The Relative Power of CEOS and Board of Directors: Associations with Corporate Performance

Abstract

Drafts and tests a topology of the relative powers of the chief executive officer (CEO) and the board of directors. A review of relevant literature reveals four types of boards of directors: caretaker, statutory, proactive, and participative, of which the latter two represent the strongest boards, and the participative also gives a strong role to the CEO. Each board type is made up of a combination of four attributes -- decision-making style, characteristics, internal process, and composition. Data were collected through questionnaires from 69 Fortune 500 manufacturing firms and 70 Fortune 500 service companies, which asked top executives to rate CEO power, board power, and five characteristics of the board. The results support the proposition that there are significant differences among the four board types across the four attributes and organizational performance. With respect to the composition attribute, the difference found among the boards was that powerful boards had high numbers of female directors. The CEOs surveyed whose boards had power equal to or greater than the CEO described those boards as more efficient. Further, CEOs viewed more powerful boards as being more progressive, encouraging, and supportive. The highest level of company financial performance was found in the participative boards. The results of this survey suggest that it is beneficial for CEOs to share power with their boards of directors if they seek better financial performance. This strengthens the arguments of those who wish to reform and strengthen corporate boards of directors, or who argue that powerful boards strengthen organizational effectiveness, and contradicts the belief that CEOs desire weak boards. (SRD)

Keywords: Decision making, Chief executive officers (CEOs), Firm performance, Financial performance, Directors, Females, Participative decisions, Boards of directors