Non-executive Chair Research Articles

The influence of powerful non-executive Chairs in Mergers and acquisitions

This paper examines the influence of the non-executive Chair of bidding firms on various takeover outcomes. We study this in the Australian context due to its unique institutional setting where only 5% of Chair and CEO roles are combined, compared to 60% in the U.S. Based on a sample of 316 acquisitions by ASX listed firms between 2004 and 2014, we find that firms with a powerful Chair pay lower bid premiums and are also less likely to revise the initial offer price. Furthermore, Chair power is found to have a positive association with the bidding firm’s market reaction to the takeover announcement. Our evidence is robust with respect to alternative tests and variable specifications.

Does Life-Cycle Influence Board Composition?

Using a sample of over 6,000 firm years and 36,000 directorships, we examine whether board composition follows a predictable pattern consistent with firm life-cycle. Our findings build on the established notions on board monitoring and mentoring, and extend the theoretical work by incorporating the life-cycle dimension. Our models explain as much as 71% of the variation in board composition and find that early stage, growth, mature and declining firm boards differ significantly. Consistent with the resource dependence theory, we find that mature firms have larger boards and higher expertise diversity, including expertise in non-business fields. Theory also suggests, and we confirm that the agency problem is mitigated by mature firms through the appointment of independent directors and an independent non-executive chair. Collectively, our results suggest that life-cycle has a significant impact on board composition.

Making the governance of public bodies work: chair–chief executive relationships in practice

The importation, over the past 30 years, of private sector governance mechanisms into public sector bodies at arm's-length from government has brought greater focus on the relationship of part-time non-executive chairs and full-time chief executives. This paper explores this relationship in 14 UK public bodies, based on in-depth interviews with chairs, chief executives and, as triangulation, audit committee chairs. The findings concern the negotiated differentiation of roles; the effects of the chief executive's separate authority as accounting officer on internal governance; the management of external stakeholders; and how crises can affect roles and relationships. Improved processes of training and mentoring are proposed.

Chairmanship: The Effective Chair-CEO Relationship - Insight from the Boardroom

The 2011 Chairmanship report published by Yale’s Millstein Center for Corporate Governance and Performance examines the question of how the non-executive Chair and the CEO, both important roles in the corporate governance, can work together effectively toward the corporate best interest. Based on interviews with dozens of CEOs, non-executive Chairs, and stakeholders, the report paints a picture of how the effective relationship works.The report identifies three major areas that characterize an effective working relationship: chemistry, a clear framework, and a supportive context. Most commonly mentioned in interviews was good Chair-CEO chemistry – that is, the direct interpersonal relationship between the two. Expanding on the chemistry concept, Chairs and CEOs identified effective communications as underlying factor. Effective communications included frequent contact, open, ongoing dialogue, and a mix of formal and informal venues. Also supporting good chemistry was reciprocity and consideration – keeping each other well informed, avoiding surprises, and assuming good intent.Communications should be purposeful – and while the relationship might be close, it should not become a personal friendship. Chairs and CEOs alike felt their good communications created an overall environment conducive to sharing, learning, and confidence.Other areas, such as a clear framework and a supportive context were also identified. A clear framework also meant having the right processes, usually around key areas of board responsibilities such as managing the board agenda, material financial decisions, major transactions such as acquisitions, compensation, C-suite personnel, and succession planning. Three elements of board context also effected the Chair-CEO relationship – a talented executive team, a strong supportive board and a culture of transparency promoted an effective working relationship between the Chair and CEO.As this leadership structure becomes more prevalent, these insights and guidelines should be useful to those working together in these interdependent roles. Effective working Chair-CEO relationships may create value for shareholders in ways that neither leader could do alone.

The role, power and influence of company chairs

This paper develops an analytical framework to depict the heterogeneity that characterises the role of board chair and demonstrate the potential variability in how chairs operate boards and exercise power and influence on strategy, control and resource related tasks at board level. Theories of power and influence, as applied to top management teams and boards of directors, are explicated within the context of contemporary governance practices that are establishing the role of the board chair as distinct to that of the chief executive officer. Specifically, the paper maps sources of power and varying contemporary chair practices, including chair nomenclature (i.e. executive vs. non-executive chairs), chair origin (insider vs. outsider) and chair time (full-time vs. part-time). A number of theoretical chair-power models emerge from this analysis and are subject to empirical analysis using data collected from 160 chairs of 500 FTSE-listed companies. Theoretically and empirically, the paper complements structural approaches to studying boards with attention to behaviour on boards. By linking board structure, board process and the exercise of influence, the study reveals both differences amongst chairs in how they run the board, but also that chairs’ differ in the influence they exert on board-related tasks. Full-time executive chairs exert their greatest influence in strategy and resource dependence tasks whereas part-time, non-executive chairs seem to exert more influence over monitoring and control tasks.

Generalized Agency Problems

Agency problems in economics virtually always entail self-interested agency exhibiting “insufficient” loyalty to principal. Social psychology also has a literature, mainly derived from work by Stanley Milgram, on issues of agency, but this emphasizes excessive loyalty – people undergoing a so-called “agentic shift” and forsaking rationality for loyalty to a legitimate principal, as when “loyal” soldiers obey orders to commit atrocities. This literature posit that individuals experience a deep inner satisfaction from acts of loyalty - essentially a “utility of loyalty” – and that this both buttresses institutions organized as hierarchies and explains much human misery. Agency problems of excessive loyalty, as when boards kowtow to errant CEOs and controlling shareholders, may be as economically important in corporate finance as the more familiar problems of insufficient loyalty of corporate insiders to shareholders. Overt conflict between rival authorities is shown to reverse the “agentic shift” – justifying institutions that formalize argumentation such as the adversary system in Common Law courts; the Official Opposition in Westminster democracies; discussants and referees in academia; and independent directors, non-executive chairs, and proxy contests in corporate governance.

Behavioral Finance in Corporate Governance - Independent Directors and Non-Executive Chairs

Corporate governance disasters could often be averted had directors asked their CEOs questions, demanded answers, and blown whistles. Work in social psychology by Milgram (1974) and others shows human subjects to have an innate predisposition to obey legitimate authority. This may explain directors' eerily compliant behavior towards unrestrained CEOs. Other work reveals factors that weaken this disposition to include dissenting peers, conflicting authorities, and distant authorities. This suggests that independent directors, non-executive chairs, and committees composed of independent directors that meet without the CEO might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant. This may reflect measurement problems, in that many apparently independent directors actually have financial or personal ties to their CEOs. It might also reflect other behavioral considerations that reinforce director subservience to CEOs.

Behavioral Finance in Corporate Governance - Independent Directors and Non-Executive Chairs

Corporate governance disasters could often be averted had directors asked their CEOs questions, demanded answers, and blown whistles. Work in social psychology by Milgram (1974) and others shows human subjects to have an innate predisposition to obey legitimate authority. This may explain directors’ eerily compliant behavior towards unrestrained CEOs. Other work reveals factors that weaken this disposition to include dissenting peers, conflicting authorities, and distant authorities. This suggests that independent directors, non-executive chairs, and committees composed of independent directors that meets without the CEO might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant. This may reflect measurement problems, in that many apparently independent directors actually have financial or personal ties to their CEOs. It might also reflect other behavioral considerations that reinforce director subservience to CEOs.