Printer Friendly

Board of directors leadership and structure: control and performance implications.

Despite recent attention from the academic community, it seems fair to conclude that there remains some controversy regarding the impact of corporate governance on firm performance (Cochran & Wartick, 1988; Day & Lord, 1988; Zahra & Pearce, 1989). Most of the empirical work has focused on two critical governance issues: (1) whether the CEO serves simultaneously as chairperson of the board; and (2) the composition and size of the board. A major criticism of the extant research is the exclusive focus on large (e.g., Fortune 500) firms. It may be that CEOs and directors are less constrained by organizational systems and structures in the small corporation as compared to their large firm counterparts (e.g., Dalton & Kesner, 1983; Norburn & Birley, 1988). Accordingly, a focus on small corporations may reduce some of the ambiguity in the governance literature.

The issue of what constitutes the small firm has been recently addressed by d'Amboise and Muldowney (1988). They concluded that the criteria most commonly used to denote a small business are that the firm generates revenues of less than $20 million and employs 500 or fewer. Eisenhardt and Schoonhoven (1990) concur, noting that $20 million in revenues constitutes a firm that has "made it," reaching a sufficient size to endure. These criteria guide the discussion of the small firm.

This study will examine the effects of corporate governance structures and firm performance for the small corporation, where the effects of CEO and director actions might be more easily observed. CEOs and directors may, for example, be able to more directly influence organizational processes and outcomes in the small firm (Eisenhardt & Schoonhoven, 1990; Reinganum, 1985). Much of this influence may be attributed to fewer constraints as a result of organizational factors (Fama & Jensen, 1983; Miller, Kets de Vries, & Toulouse, 1982).

The complexity of larger firms may serve to constrain the ability of any given individual to initiate change and affect the direction of the firm (Dalton & Kesner, 1983). Fama and Jensen (1983) noted that large firms tend to be quite complex, whereas smaller firms adopt simpler systems and structures. The simplicity found in smaller firms results in a more narrow focus with respect to leadership, planning, and knowledge of the business (Smith & Gannon, 1987). The complexity of the large firm, however, complicates these relationships.

Larger firms face a wide variety of internal and external forces in their attempt to accomplish organizational goals (Baysinger & Hoskisson, 1990). These forces may limit their ability to influence organizational outcomes (Reinganum, 1985). As evidence, Bourgeois (1987, p. 347) has stated that managers in the large, complex organization are limited in their capacity as "influencers of events rather than controllers of certain outcomes." When decision management and control are diffuse, as in the large, complex firm, the power of an individual to initiate action is lessened (Fama & Jensen, 1983). Conversely, smaller firms tend to have more concentrated leadership and centralized decision-making control (Whisler, 1988). In the small firm the CEO is typically--and perhaps unequivocally--the locus of decision making and control (Begley & Boyd, 1986, 1987).

Based upon this literature, we propose a model of corporate control and the impact of governance structures on firm performance. The following sections develop literature pertinent to the model. We focus first on the role of the CEO, especially the founder/nonfounder distinction. Subsequent sections develop the rationale for the election of alternative governance structures and the impact of these choices on firm performance.


A cursory examination of the more popular business periodicals reveals an obvious attribution that corporate leadership "matters." The tone is consistent; it portrays obvious linkages between the CEO and outcomes:

Jim Kinnear is Pumping New Life into Texaco (Business Week, April 17, 1989, p. 50);

Master Innovator: Anthony Robbins . . . (Entrepreneur, February 1992, p. 102);

Bob Allen Rattles the Cages at AT&T (Fortune, June 19, 1989, p. 58);

Captain Marvel . . . Southwest Airlines' Herb Kelleher has Built (Inc., January 1992, p. 44).

Organizational observers, however, are far less settled on the issue of a CEO/corporate performance linkage. The "individualist" view suggests that CEOs have a significant, if not crucial, impact on the performance of the organization they head (Thomas, 1988). Others, however, embrace a "contextualist" perspective in which environmental factors may constrain a leader's discretion to influence the organization (e.g., Meindl & Ehrlich, 1987). Still others argue that effective CEO/performance linkages must depend on the context of a succession event or other contingent factors (e.g., Dalton & Kesner, 1985; Hambrick & Mason, 1984; Norburn, 1986).

It may be that there is even more ambiguity regarding the linkages between corporate leadership and firm performance in the small firm. Here, there is actually a third factor to consider. There is a tradition of discussion and research in the area of small firm leadership which distinguishes those firms managed by an independent CEO and those that continue to be managed by the founder (e.g., Boeker, 1989; Flamholtz, 1986; Levinson, 1971; Willard, Krueger, & Feeser, 1992). The impact of the founder on the organization has been widely reported. Eisenhardt (1988), for example, notes the influence of the founder on structures and processes which are difficult to change without altering the entire organizational system.

The performance effects of founders, too, have been reported. There is a rather common perspective that firms managed by founders may eventually fail due to the lack of professionalization. Some feel that the very viability of the firm is some function of its transition from founder-managed to professionally managed (e.g., Barnes & Hershon, 1976).

