The board chair effect across countries: An institutional view

• Published date: 01 October 2019
• Author: Xufei Ma,Ryan Krause,Weiwen Li,Garry D. Bruton
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/smj.3057

RESEARCH ARTICLE

The board chair effect across countries:

An institutional view

Ryan Krause

1

| Weiwen Li

2

| Xufei Ma

3

| Garry D. Bruton

1,4,2

1

Neeley School of Business, Texas

Christian University, Fort Worth, Texas

2

Business School, Sun Yat-Sen University,

Guangzhou, China

3

Department of Management, City

University of Hong Kong, Kowloon, Hong

Kong SAR

4

School of Management, Jilin University,

Changchun, China

Correspondence

Weiwen Li, Business School, Sun Yat-Sen

University, Guangzhou, China.

Email: allenliweiwen@gmail.com

Funding information

National Natural Science Foundation of

China, Grant/Award Numbers: 71572198,

71620107001, 71702058, 71810107002;

CityU Startup, Grant/Award Number:

9380098; HKSAR GRF, Grant/Award

Number: 14504715; Fundamental Research

Funds for the Central Universities, Grant/

Award Number: 18wkzd02

Abstract

Research Summary:Strategic leadership scholars have

produced consistent evidence that the CEO effect on firm

performance depends on the latitude of actions CEOs

enjoy in their particular context. We argue that as the gov-

ernance leaders of their firms, board chairs choose a firm's

objectives more than they do its actions. As a result, the

board chair effect should vary with latitude of objectives,

rather than latitude of actions. We explore this possibility

by comparing the board chair effect in two countries with

relatively high latitude of objectives—Germany and

China—with the board chair effect in two countries with

relatively low latitude of objectives—the United States

and United Kingdom. Results confirm that latitude of

objectives influences the effect of board chair heterogene-

ity on firm performance.

Managerial Summary:Do board chairs matter to different

degrees in different countries? Building on prior work

showing that U.S. board chairs account for a significant

portion of firm performance, we collected data on board

chairs from four different countries to find out if this effect

differs by institutional environment. We find that board

chairs matter for firm performance across countries, but

that board chairs in Germany and China exhibit a consid-

erably larger effect on firm performance than do board

chairs in the United States and United Kingdom. We inter-

pret these findings as evidence that board chairs enjoy

wider discretion with regard to organizational objectives

Received: 24 July 2017 Revised: 17 April 2019 Accepted: 19 April 2019 Published on: 5 August 2019

DOI: 10.1002/smj.3057

1570 © 2019 John Wiley & Sons, Ltd. Strat Mgmt J. 2019;40:1570–1592.wileyonlinelibrary.com/journal/smj

in Germany and China than they do in the United States

and United Kingdom.

KEYWORDS

board chair effect, corporate governance, cross-country comparison,

institutional environment, variance decomposition

1|INTRODUCTION

Strategic leadership scholars have long sought to understand organizational leaders' impact on firm

performance, with a particular emphasis on the share of variance in performance attributable to indi-

vidual CEOs. In spite of disagreement over the magnitude of the effect (e.g., Fitza, 2014, 2017;

Quigley & Graffin, 2017), scholars examining the CEO effect have generally reached a consensus

that CEOs do matter for firm performance (e.g., Crossland & Hambrick, 2011; Mackey, 2008;

Quigley & Hambrick, 2015). These studies focus on the CEO effect based on the premise that the

CEO is the leader of the organization and thus a good proxy for the overall effect of strategic leaders.

However, firms are increasingly separating the positions of CEO and board chair (Krause &

Semadeni, 2013, 2014), raising the question of how influential the board chair—the firm's gover-

nance leader—is when separate from the CEO. Recently, Withers and Fitza (2017) provided the first

evidence that individual heterogeneity among board chairs explains a significant percentage of vari-

ance in performance among U.S. firms. Using a variance decomposition methodology with a sample

of publicly traded U.S. firms, Withers and Fitza (2017) found that individual differences among

board chairs explained 9.2% of variance in firm performance and individual differences among CEOs

explained 11.1% of variance in firm performance. Recent research from Krause et al. has further

demonstrated that board chairs differ in how they approach firm governance, with some oriented

more toward control and others oriented more toward collaboration, and that this difference can

affect firm performance (Krause, 2017; Oliver, Krause, Busenbark, & Kalm, 2018).

Though Withers and Fitza (2017) found that both board chairs and CEOs exhibited a significant

effect on firm performance, fundamental theoretical differences between the role of board chair and

the role of CEO raise questions about whether prior empirical findings relating to the CEO effect can

be generalized to the board chair as well. In particular, the primary theoretical mechanism—and con-

tingency factor—scholars have used to explain the effect of CEOs on firm performance is managerial

discretion (Finkelstein & Boyd, 1998; Hambrick & Finkelstein, 1987). Tracking variance in manage-

rial discretion across countries (Crossland & Hambrick, 2007, 2011), industries (Hambrick &

Quigley, 2014), and time periods (Quigley & Hambrick, 2015), strategic leadership scholars have

routinely shown that in environments with higher managerial discretion the CEO effect is stronger.

There are two types of managerial discretion, however: latitude of actions and latitude of objec-

tives (Parker, Krause, & Devers, 2019; Shen & Cho, 2005). Whereas “latitude of actions addresses

the range of strategic options available to managers as they strive to bring about the performance

demanded by stakeholders”(Shen & Cho, 2005, p. 846), latitude of objectives addresses “the range

of organizational outcomes managers believe they are able to target”(Parker et al., 2019, pp. 15–16).

Generally, the choice of strategic actions in pursuit of particular objectives falls more to the CEO and

top management team, whereas the choice of which objectives to pursue falls more to the board

(Shen & Cho, 2005; Whitler, Krause, & Lehmann, 2018). Understandably, then, the CEO effect

KRAUSE ET AL.1571