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date: 26 June 2022

The Role of Board Leadership Structure in Firm Governancelocked

The Role of Board Leadership Structure in Firm Governancelocked

  • Danuse BementDanuse BementMays Business School, Texas A&M University
  •  and Ryan KrauseRyan KrauseNeeley School of Business, Texas Christian University

Summary

Boards of directors are governing bodies that reside at the apex of the modern corporation. Boards monitor the behavior of firm management, provide managers access to knowledge, expertise, and external networks, and serve as advisors and sounding boards for the CEO. Board attributes such as board size and independence, director demographics, and firm ownership have all been studied as antecedents of effective board functioning and, ultimately, firm performance. Steady progress has been made toward understanding how boards influence firm outcomes, but several key questions about board leadership structure remain unresolved.

Research on board leadership structure encompasses the study of board chairs, lead independent directors, and board committees. Board chair research indicates that when held by competent individuals, this key leadership position has the potential to contribute to efficient board functioning and firm performance. Researchers have found conflicting evidence regarding CEO duality, the practice of the CEO also serving as the board chair. The effect of this phenomenon—once ubiquitous among U.S. boards—ranges widely based on circumstances such as board independence, CEO power, and/or environmental conditions. Progressively, however, potential negative consequences of CEO duality proposed by agency theory appear to be counterbalanced by other governance mechanisms and regulatory changes.

A popular mechanism for a compromise between the benefits of CEO duality and independent monitoring is to establish the role of a lead independent director. Although research on this role is in its early stage, results suggest that when implemented properly, the lead independent director can aid board monitoring without adding confusion to a unified chain of command. Board oversight committees, another key board leadership mechanism, improve directors’ access to information, enhance decision-making quality by allowing directors to focus on specialized topics outside of board meetings, and increase the speed of response to critical matters. Future research on the governance roles of boards, leadership configurations, and board committees is likely to explore theories beyond agency and resource dependence, as well as rely less on collecting archival data and more on finding creative ways to access rarely examined board interactions, such as board and committee meetings and executive sessions.

Subjects

  • Business Policy and Strategy
  • Organization Theory

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