CEOs as corporate directors: a human capital perspective.

Author:Horner, Stephen V.


Decades-long research on boards of directors based on the agency theoretic insider/outsider distinction (Berle & Means, 1968; Fama & Jensen, 1983) has yielded limited results regarding the effectiveness of boards as monitors of senior management (Johnson, S., Schnatterly, & Hill, 2013). In response, governance scholars have begun incorporating such agency theory based distinctions with rich characterizations of the human and social capital content of board composition. Among these lines of inquiry are those examining the human capital of individual directors (Johnson, S., Schnatterly, & Hill, 2013) as well as the resulting human capital at the board level. Such inquiry seeks to determine what skills and experience directors bring to the board and the aggregate impact of this human capital on firm outcomes.

Among such scholarly investigations are those examining characteristics of subgroups of directors (Jensen & Zajac, 2004; Johnson, S., Schnatterly, & Hill, 2013; Lau & Murnighan, 1998) such as outside directors who are active CEOs at other firms. These scholarly investigations expand on agency theoretic research based primarily on directors' structural position by seeking to understand the human capital of boards that proceeds from the perspectives of these key strategic leaders. In this way, examination of board human capital in general and CEO director human capital specifically complements the agency theoretic emphasis on the structural position of directors by including the perspectives of these strategic leaders (Mintzberg, 1988) that result from the vantage point of this structural position. Simply put, outside directors bring more than their employment relationship to the focal firm and bring along with this structural relationship some rather unique perspectives stemming from a wide variety of direct experiences at their home firms and indirect experiences through observation of other firms.

In addition, previous research suggests that governance is more than oversight. Indeed, it depends on a balance or trade-off between inward-looking versus outward-looking perspectives (Cohen & Levinthal, 1990). As part of their external organizational role, boards link their focal organizations to critical environmental resources and information lying in a network of interlocking directorates (Finkelstein & Hambrick, 1996; Price, 1963; Pfeffer, 1972; Zald, 1969). Internally, in addition to their monitoring role, boards also perform policy roles of advice and counsel and ratification of strategy (Fama & Jensen, 1983; Finkelstein & Hambrick, 1996). Much of these external and internal roles are heavily informed by certain levels of expertise and skill (Baysinger & Butler, 1985). CEO directors come to the board with a great deal of experience, knowledge, and expertise comprising potentially valuable human capital. This human capital may enhance the capacity of the board to advise, counsel, ratify, and monitor the firm's management and strategic direction. This study examines the human capital brought to the boards of directors by active CEOs whose experience as general managers has resulted in both general human capital and specific human capital.


What scholars know about CEO directors comes from both the finance and strategic management literatures and can be summarized in terms of their effects on the appointing firm, factors influencing acceptance by active CEOs of board appointments, and source (home) firm and appointing (focal) firm characteristics. Regarding the impact on appointing firms, Fich (2005) reported a positive stock market reaction to appointment of CEO directors to boards of Fortune 1000 firms between 1997 and 1999. Faleye (2011) demonstrated that managerial compensation is higher and less sensitive to firm performance when CEOs serve as directors, although Fahlenbrach and colleagues (2010) using a broader sample and longer time series did not observe any relationship between the existence of CEO directors on the board and managerial compensation. Fahlenbrach and colleagues (2010) also note that CEO directors' authority and strategic leadership experience may enhance the value of the board's advising and monitoring functions particularly at small and/or growing firms with high advisory needs and for young, less experienced CEOs (Hermalin & Weisbach, 1988). Fich (2005) noted an inverse relationship between appointment of CEO directors and the existence of CEO directors already on the board, while Fahlenbrach and colleagues observed that firms with CEO directors already on the board seemed to be related to subsequent appointment of new CEO directors. In fact, Fahlenbrach and colleagues noted that CEOs cluster on boards: the existence of a CEO director on the board increases likelihood of additional CEO directors. CEO directors may also influence the spread of institutional governance norms across firms. Westphal & Zajac (1997) demonstrated the impact of CEO directors as a means whereby corporate practices are diffused across firms. CEO directors were more likely to bring changes to the appointing firm's board (e.g., dual leadership or more outside directors) if they had experienced similar changes by way of board policy changes at their home firms. Noting a leveling effect, they demonstrated the effects of an equity or social comparison perspective (Festinger, 1954; Walster, Berscheid, and Walster, 1973) in which CEOs who recently experienced loss of power at their home firms saw their status as having decreased in comparison to CEOs on whose boards they served and behaved in such a way as to similarly reduce support on behalf of those CEOs on whose boards they served.

