Does board turnover enhance firm performance? A contingency approach

Abstract

AbstractResearch Question/IssueDoes board turnover improve future firm performance? Our research investigates whether and when board turnover is beneficial from an information processing perspective.Research Findings/InsightsDrawing from information processing theory, we propose and test a novel model that explains how magnitude of board turnover influences future firm performance, and what pre‐turnover board characteristics mitigate the negative impact of board turnover on future firm performance. We find that board turnover negatively influences future firm performance, and pre‐turnover board meeting frequency, board job‐related diversity, CEO power relative to the board, and board tenure moderate this negative impact.Theoretical/Academic ImplicationsPast findings of the impact of board turnover are limited and equivocal, suggesting the need to conduct more systematic investigation to explain post‐turnover firm performance and to consider boundary conditions that affect this relationship. Building on information processing theory, we explain that the negative impact of board turnover on future firm performance is due to disruption of the board's information elaboration ability. Furthermore, we advance the novel perspective that boards which developed higher information elaboration ability prior to turnover can better mitigate the disruption in information processing resulting from board turnover.Practitioner/Policy ImplicationsThere are costs to board turnover that should be considered seriously. Our study demonstrates that higher magnitude of board turnover leads to poorer subsequent firm performance. The importance of pre‐turnover board's information elaboration ability implies that board turnover should be planned and actively managed—just like CEO succession planning—to minimize information processing disruption from turnover.