Others, however, are evidently unconvinced. Not only could the "vision" of the firm be lost absent the founder, but professional management may threaten the ownership of the firm and certainly its control (e.g., Churchill & Lewis, 1983). There is some support for a more moderate position. Willard et al. (1992) found no significant differences in firm performance under the leadership of a founder CEO as compared to a non-founder CEO. They concluded that founders are equally as capable as non-founders. It has also been reported that firms with continuing founder influence actually outperform those firms in which this influence has been dissipated (Alcorn, 1982).

Perhaps these performance differences are a function of governance structure preferences designed to meet the differing goals between founder and non-founder CEOs (see Daily & Dalton, 1992 for an overview of the founder/non-founder distinction). Rapid firm growth may present a unique challenge for founders (Churchill & Lewis, 1983). Firm growth, for example, is a function of individual goals and needs (Stanworth & Curran, 1976). Founders have demonstrated some propensity to operate income substitution businesses as opposed to high-growth or large-scale firms (Birch, 1987). Willard et al. (1992) found that firms led by non-founder CEOs were larger and grew at faster rates as compared to those with founder CEOs. These differences, however, were not significant.

An additional factor is the control mentality of the founder. Founders are often willing to sacrifice some measure of profitability in order to retain strong control positions (Allen & Panian, 1982). Rubenson and Gupta (1990) found a negative association between the firm's growth rate and the founder's tenure. With a high need for control, founders may be reticent to delegate or bring in outside management when the founder's skills are inadequate.

These preferences, then, may result in differences in the selection of alternative governance structures.


A corporate governance issue that combines aspects of the CEO position with the board of directors is the structure of the CEO/board chairperson roles. Under the independent structure two individuals serve in these roles. In the alternative, CEO duality, these roles are held simultaneously by one party. The latter structure is quite common, with approximately 80 percent of large firms employing the dual structure (Lorsch, 1989).

The adoption of this structure represents the exercise of power by the CEO. Hambrick recently noted that holding multiple titles, as in the case of the dual structure, "tends to be a sign of power accumulation and power hoarding" (Fortune, 1991, p. 13). He commented further on the negative effects of this collection of power through titles calling it the Idi Amin phenomenon, in reference to the former Ugandan leader who assigned himself approximately a dozen top-brass positions in his country.

If maintaining control is imperative for founders, it seems likely that the founder CEO would elect to serve concurrently as board chairperson. To do otherwise invites some risk of divided authority. By holding both of these powerful organizational positions founders virtually assure that both management and the board do not challenge or constrain their actions.

H1: Founder-managed firms will be associated with a higher incidence of CEO duality.

There is some consistency that the choice of these structures could be strongly related to corporate performance. Views differ diametrically, however, regarding the direction of the impact (e.g., Dalton & Kesner, 1987; Rechner & Dalton, 1991). Rechner and Dalton (1989), for example, suggest that the dual role represents a prima facie case of conflict of interests. Dayton concurs, noting that

the chairman ensures the independence of the board--a condition that cannot exist when there is an all-powerful chairman/CEO who controls the agenda, the presentations, the discussions, and often the selection of the directors themselves (1984, p. 37).

Others acknowledge the importance of the duality distinction but are strong proponents of this structure:

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).

Whether the choice of these structures is related to corporate performance remains undetermined. Examinations of large firms have reported no differences in financial performance across a number of indices as a function of board leadership structure (Berg & Smith, 1978; Chaganti, Mahajan, & Sharma, 1985). There is, however, some evidence of higher accounting returns under the independent structure for Fortune 500 companies (Rechner & Dalton, 1991).

While support for the independent structure remains equivocal, reasonable theoretical arguments would advocate the separation of the positions of CEO and board chairperson. It is unlikely that the unification of these two positions best serves the interests of shareholders who rely on the board to protect them from inefficiencies due to managerial self-interest. Kesner and Dalton (1986) liken the unification of the positions of CEO and board chairperson to the President of the United States concurrently serving as Chief Justice of the Supreme Court. The potential for abuse of power under this structure is obviously great.

Some evidence of the board failing to serve stockholder interests to the benefit of not only the CEO, but the top management of the corporation, can be found with the adoption of golden parachutes, poison pills, and related antitakeover defense mechanisms. These practices do more to financially benefit individual managers than they do to protect the financial well-being of the shareholders. It would be naive to believe that CEOs could reasonably divorce themselves from their interests as managerial agents of the corporation when issues affecting their job security arise. It is more likely that CEOs would choose to exert some measure of influence as board chairpersons in order to protect their managerial positions as CEOs. Unfortunately, these decisions rarely benefit the shareholders in kind. Accordingly,

H2: CEO duality will be associated with lower firm performance.


The structure of the board of directors is a second area of concern in corporate governance research. We consider two aspects of board structure: composition and size. Board composition refers to the distinction between inside and outside directors and is traditionally operationalized as the percentage of outside directors (i.e., those not in the direct employ of the organization) on the board. It may be noted, however, that alternative definitions of outside directors have been utilized (e.g., Danco & Jonovic, 1981; Pfeffer, 1972; Vance, 1964). A recent, exhaustive review of the board composition/performance linkage provides an excellent summary of its rationale (Zahra & Pearce, 1989). There are three areas in which board composition is posited to affect firm performance: service, resource acquisition, and control. These three perspectives are not necessarily considered to be mutually exclusive (Pfeffer & Salancik, 1978).

