On the Alignment of Stakeholder Orientation between the Board and Managers

Abstract

Adams and Ferreira (2007) suggest that well-aligned stakeholder orientation between the board and managers may be optimal because managers are then more likely to provide information to the board, thereby allowing the board to provide better advice to managers. We test this and related implications using a panel dataset that contains the stakeholder orientation of the board and managers based on indices that capture the degree of stakeholder orientation. We find that the focal firm’s stakeholder orientation index (SO Index) is strongly associated with the SO Index of other firms on whose board the outside directors of the focal firm have a board seat (Board SO Index). In addition, the higher the Board SO Index relative to the focal firm’s SO Index, the larger is the subsequent change in SO Index observed for the focal firm. This evidence suggests that outside directors influence the focal firm’s stakeholder orientation. In the director selection process, prospective directors are more likely to be appointed if their stakeholder orientation is aligned with that of the focal firm. Additionally, prospective directors expected to increase the alignment of stakeholder orientation between the board and managers are more likely to be chosen, and are accompanied with a higher stock price reaction upon director appointment announcement. Finally, we find that a larger divergence in stakeholder orientation between the board and managers negatively affects firm value, and that this effect is concentrated in environments where the board’s advisory role is likely to be more critical. Overall, our results are consistent with the predictions in Adams and Ferreira (2007).