In addition to impacting appointing firm outcomes, certain factors such as reduced employment risk, enhanced compensation and reputation, and exposure to new business opportunities may influence active CEOs to accept board appointments at other firms. Fahlenbrach and colleagues (2010), noting Fich's (2005) report of a positive stock market reaction to the appointment of CEOs to corporate boards examined factors attracting active CEOs to outside board service. Learning about the new firm as a member of the board may require considerable cognitive effort (Wiersema, 2002) as well as an extended period of orientation at the new firm. Governance scholars suggest that a new director can require three to five years to sufficiently understand the firm (Bacon & Brown, 1975). Hence, newly appointed directors face considerable opportunity costs associated with board service, and this phenomenon is especially acute for active CEOs (Wiersema, 2002). These opportunity costs may be ameliorated by acceptance by CEOs of appointments to boards of firms bearing marked similarity to their home firm on attributes such as firm size, age, financial and investment policies, and governance structures (Fahlenbrach et al., 2010) making appointing firms perhaps easier to understand. These similarities between the CEO director's home firm and the appointing firm result in decreased time and effort to understand the appointing firm's strategic context allowing these directors to "economize on governance costs" (Carpenter & Westphal, 2001: 654). In contrast to the risks and high opportunity costs just described, board service may bring benefits and rewards to CEO directors in the form of more knowledge of business opportunities, enhanced prestige and other potential improvements regarding an active CEO's position (Fahlenbrach et al., 2010) perhaps bringing value beyond financial compensation to individuals who are already rather well compensated (Fich, 2005). Service by active CEOs on boards of other firms presents risks to their jobs and reputations but also provides tangible and intangible rewards as well as opportunities for further strategic leadership development.

Looking beyond CEO directors' individual characteristics, empirical research has examined the characteristics of these CEO directors' home firms and those of appointing firms. Prior discussion points up the role that similarities between the source (home) and appointing (focal) firms play in attracting active CEOs as directors. Regarding other source firm characteristics, Booth and Deli (1996) noted that CEOs of firms with growth opportunities hold fewer outside directorships but also demonstrated that CEOs with strong top management teams to whom they may transfer decision making tend to hold more outside directorships. Furthermore, with respect to appointing firms, appointments of active CEOs as directors tend to come from older CEOs than those making non-CEO director appointments (Fahlenbrach et al, 2010)

In sum, this line of research demonstrates that active CEOs are highly sought after for board service, that such directors seek favorable tradeoffs between total compensation (including intangible incentives in the form of prestige and expected networking opportunities) and the workload associated with board service, and that investors favorably view the appointment of active CEOs as outside directors by bidding up the appointing firm's stock price. The next section addresses the nature of human capital and the types of human capital brought to firms' boards of directors by active CEOs serving as directors.


Human capital consists of knowledge and skills and is composed of general and specific human capital. General human capital such as education or general business experience is deployable across multiple and somewhat varied contexts (Becker, 1964; Dimov & Shepherd, 2005; Hatch & Dyer, 2004; Le, Kroll, & Walters, 2013; Nonaka, 1994). Other human capital is specific (e.g., industry experience, functional experience, general management experience (Kotter, 1982)) and deployable across similar contexts (Amit & Schoemaker, 1993). Yet other types of human capital are firm specific (e.g., context...

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