The service component (e.g., Anderson & Anthony, 1986; Carpenter, 1988; Vance, 1983) suggests that outside board members provide counsel and advice to the CEO not necessarily available from inside directors. Beyond that, outside board members may, by virtue of their own experience, accomplishment, and exposure, enhance the reputation of the firm.

Another advantage of the outside director is aligned with the notion of resource dependence (Pfeffer & Salancik, 1978). Resource dependence theory suggests that the effectiveness of the firm rests on the ability of key organizational members to act as boundary spanners. In their role as boundary spanners they interact with the environment in a manner that coopts "important external organizations with which they are interdependent" (Pfeffer & Salancik, 1978, p. 167).

While in some ways this may be considered as a subset of the service role, it is thought by many to be crucial and might be noted separately. The point here is that carefully selected outside directors may be in a position to extract important resources from the environment that might be otherwise unavailable. Additionally, it is expected that these directors will support the organization, attend to its problems, and present it favorably to outsiders. There is some empirical support that boards of directors can be quite effective in this role (Pfeffer, 1973; Provan, 1980).

A third factor is control, which refers primarily to the board's monitoring function (Anderson & Anthony, 1986; Vance, 1983). It is in this regard that boards of directors may have received the most stinging criticism in recent years (e.g., Geneen, 1984; Kesner & Dalton, 1986). Some observers have been quite outspoken in their doubt that insider-dominated boards could fulfill the monitoring charter (Dalton & Rechner, 1989). Former SEC Chairperson Williams noted,

I think a subordinate to the chief executive officer who works for him has to be either a saint or a fool to treat him severely and negatively. I don't think it's going to happen . . . (Securities and Exchange Commission, 1980, p. 438).

Board reform critics have suggested increasing representation by outside directors as a means for better protecting shareholder interests (e.g., Geneen, 1984; Kesner, Victor, & Lamont, 1986). Due to their subordinate position in the organization, it is not likely that inside directors will aggressively monitor and evaluate CEO actions (Fleischer, Hazard, & Klipper, 1988). Often the effectiveness of inside directors is compromised by their ties to the CEO, resulting in financial losses for shareholders (Baysinger & Hoskisson, 1990).

Despite the series of recommendations advocating the addition of outside board members to the smaller firm, the founder CEO may perceive such a strategy as potentially threatening. Under these circumstances, the addition of outside directors is unlikely. As evidence, the typical board for the small firm tends to be the underutilized cronies of the owners or CEO (Castaldi & Wortman, 1984). Founders, in particular, are apt to exert control over firm operations due to the personal stakes invested in the business (Pondy, 1969). Accordingly,

H3: Founder-managed firms will be associated with fewer outside board members.

H4: Founder-managed firms will be associated with a lower proportion of outside board members.

Empirical support for outsider-dominated boards remains equivocal (e.g., Kesner et al., 1986; Pfeffer, 1972; Schellenger, Wood, & Tashakori, 1989; Vance, 1964). There is some evidence that smaller firms are responding to the admonition to include outside directors and are increasing their representation on their boards (Ward & Handy, 1988). Ford (1988), however, reported that among Inc. 500 firms insider-dominated boards exerted more influence or were more important with respect to strategic planning, the budget process, crisis management, and the board's ability to assist in operating the firm in the event of CEO disability.

A similar rationale would apply to the resultant impact of a lack of independence among board members, as it would under the dual leadership structure. Executives who concurrently serve as board members are unlikely to be able to set aside their interests as managers of the corporation when serving as directors. As some evidence, executive (inside) directors have been found to be more likely to vote in favor of golden parachutes or the payment of greenmail, practices designed to further entrench management, often at the stockholder's expense (e.g., Kosnik, 1987, 1990; Singh & Harianto, 1989). It would seem that greater concentrations of independent (outside) directors would best serve the financial interests of the shareholders.

A related issue is the size of the board. Preferences for board size are related to the resource dependence perspective (Pfeffer & Salancik, 1978). The greater the reliance on the external environment, the larger the board of directors. Small boards are most appropriate when directors serve primarily as administrators (Pfeffer, 1973). It might also be noted that small boards are more "manageable" from the CEO's perspective (Chaganti et al., 1985).

Based upon resource dependencies, we might expect a positive relationship between the size of the board and the size of the organizations. With the coupling of organizational size and complexity, boards may provide an important linkage between the firm and the environment. Pfeffer has noted, "the requirement for a large board undoubtably increases as the size of the organization itself increases" (1972, p. 223).

