni & MacMillan, 1990 Goodstein & Boeker, 1991

Davidson, Worrell & Cheng, Hoskisson, Johnson & Moesel,

1990 1994

Finkelstein & D’Aveni, Judge & Zeithaml, 1992

1994 Kesner & Johnson, 1990

Friedman & Saul, 1991 Kosnik, 1990

Friedman & Singh, 1989 Lang & Lockhart, 1990

Furtado & Karan, 1990 Mallette & Fowler, 1992

Goodstein & Boeker, 1991 Morck, Shleifer & Vishny, 1988

Greiner & Bhambri, 1989 Oswald & Jahera, 1991

Hambrick, 1989 Pearce & Zahra, 1991, 1992

Hambrick & Fukutomi, 1991 Rechner & Dalton, 1989

House, Spangler & Woycke, Schellenger, Wood & Tashakori,

1991 1989

Jonas, Fry & Srivasta, 1989 Singh & Harianto, 1989

Lubatkin, Chung, Rogers & Stearns & Mizruchi, 1993

Owers, 1989 Virany, Tushman & Romanelli,

Miller, 1993 1992

Norburn, 1989 Walsh & Seward, 1990

Oswald & Jahera, 1991 Zahra & Pearce, 1989

Pearce & Zahra, 1991

Puffer & Weintrop, 1991

Rechner & Dalton, 1989

Rechner & Dalton, 1991

Singh & Harianto, 1989

Virany, Tushman & Romanelli


Wade, O’Reilly & Chandratat,


Walsh & Seward, 1990

Worrell, Davidson & Glascock


Zajac, 1990

Notes (1)While the preponderance of this work does rely on CEOs as a

sample, other categories are included here as well (e.g., chief

officers of governments, military officers). We do not include here

the extensive literature addressing CEO compensation.

Table 2.

Dominant Governance Configurations

Board of Directors

Joint CEO/Board Chairperson

Insider Dominated Board

Top Homogeneous Top Management Team


Team Joint CEO/Board Chairperson

Insider Dominated Board

Homogeneous Top Management Team

Separate CEO/Board Chairperson

Outsider Dominated Board

Top Homogeneous Top Management Team


Team Separate CEO/Board Chairperson

Outsider Dominated Board

Homogeneous Top Management Team

Table 3.

Balanced Governance Configurations

Board of Directors

Joint CEO/Board Chairperson

Insider Dominated Board

Top Homogeneous Top Management Team


Team Joint CEO/Board Chairperson

Insider Dominated Board

Homogeneous Top Management Team

Separate CEO/Board Chairperson

Outsider Dominated Board

Top Homogeneous Top Management Team


Team Separate CEO/Board Chairperson

Outsider Dominated Board

Homogeneous Top Management Team

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