Some support for this relationship exists. Pfeffer (1972, 1973) has found the size of the board to be significantly related to total sales volume and a reliance upon external funding. In an examination of failed and non-failed firms, Chaganti et al. (1985) found that non-failed firms tended to have larger boards. Despite support for the board size/firm size relationship, it would seem some controversy remains concerning the issue of size. Vance noted that "there have been no reputable studies which show that the size of the board increases proportionately to the size of capital, net assets or even sales" (1983, p. 31). Consequently, we examine this board size/performance relationship for small corporations.

H5: Fewer total outside directors will be associated with lower firm performance.

H6: Proportion of outside directors will be associated with higher firm performance.

H7: Greater numbers of total directors will be associated with higher firm performance.



As previously noted, this research focuses on the small corporation. While a variety of definitions have been suggested, the most commonly relied on for research and reporting purposes is provided by d'Amboise and Muldowney (1988). Such corporations should employ fewer than 500 and generate sales not exceeding $20 million per year. These criteria guided the selection of the 186 companies included in this study.

These firms were identified using Standard & Poor's Reports: Over-the-Counter & Regional Exchanges and Standard & Poor's Reports: American Stock Exchange. These sources provide a comprehensive listing of corporations fitting the selection criteria. All corporations meeting these criteria were included in this study. This sample, then, constitutes the population of firms meeting these parameters.

Dependent Variables

While it is certain that there is no consensus about what constitutes the dependent variables of choice with regard to firm financial performance, it is unlikely that any single indicator could adequately capture the many aspects of such "performance" (see Chakravarthy, 1986 for an excellent compendium of performance indicators). The trend, therefore, has been toward multiple indicators of firm performance (e.g., Capon, Hulbert, Farley, & Martin, 1988; Maupin, 1987; Shortell & Zajac, 1988). The selection of "appropriate" indicators remains at issue:

. . . the adoption of any particular set of indicators embroils the researcher in the quagmire of problems of quantification and dimensionality, not to mention the issue of validity choosing the set of indicators which meets universal acceptance (Bourgeois, 1980, p. 235).

Weiner and Mahoney (1981, p. 456), too, underscore the apparent frustration in making such a selection: "the number of corporate performance measures that could serve as dependent variables is almost infinite." Cochran and Wood (1984) concede that there is no consensus concerning the choice of dependent variables. They argue, however, that performance measures fall into one of two categories: accounting returns and market returns. We rely on three such indices as dependent variables, representing both accounting (return on assets and return on equity) and market (price/earnings ratio) returns. We also include two measures of size important in examinations of founder-managed firms: sales revenue and sales growth (three years).

Independent Variables

CEO duality is binary. Either one individual serves as both CEO and chairperson of the board (dual structure) or two different persons fill these roles (independent structure). This variable is derived from Standard and Poor's Register of Corporations, Directors, and Executives (1990).

Board composition refers to the distinction between inside and outside directors. As previously noted, inside directors include those active in the current management of the corporation. Outside directors are those not in the direct employ of the corporation (see e.g., Zahra & Pearce, 1989 for an overview of this issue).

Two previously relied on measures were included in this study. The first is simply the ratio of outside directors to total directors. Total numbers of outside directors is also used as a measure of board composition. These measures are believed to fully capture the service, resource, and control function of the board. Board size is simply the total number of directors serving on the board. This information, too, was derived from Standard and Poor's Register of Corporations, Directors, and Executives (1990).

Founder is binary as well. Either the current CEO is the founder of the firm or some other individual serves in this capacity. These data were collected through telephone interviews with representatives of the sample firms.


Table 1 provides the means, standard deviations, and Pearson product-moment correlations for the variables of interest in this study.

There are two possible confounds with regard to those hypotheses that suggest relationships with firm performance. It is possible that both firm performance and certain governance structures are associated with age of the firm (Beatty & Zajac, 1990). This may be particularly true in the case where the founder directs the firm. The average life span of a first generation firm is 24 years (Goldwasser, 1986). Only thirty percent survive into the second generation (Ward, 1987). Firm age, then, may confound relationships between governance and performance.

Perhaps, for example, newer firms are more likely to rely on CEO duality and more mature firms have a tendency to perform systematically better on the selected performance indices. It is possible, then, that both corporate governance structures and firm performance may covary with firm age. Given this, the testing of performance hypotheses includes age of the firm as a covariate.

A second confound may be industry effects. Murray (1989) has found that management effects may differ across industries. Additionally, Baysinger and Zardkoohi (1986) found that board composition varied depending upon the institutional environment in which the firm operated. While industry effects were not of primary interest to this study, the ability to test for such effects may strengthen the identification of differences among governance structures and the relationship to firm performance.

When relying on financial performance data drawn from heterogeneous firms, there is always the potential for the loss of information by collapsing across industries (Dess, Ireland, & Hitt, 1990). Accordingly, we classified the sample of 186 firms into eight categories based on the division classification provided in the SIC Classification Manual (1987). The industries included: (1) mining (10%), (2) construction (3%), (3) manufacturing (54%), (4) transportation, communications, electric, gas, and sanitary services (3%), (5) wholesale trade (3%), (6) retail trade (1%), (7) finance, insurance, and real estate (12%), and (8) services (14%). Industry, too, is included as a covariate in the performance analyses.

The first hypothesis suggested that the incidence of CEO duality will be higher for those companies whose CEO is the founder of the firm. A contingency analysis provides strong support for this proposition. Notice that in cases where the founder continues to head the company, the incidence of CEO duality is some 79.3 percent; in cases where someone other than the founder serves as CEO, the incidence is 44.4 percent (|X.sup.2~ = 11.76; p |is less than~ .05).

It was hypothesized that CEO duality would be associated with firm performance (H2). Given the multiple, interrelated dependent variables, we rely here on a MANOVA. The multivariate test of significance is not significant (F = 1.04; ns).

The third hypothesis suggested that firms with the founder as CEO would be characterized by fewer outside members on the board of directors. A t-test, relying on a pooled variance estimate, provides strong support for that proposition (t = 2.90; p |is less than~ .01). Founder-managed firms have some 20 percent fewer outside directors than those of professionally managed firms.

It was also hypothesized that founder-managed firms would be associated with lower proportions of outside directors. A difference of proportions test (z = 2.47; p |is less than~ .05) indicates that the percentage of outside directors for founder-managed firms (55.1 percent) is different from that of professionally managed firms (62.1 percent).

Hypotheses five through seven can be addressed simultaneously. We have suggested that board structure (composition and size) will be associated with firm performance. Given the interval nature of both the multiple dependent variables and the independent variables, we rely on a canonical correlation for these analyses. The results demonstrate a significant multivariate test of significance (F = 1.53; p |is less than~ .05), indicating that the governance variables are an important indicator of corporate financial performance.


The Founder CEO

These data reflect an interesting--perhaps unsettling--irony. It seems that many observers have underscored the absolute necessity of the small firm's transition to professional management (e.g., Barnes & Hershon, 1976; Dandridge & Ward, 1983; Flamholtz, 1986; Ward, 1987). Certainly, one approach to this is to separate the CEO from the chairperson of the board. Under this structure, the founder of the firm could maintain presence as chairperson, but the CEO would have operational authority. One practical effect of this, of course, is the opportunity to introduce professional management.

This is apparently not the case. For this sample of smaller corporations, we find that when the founder is active in the management of the firm, the CEO/chairperson role is held by the founder some 79 percent of the time, versus less than 50 percent when the firm is run by a non-founder. The results for founder-run firms parallel those of their large firm counterparts where approximately 80 percent of firms are characterized by the TABULAR DATA OMITTED dual structure (Lorsch, 1989). Interestingly, those small firms where someone other than the founder is the CEO rely on this structure far less than CEOs of the Fortune 500.

It has also been suggested that this transition from founder to professional management could be achieved by more attention to securing outside directors for the board (Nelton, 1987). Such members may add to the firm through their service, resource access, and monitoring function. Once again, however, we find an opposite tendency. Firms that are managed by the founder are characterized by lower proportions of outside directors. Indeed, not only is the proportion of outside directors lower for these firms, but they have fewer outside directors in absolute terms. This may be particularly unfortunate since these data indicate that there may be a systematic relationship between board structure and the performance indicators.

Unlike the findings for CEO duality, those firms with non-founder CEOs more closely mirror their large firm counterparts in adherence to board reform activism. Much like Fortune 500 firms, these CEOs employ between 60 to 70 percent of outsiders for board service (Kesner & Dalton, 1986). These results for non-founder CEOs, then, are strikingly similar to those found by Kesner (1988). In an examination of Fortune 500 firms, she found that approximately 63 percent of directors were deemed to be outsiders.

It seems, then, that the very firms that might benefit from some adherence to suggested corporate governance structures are those that rely on them least. The founder-run firm has a tendency to adopt CEO duality. Beyond that, such firms are associated with fewer outside directors and a lower outside director proportion. Curiously, it is the professionally managed firm--one with a non-founder at the CEO position--that employs the alternative structure. These firms are far less likely to use CEO duality as a structure; they have more outside directors; they have higher outside director proportions.

Governance Structure/Firm Performance Linkage

The governance structure/firm performance results may have interesting implications as well. It seems that firms adhering to suggested board reforms realize performance advantages. The tests of hypotheses two and five through seven may suggest that of the three roles of the board of directors, control may be of less importance for the financial performance of the small corporation. This is in comparison to the service and resource dependence functions.

It could be reasonably argued that CEO duality is far more a measure of control than service or resource acquisition. To the extent that a given firm elects this structure effective control is in the hands of the CEO, as opposed to the board. Conversely, it is not immediately apparent what impact this structure would have on service and resource contributions.

The board composition and size measures, however, are consistent with the service and resource rationales for board contribution. Here, the argument would suggest that the smaller firm has a need for those actors--in this case independent board members--who can share their expertise, their experience, and their contacts. Presumably, not only does this provide valuable information to the firm, but also access to critical resources. It is sensible, then, that the smaller firm is better served by having more individuals who can provide this assistance. Accordingly, these results would seem to argue that service and resource attributes of the independent board are more important than the control function.

An Issue of Size

When considering the measures of governance structure and their relationship to corporate performance, these data suggest that the link between CEO duality and corporate performance may not be an issue of the size of the firm. The findings for the relationship between board leadership and performance are similar to those of Berg and Smith (1978) and Chaganti et al. (1985), who found no relationship between performance and choice of board leadership structure among large firms. This same conclusion, however, can not be reasonably argued for the board structure/corporate performance relationship.

These findings provide some evidence that the extent to which firms adopt reforms aimed at fulfilling the resource and service function of the board does positively affect firm performance. Past examinations relying largely on samples of Fortune 500 firms have yielded inconsistent results. Perhaps, then, for the small corporation the resources and expertise provided by outside directors are more critical to improved performance than the control function of the board.

The importance of the outside directors lends support to the resource dependence perspective. In acting as resource providers the board of directors acts as a link between the firm and its environment (Pfeffer & Salancik, 1978). Directors are able to absorb much of the uncertainty in the environment by providing the firm with valuable information and expertise (e.g., Pfeffer, 1973; Pfeffer & Salancik, 1978; Provan, 1980; Zahra & Pearce, 1989). The very presence of these directors enables the firm to more effectively manage its environmental dependencies (Pfeffer, 1972, 1973; Provan, 1980).

It is in this area that small corporations may best benefit from the adherence to board reforms. These findings suggest that an effective means for overcoming the "liability of size" is through the inclusion of outside directors. The expertise and resources garnered by these individuals may counter any disadvantages experienced as a result of the modest resource base experienced by many small firms. It is not reasonable to expect, for instance, the corporation of $15 million in sales to enjoy the same level of slack in its resource base as the corporation of $1 billion in sales.


A potential limitation of this study lies in the selection of firms. The firms examined in this study constitute a population of small, publicly traded corporations that may not be representative of those corporations not publicly traded or those small firms who voluntarily elect to utilize a board of directors. These firms do, however, provide a sensible sample of firms for initial explorations of the small firm governance structure/performance relationship.

These firms were selected because comparable data for those corporations not publicly traded and private firms are not readily available. Additionally, the independent variables in other than publicly traded corporations may be insensible for examinations of this nature. Because control appears to be at issue, it is likely that little or no variability will exist in the number of outside directors.


Given the ubiquity of the smaller corporation and its many advantages as a research forum (e.g., d'Amboise & Muldowney, 1988; Weick, 1974), it would seem that further research attention in the area of corporate governance structures would be well placed. In particular, an emphasis on the role of directors as resource actors may lead to greater insights regarding the performance implications of inviting outside directors to serve on corporate boards. While control appears to be at issue in the selection of alternative governance structures, this study does not demonstrate any relationship to this control function and firm performance. Future studies, then, which examine the governance bodies as a means for garnering necessary resources and expertise, may provide explanations that reconcile the control and resource actor perspectives.


Alcorn, P. B. (1982). Success and survival in the family-owned business. New York: McGraw-Hill.

Allen, M. P., & Panian, S. K. (1982). Power, performance, and succession in the large corporation. Administrative Science Quarterly, 27, 538-547.

Anderson, C. A., & Anthony, R. N. (1986). The new corporate directors. New York: John Wiley.

Barnes, L. B., & Hershon, S. A. (1976). Transferring power in the family business. Harvard Business Review, 54(4), 105-114.

Baysinger, B. D., & Hoskisson, R. E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. Academy of Management Review, 15, 72-87.

Baysinger, B. D., & Zardkoohi, A. (1986). Technology, residual claimants, and corporate control. Journal of Law, Economics, and Organization, 2, 339-349.

Beatty, R. P., & Zajac, E. J. (1990). Top management incentives, monitoring, and risk-bearing: A study of executive compensation, ownership, and board structure in initial public offerings. Academy of Management Best Papers Proceedings, 7-11.

Begley, T. M., & Boyd, D. P. (1986). Executive and corporate correlates of financial performance in smaller firms. Journal of Small Business Management, 24(2), 8-15.

Begley, T. M., & Boyd, D. P. (1987). Psychological characteristics associated with performance in entrepreneurial firms and smaller businesses. Journal of Business Venturing, 2(1), 79-93.

Berg, S. V., & Smith, S. K. (1978). CEO and board chairman: A quantitative study of dual vs. unitary board leadership. Directors and Boards, 3, 70-87.

Birch, D. (1987). Job creation in America: How our smallest companies put the most people to work. New York: The Free Press.

Boeker, W. (1989). Strategic change: The effects of founding and history. Academy of Management Journal, 32, 489-515.

Bourgeois, L. J. (1980). Performance and consensus. Strategic Management Journal, 1, 227-248.

Bourgeois, L. J. (1987). Strategic management: From concept to implementation. In G. E. Germane (Ed.), The executive course, pp. 347-391. Reading, MA: Addison-Wesley.

Capon, N., Hulbert, J. M., Farley, J. U., & Martin, L. E. (1988). Corporate diversity and economic performance: The impact of market specialization. Strategic Management Journal, 9, 61-74.

Castaldi, R., & Wortman, M. S. (1984). Boards of directors in small corporations: An untapped resource. The American Journal of Small Business, 9(2), 1-11.

Carpenter, R. N. (1988). Cooperative governance: Directors' responsibilities. Directors and Boards, 12(3), 3-6.

Chaganti, R. S., Mahajan, V., & Sharma, S. (1985). Corporate board size, composition and corporate failures in the retailing industry. Journal of Management Studies, 22, 400-417.

Chakravarthy, B. S. (1986). Measuring strategic performance. Strategic Management Journal, 7, 437-458.

Churchill, N. C., & Lewis, V. L. (1983). The five stages of small business growth. Harvard Business Review, 61(3), 30-51.

Cochran, P. L., & Wartick, S. L. (1988). Corporate governance: A review of the literature. Morristown, NJ: Financial Executives Research Foundation.

Cochran, P. L., & Wood, R. A. (1984). Corporate social responsibility and financial performance. Academy of Management Journal, 27, 42-56.

Daily, C. M., & Dalton, D. R. (1992). Financial performance of founder-managed versus professionally managed small corporations. Journal of Small Business Management, 30(2), 25-34.

Dalton, D. R., & Kesner, I. F. (1983). Inside/outside succession and organizational size: The pragmatics of executive replacement. Academy of Management Journal, 26, 736-742.

Dalton, D. R., & Kesner, I. F. (1985). Organizational performance as an antecedent of inside/outside chief executive succession: An empirical assessment. Academy of Management Journal, 28, 749-762.

Dalton, D. R., & Kesner, I. F. (1987). Composition and CEO duality in boards of directors: An international perspective. Journal of International Business Studies, 28, 33-42.

Dalton, D. R., & Rechner, R. L. (1989). On the antecedents of corporate severance agreements: An empirical assessment. Journal of Business Ethics, 8, 455-462.

d'Amboise, G., & Muldowney, M. (1988). Management theory for small business: Attempts and requirements. Academy of Management Review, 13, 226-240.

Danco, L. A., & Jonovic, D. J. (1981). Outside directors in the family-owned business. Cleveland, OH: University Press, Inc.

Dandridge, T., & Ward, J. L. (1983). How are small businesses different? In G. E. Hills, D. J. Barnaby, & L. R. Duffus (Eds.), Marketing and small business/entrepreneurship, pp. 12-14. Washington, DC: International Council for Small Business.

Day, D. V., & Lord, R. G. (1988). Executive leadership and organizational performance: Suggestions for a new theory and methodology. Journal of Management, 14, 453-464.

Dayton, K. N. (1984). Corporate governance: The other side of the coin. Harvard Business Review, 59(1), 34-37.

Dess, G. G., Ireland, R. D., & Hitt, M. A. (1990). Industry effects and strategic management research. Journal of Management, 16, 7-27.

Eisenhardt, K. M. (1988). Agency- and institutional-theory explanations: The case of retail sales compensation. Academy of Management Journal, 31, 488-511.

Eisenhardt, K. M., & Schoonhoven, C. B. (1990). Organizational growth: Linking founding team, strategy, environment, and growth among U.S. semiconductor ventures, 1978-1988. Administrative Science Quarterly, 35, 504-529.

Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law & Economics, 26, 301-325.

Flamholtz, E. G. (1986). How to make the transition from an entrepreneurship to a professionally managed firm. San Francisco: Jossey-Bass.

Fleischer, A., Hazard, G. C., & Klipper, M. Z. (1988). Board games: The changing of corporate power. Boston: Little, Brown.

Ford, R. H. (1988). Outside directors and the privately owned firm: Are they necessary. Entrepreneurship Theory & Practice, 13(1), 49-57.

Fortune. (1991). Chief executives as Idi Amin? July 1, 13.

Geneen, H. (1984). Why directors can't protect the stockholders. Fortune, September 17, 28-32.

Goldwasser, T. (1986). Family pride. New York: Dodd Mead.

Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9, 193-206.

Kesner, I. F. (1987). Director's stock ownership and organizational performance: An investigation of Fortune 500 companies. Journal of Management, 13, 499-508.

Kesner, I. F. (1988). Director's characteristics and committee membership: An investigation of type, occupation, tenure, and gender. Academy of Management Journal, 31, 66-84.

Kesner, I. F., & Dalton, D. R. (1986). Boards of directors and the checks and (im)balances of corporate governance. Business Horizons, 29(5), 17-23.

Kesner, I. F., Victor, B., & Lamont, B. (1986). Board composition and the commission of illegal acts: An investigation of Fortune 500 companies. Academy of Management Journal, 29, 789-799.

Kosnik, R. D. (1987). Greenmail: A study of board performance in corporate governance. Administrative Science Quarterly, 32, 163-185.

Kosnik, R. D. (1990). Effects of board demography and directors' incentives on corporate greenmail decisions. Academy of Management Journal, 33, 129-150.

Levinson, H. (1971). Conflicts that plague family business. Harvard Business Review, 49(2), 90-98.

Lorsch, J. W. (1989). Pawns or potentates: The reality of America's corporate boards. Boston: Harvard Business School Press.

Maupin, R. J. (1987). Financial and stock market variables as predictors of management buyouts. Strategic Management Journal, 8, 319-327.

Meindl, J. R., & Ehrlich, S. B. (1987). The romance of leadership and the evaluation of organizational performance. Academy of Management Journal, 30, 91-109.

Miller, D., Kets de Vries, M. F. R., & Toulouse, J. (1982). Top executive locus of control and its relationship to strategy-making, structure, and environment. Academy of Management Journal, 25, 237-253.

Murray, A. I. (1989). Top management group heterogeneity and firm performance. Strategic Management Journal, 10, 125-141.

Nelton, S. (1987). Ten reasons for an outside board. Nation's Best, 75(10), 48, 50.

Norburn, D. (1986). "GOGOS," "YOYOS," and "DODOS": Company directors and industry performance. Strategic Management Journal, 7, 110-117.

Norburn, D., & Birley, S. (1988). The top management team and corporate performance. Strategic Management Journal, 9, 225-238.

Pfeffer, J. (1972). Size and composition of corporate boards of directors: The organization and its environment. Administrative Science Quarterly, 17, 218-229.

Pfeffer, J. (1973). Size, composition, and function of hospital boards of directors: The organization and its environment. Administrative Science Quarterly, 18, 349-364.

Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. New York: Harper & Row.

Pondy, L. R. (1969). Effects of size, complexity, and ownership on administrative intensity. Administrative Science Quarterly, 14, 47-60.

Provan, K. G. (1980). Board power and organizational effectiveness among human service agencies. Academy of Management Journal, 23, 221-236.

Rechner, P. L., & Dalton, D. R. (1986). Board composition and shareholder wealth. International Journal of Management, 3(2), 86-92.

Rechner, P. L., & Dalton, D. R. (1989). The impact of CEO as board chairperson on corporate performance: Evidence vs. rhetoric. Academy of Management Executive, 3, 141-144.

Rechner, P. L., & Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12, 155-160.

Reinganum, M. C. (1985). The effect of executive succession on stockholder wealth. Administrative Science Quarterly, 30, 46-60.

Rubenson, G. C., & Gupta, A. K. (1990). The founder's disease: A critical reexamination. Babson Entrepreneurship Research Conference proceedings, Wellesley, MA, 167-183.

Schellenger, M. H., Wood, D. D., & Tashakori, A. (1989). Board of director composition, shareholder wealth, and dividend policy. Journal of Management, 15, 457-468.

Securities and Exchange Commission. (1980). Staff report on corporate accountability. Washington, DC: U.S. Government Printing Office.

Shortell, S. M., & Zajac, E. J. (1988). Internal corporate joint ventures: Development processes and performance outcomes. Strategic Management Journal, 9, 527-542.

Singh, H., & Harianto, F. (1989). Top management tenure, corporate ownership structure and the magnitude of golden parachutes. Strategic Management Journal, 10, 143-156.

Smith, K. G., & Gannon, M. J. (1987). Organizational effectiveness in entrepreneurial and professionally managed firms. Journal of Small Business Management, 25(3), 14-21.

Stanworth, M. J. K., & Curran, J. (1976). Growth and the small firm--An alternative view. Journal of Management Studies, 13, 95-110.

Thomas, A. B. (1988). Does leadership make a difference to organizational performance? Administrative Science Quarterly, 33, 388-400.

Vance, S. C. (1964). Boards of directors: Structure and performance. Eugene: University of Oregon Press.

Vance, S. C. (1983). Corporate leadership: Boards, directors, and strategy. New York: McGraw-Hill.

Ward, J. L. (1987). Keeping the family business healthy. San Francisco: Jossey-Bass.

Ward, J. L., & Handy, J. L. (1988). A survey of board practices. Family Business Review, 1, 289-308.

Weick, K. (1974). Amendments to organization theorizing. Academy of Management Journal, 17, 487-502.

Weiner, N., & Mahoney, T. A. (1981). A model of corporate performance as a function of environmental, organizational, and leadership influences. Academy of Management Journal, 24, 453-470.

Whisler, T. L. (1988). Professionalizing: A necessary hurdle. Nation's Business, 77(11), 38-39.

Willard, G. E., Krueger, D. A., & Feeser, H. R. (1992). In order to grow, must the founder go: A comparison of performance between founder and non-founder managed high growth manufacturing firms. Journal of Business Venturing, 7, 181-194.

Zahra, S. A., & Pearce, J. A. (1989). Board of directors and corporate financial performance: A review and integrative model. Journal of Management, 15, 291-334.

Catherine M. Daily is Assistant Professor of Strategic Management at Ohio State University.

Dan R. Dalton is Dow Professor of Management at Indiana University.
COPYRIGHT 1993 Sage Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Daily, Catherine M.; Dalton, Dan R.
Publication:Entrepreneurship: Theory and Practice
Date:Mar 22, 1993
Previous Article:Effects of formal strategic planning on financial performance in small firms: a meta-analysis.
Next Article:A conceptual model of entrepreneurship as firm behavior: a critique and extension.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters