The 1980s, 1990s and 2000s have each seen sufficient incidence of corrupt corporate governance practices and/or poor strategic decision making by chief executive officers (CEOs) to justify a significant focus of academic and professional resources on rectifying this situation (Shleifer & Vishny, Reference Shleifer and Vishny1997; Cadbury, Reference Cadbury2000; Kiel & Nicholson, Reference Kiel and Nicholson2003; OECD, 2004; Hambrick, Werder, & Zajac, Reference Hambrick, Werder and Zajac2008; Dowell, Shackell, & Stuart, Reference Dowell, Shackell and Stuart2011; Clarke, Reference Clarke2014). Examples from the early 2000s alone include the collapse of high profile corporations in the United States such as Enron Corporation and WorldCom, and in Australia One.Tel Limited and HIH Insurance Limited. These corporate collapses broadly highlight continuing shortcomings in corporate ethics and governance practice (Kiel, Nicholson, & Barclay, Reference Kiel, Nicholson and Barclay2005; Kiel, Nicholson, Tunny, & Beck, Reference Kiel, Nicholson, Tunny and Beck2012; Clarke, Reference Clarke2014). Poor CEO performance has been identified as a specific consideration in each of these company failures. The global financial crisis only served to further highlight the importance of broadly improving corporate governance practices and specifically improving the probability of the positive influence of a CEO delivering strong organisation performance (Smallman, McDonald, & Mueller, Reference Smallman, McDonald and Mueller2010). The qualifications, knowledge, experience and work context of the CEO as the key executive member, usually with a seat on the board of directors, can be a key differentiating element in getting strong organisation performance (Carpenter, Sanders, & Gregersen, Reference Carpenter, Geletkanycz and Sanders2001). The CEO is a key firm resource who can deliver a company a strong performance in his or her role (Carpenter, Sanders, & Gregersen, Reference Carpenter, Geletkanycz and Sanders2001). This is why this paper focuses on the CEO’s professional development and work context and seeks to theoretically understand international best practice in relation to when and where these considerations deliver better organisation performance.
Stock exchange listed companies operate in a highly competitive business environment where they compete for access to capital and the best human resources (Clarke, Reference Clarke2014; Galvin & Arndt, Reference Galvin and Arndt2014). Their business operations are regulated by the listing rules of the local stock exchange. Multinational companies can be listed in more than one country (e.g., BHP Billiton Limited, News Corporation Limited) creating additional international management and compliance challenges. Advances in transport, media and information technology have also increased the speed of the strategy cycle companies have to manage, creating additional demands on the strategic ability of the CEO (Hamel, Reference Hamel2000; Clarke, Reference Clarke2014).
CEOs able to perform strongly in any legal jurisdiction are a key organisation resource. The resource-based view of the firm and the dynamic capabilities perspective provide useful insight here (Galvin & Arndt, Reference Galvin and Arndt2014). Applying these theories a human resource such as a CEO who is valuable, rare with a difficult to imitate bundle of qualifications, knowledge, skills (i.e., human capital) and networks (i.e., social capital) can be a source of competitive advantage to his or her employer over rival firms and this can help the firm generate favourable rents (Barney, Reference Barney1991; Teece, Pisano, & Shuen, Reference Teece, Pisano and Shuen1997; Tian, Haleblian, & Rajagopalan, Reference Tian, Haleblian and Rajagopalan2011).
Australia and the United Kingdom are two countries that have what is understood internationally to be best practice in corporate governance (Kiel & Nicholson, Reference Kiel and Nicholson2003). This follows from Anglo corporate governance reports (e.g., Cadbury, Reference Cadbury1992; Higgs, Reference Higgs2003; ASX, 2010) recommending an embrace of agency theory with separation of the roles of chair and CEO to avoid the principal–agent problem emerging and also company boards having a majority of outside directors (Kiel & Nicholson, Reference Kiel and Nicholson2003). This choice has been widely accepted and practiced by business and government in Australia and the United Kingdom and is evidenced in the Australian Stock Exchange Top 200 chairperson CEO separation statistic. However, more recently Clarke (Reference Clarke2014) has been critical of the restrictions of this agency theory informed approach to corporate governance practice, especially its neglect of creativity, innovation and the benefits of diversity on company boards.
Much of the published corporate governance research has been undertaken in the United States, and this has had a substantial impact on theory development and empirical insight in the field. In the United States the CEO is seen as the key man or woman for organisation strategy and in ~70% of Russell 200 companies (i.e., the largest 200 companies on the New York Stock Exchange and the NASDAQ) occupies both the chairperson and CEO role (i.e., duality). This reflects a tradition on the United States institutional scene for the Chairperson and CEO having an important stewardship role, granted authority by the board of directors to lead company strategy development and its execution (Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996). The United States context has also been influenced by the Enron and WorldCom corporate collapses which precipitated review of United States regulation by policy makers, the New York Stock Exchange and NASDAQ. Two key outcomes have been the Accounting Industry Reform Act 2002 otherwise known as the ‘Sarbanes Oxley Act’ in relation to improved company disclosure standards and the New York Stock Exchange Commission published principles of corporate governance in 2010 (Mallin, Reference Mallin2013). The New York Stock Exchange Commission principles highlight the importance of having a majority of outside directors on the board (Mallin, Reference Mallin2013), though this is a matter of some research controversy (Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996; Kiel & Nicholson, Reference Kiel and Nicholson2003).
In Australia on the Australian Stock Exchange Top 200 duality is practiced by <10% of companies. This statistic from the Australian industry context must have theoretical and empirical implications for research on CEO professional development and work context in this country and in other countries where this statistic may also vary. For example in the 70% of Russell 200 companies in the United States a variable such as CEO tenure is really measuring chairperson and CEO tenure compared with <10% of Australian Stock Exchange Top 200 companies. Australian Stock Exchange Top 200 companies will have a separate measure for chairperson tenure in >90% of cases. This type of variation between Anglo and American legal jurisdictions on key measures must influence corporate governance theory development and empirical findings. We need to understand this better, question and challenge United States research findings as we establish what is best practice in corporate governance.
Given this complex background (Clarke, Reference Clarke2014; Galvin & Arndt, Reference Galvin and Arndt2014) this paper proceeds with the following objectives. First, we set out to review the literature about the professional development and work context of the CEO. Then taking a multi-theoretic perspective going beyond agency theory we develop a series of propositions exploring the effect of CEO professional development and CEO work context on organisation performance that reflect international best practice in this area. These research propositions are summarised in a conceptual framework. A discussion is developed including theoretical implications, practical implications, limitations and our proposed future research agenda; this is followed by development of a succinct conclusion section.
The Professional Development and Work Context of the CEO
Attempts to link the CEO to organisation performance have become a subject of vast interest to scholars, investors and practitioners. Existing empirical studies based on United States samples are abundant but they often yield mixed results (e.g., Hambrick & Mason, Reference Hambrick and Fukutomi1984; Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Sanders and Gregersen2004; Krause, Semadeni, & Cannella, Reference Krause, Semadeni and Cannella2014). This creates a research opportunity to attempt to resolve unclear research outcomes and advance knowledge (Galvin & Arndt, Reference Galvin and Arndt2014). The Cadbury Committee Report of 1992 commissioned by the London Stock Exchange and the Organisation for Economic Co-operation and Development Principles of Corporate Governance Practice (Aguilera & Cuervo-Cazurra, Reference Aguilera and Cuervo-Cazurra2004; OECD, 2004) explain the core of corporate governance practice lies in the set of relationships between a company’s management, its board led by the chairperson, the shareholders and stakeholders. These reports also give guidance to the corporate governance community comprising a wide range of stakeholders inside the firm (e.g., the chairperson, CEO, inside directors, outside directors, top management team [TMT], middle managers) and outside the firm (e.g., Organisation for Economic Co-operation and Development, the World Bank, Australian Securities and Investment Commission) on institutional expectations.
There are several corporate governance theories that help to understand the connection between board characteristics and organisation performance including agency theory, stewardship theory, resource dependence theory, institutional theory, legal theory and social network theory (Zahra & Pearce, Reference Zahra and Pearce1989; Kiel & Nicholson, Reference Kiel and Nicholson2003; Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011). This paper will evidence use of stewardship theory, agency theory, institutional theory and upper echelons theory as being most relevant to theory development in relation to CEO professional development, CEO work context and organisation performance. This gives this paper a multi-theoretic perspective, and helps this paper take a step forward from the over-dependence on agency theory seen in much of the corporate governance literature (Clarke, Reference Clarke2014). This is one of the theoretical contributions of this paper.
Stewardship theory asserts that professional managers are dependable individuals and good stewards of resources assigned to them (Donaldson & Davis, Reference Donaldson and Davis1991; Kiel & Nicholson, Reference Kiel and Nicholson2003). There is a favourable level of alignment between the goals and objectives of the CEO, inside directors, outside directors and shareholders who all have the best interests of the firm in mind when formulating and implementing strategy. CEOs who most often are also appointed to the only or one of a small number of inside director positions on the board are perceived as a valuable leadership and decision-making resource. In stewardship theory professional managers gain much professional, personal and social fulfilment from their executive role (Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996; Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011).
Agency theory asserts that professional managers working as agents of the firm can have a conflict of interest between their professional role and their personal interests (Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011). The increasing size of the corporation has led to the separation of ownership and control between the agent and the principal (Berle & Means, Reference Berle and Means1932; Fama & Jensen, Reference Fama and Jensen1983). Although the owners would desire to lead their own corporations and obtain the maximum benefit for themselves, this is unfeasible considering the high capital demands of contemporary organisations (Berle & Means, Reference Berle and Means1932; Davis, Schoorman, & Donaldson, Reference Davis, Schoorman and Donaldson1997). Consequently an agency relationship develops and involves the transfer of decision-making power from the principal to the agent (Jensen & Meckling, Reference Jensen and Meckling1976; Psaros, Reference Psaros2009). This conflict of interest can impact their leadership and decision making, in particular their propensity for entrepreneurial risk taking (Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011). As a consequence sufficient monitoring or control mechanisms should be established to protect shareholders from emergence of this principal–agent problem emerging including a suitable structure for the board of directors with an independent chairperson and a majority of outside directors (Fama & Jensen, Reference Fama and Jensen1983; Kiel & Nicholson, Reference Kiel and Nicholson2003).
In institutional theory cultural influences have an important impact on corporate governance practices. Institutional theory rejects explanations of governance behaviour that is rational or efficient. Rather companies adopt practices that are preferred by respected and prominent institutional groups including government departments, rating agencies and professional bodies and associations, or they conform to norms accepted by their community to gain acceptance and legitimacy (Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011). These institutional pressures will vary from country to country and between developed and developing economies (Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996).
Finally, Hambrick and Mason (Reference Hambrick and Fukutomi1984) developed upper echelons theory that provides useful insight to inform this CEO study. The focus of upper echelon theory is on TMT cognition, perception and values and the influence this has on the process of strategic choice for the TMT. This process of strategic choice has organisation performance consequences (Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011). As these elements are hard to measure Hambrick and Mason (Reference Hambrick and Fukutomi1984) proposed that observable managerial characteristics are efficient proxies that provide reliable indicators of these psychological constructs (Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Sanders and Gregersen2004). Variables including international work experience, educational heterogeneity, functional heterogeneity and tenure heterogeneity have been used to better understand TMT strategic choices (Hambrick & Mason, Reference Hambrick and Fukutomi1984; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). This research stream has yielded inconsistent research findings (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001).
The CEO is the key TMT executive. The representative studies summarised in Table 1 below suggest that certain variables in relation to CEO professional development and CEO work context will help to predict if a particular CEO will exert a favourable influence on organisation performance. Table 1 is not given as a comprehensive summary of what is a substantial literature but does include some of the most cited and representative studies in the field relevant to the theory presented in this paper.
Representative studies CEO professional development and/or CEO work context variables and organisation performance
Note.
CEO=chief executive officer.
As noted much of this research has been conducted in the legal jurisdiction of the United States providing a research opportunity in other legal jurisdictions in developed and emerging economies where there are different institutional pressures (Clarke, Reference Clarke2014). Table 1 evidences that in corporate governance research variables including CEO and chairperson duality (or separation), CEO tenure and CEO percentage share ownership have been used to explore CEO influence on organisation performance with some interesting and sometimes unexpected results. Table 1 does indicate that this stream of research has not examined thoroughly issues in relation to CEO professional development including CEO origin (i.e., an inside selection or an outside the firm selection), CEO functional background and CEO education background for their effect on organisation performance. Table 1 also evidences that the corporate governance work context variables have not been connected to the CEO professional development variables with joint effects (e.g., CEO tenure×CEO international work experience) in prior research presenting a research gap. This appraisal of the literature provides useful background for the development of the research propositions that follow.
Development of Research Propositions
The following section will present a series of propositions to explore the linkage between the influence of the professional development and work context of the CEO and organisation performance in more detail. Similar to Hambrick and Mason (Reference Hambrick and Fukutomi1984: 198) we will draw on prior literature but also make new connections and ‘to some extent speculations’ to enable theory building in relation to ‘the most supportable and interesting’ reasoning drawing on and connecting knowledge in this area (Whetten, Reference Whetten1989).
Figure 1 provides a summary of the research propositions presented here. We have set out to develop research propositions that reflect international best practice. The research propositions provide a conceptual framework that gives a summary of the substantial future research agenda to be implemented in the first instance in the legal jurisdiction of Australia. This conceptual framework could also be explored in other legal jurisdictions to allow comparison. Indeed it is the intent of this paper to stimulate empirical research and further development of theoretical and practical insight in this area.
Conceptual framework – CEO professional development, CEO work context, the outsider ratio and organisation performance in Australia. CEO=chief executive officer; MBA=master of business administration
The research propositions presented here are phrased to accommodate a number of corporate governance and upper echelon research variables. Insider CEO explains whether the incumbent CEO was an employee of the firm or any of its subsidiaries before and at the time of appointment as CEO (Dalton & Kesner, Reference Dalton and Kesner1985; Kesner & Sebora, Reference Kesner and Sebora1994; Westphal & Zajac, Reference Westphal and Stern1995; Shen & Cannella, Reference Shen and Cannella2002), that is whether the incumbent is internally hired and therefore has an insider status (Bigley & Wiersema, Reference Bigley and Wiersema2002). CEO functional background refers to functional areas that the CEO previously had direct experience in (Finkelstein, Reference Finkelstein1992). CEOs with dominant functional backgrounds, such as product research and development, marketing, sales, entrepreneurship, merchandising and engineering are classified as possessing output functional backgrounds (Datta & Rajagopalan, Reference Datta and Rajagopalan1998; Zhang & Rajagopalan, Reference Zhang and Rajagopalan2010). CEOs with other dominant functional backgrounds, such as accounting, process research and development, operations and production are classified as possessing non-output or throughput functional backgrounds (Miles & Snow, Reference Miles and Snow1978; Hambrick, Reference Hambrick1981; Finkelstein, Reference Finkelstein1992; Datta & Rajagopalan, Reference Datta and Rajagopalan1998; Zhang & Rajagopalan, Reference Zhang and Rajagopalan2010). CEO international work experience is measured by looking at where the CEO gained his or her work experience (i.e., in the origin country or overseas). CEO education is often related to better receptiveness to innovation as it reflects the CEO’s cognitive ability, especially open-mindedness (Kimberly & Evanisko, Reference Kimberly and Evanisko1981). CEO education is measured by looking at the presence of an elite degree in particular a master of business administration (MBA) degree and the amount of degrees earned.
In general new CEOs face significant changes to their responsibilities, tasks and skill requirements; however, the challenges for the outsider CEO are often greater compared with the insider CEO (Harris & Helfat, Reference Harris and Helfat1997). Outsider CEOs are often appointed when the organisation is experiencing a period of poor performance requiring the outsider to perform a business turnaround from poor performance to better performance (Zajac, Reference Zajac1990; Cannella & Lubatkin, Reference Cannella and Lubatkin1993). Zhang and Rajagopalan (Reference Zhang and Rajagopalan2010: 337) argue that outsider CEOs can bring ‘adaptive and…disruptive effects’ to a company; so the outside CEO can be an agent of change through their influence on strategy formulation and implementation. Although some key internal and external constituents may support these changes, outsider CEOs normally face a hostile attitude from senior executives, and these senior executives are typically from the organisation’s former regime (Boeker & Goodstein, Reference Boeker and Goodstein1993; Zhang & Rajagopalan, Reference Zhang and Rajagopalan2010). The changes introduced by an outside CEO may also result in more pronounced cost, risk and organisational disturbance making the choice of an insider more appealing to the board of directors and management (Shen & Cannella, Reference Shen and Cannella2002; Greiner, Cummings, & Bhambri, Reference Greiner, Cummings and Bhambri2003). Outside CEOs will also have less of a mastery of the organisation’s resource capabilities and gaps compared with an insider (O’Shannassy, Reference O’Shannassy2011). Shen and Cannella (Reference Shen and Cannella2002: 1196) found that outside CEOs increase the chance of ‘CEO dismissal followed by inside succession’ because ‘the high expectations the board and other stakeholders have towards outside CEOs make them more vulnerable when challenges from senior executives surface’. By contrast powerful and well performed retiring CEOs often have a strong influence over successor selection; they tend to desire insider successors who are similar to them (Zajac & Westphal, Reference Zajac and Westphal1996). Part of the legacy of a successful CEO is one or more capable inside executives trained and sufficiently experienced to succeed them in the CEO role. The firm will then have the fortunate situation where there are one or more capable internal candidates for the CEO position. An insider successor has the opportunity to build company and industry specific experience, plus a network of support within the company and also among key external stakeholders before their appointment in the CEO role. Thus, stewardship theory and resource dependence theory related benefits are present when choosing an insider CEO, especially when the retiring CEO has performed well in the role. Given this background, it is predicted that:
Proposition 1 Selection of an insider CEO is positively associated with organisation performance.
Companies also have a choice between choosing a CEO with an output-oriented functional background (i.e., product research and development, marketing, sales) or a throughput-functional background (i.e., accounting, process engineering, production) (Hambrick & Mason, Reference Hambrick and Fukutomi1984). Datta and Rajagopalan (Reference Datta and Rajagopalan1998) and Hambrick and Mason (Reference Hambrick and Fukutomi1984) found that CEOs with output-oriented functional backgrounds will be preferred in organisations pursuing innovation strategy or differentiation. On the contrary, CEOs with throughput-oriented functional backgrounds will be favoured in organisations pursuing non-differentiation or efficiency-oriented strategies (Datta & Rajagopalan, Reference Datta and Rajagopalan1998). Other research (Chaganti & Sambharya, Reference Chaganti and Sambharya1987; Thomas, Litschert, & Ramaswamy, Reference Thomas, Litschert and Ramaswamy1991) also found a positive correlation between executives ‘output-related backgrounds and product differentiation strategies’ (Datta & Rajagopalan, Reference Datta and Rajagopalan1998: 838). Hambrick and Mason (Reference Hambrick and Fukutomi1984: 199) posited that ‘in stable, commodity-like industries, throughput-function experience will be positively associated with profitability’; however, ‘in turbulent, differentiable industries, output function experience will be positively associated with profitability’. In the 1990s and 2000s with developments in transport, information technology, telecommunications and media business environment has become more challenging with strategy cycles getting shorter and shorter (Hamel, Reference Hamel2000). These circumstances mean that companies need to innovate continuously to be able to cope with high levels of environmental uncertainty (Tushman & O’Reilly, Reference Tushman and O’Reilly1997). In these circumstances companies should then give preference to selection of a CEO with an output-oriented functional background who is a good steward of firm resources to increase the probability of strong performance (Ireland & Hitt, Reference Ireland and Hitt1999; Burgelman & Grove, Reference Burgelman and Grove2007; Hamel, Reference Hamel2009; O’Shannassy, Reference O’Shannassy2010). Bringing together these insights from upper echelon theory and stewardship theory we expect that:
Proposition 2 Selection of a CEO who has a functional background in an output-oriented field is associated with better organisation performance.
Harris and Helfat (Reference Harris and Helfat1997) explain that CEOs improve their executive capacity and ability by means of previous work experience making them a better steward of company resources. Every CEO may have experienced substantial accountability possibly in their early careers (Cox & Cooper, Reference Cox and Cooper1989). Some common experiences involve international assignments to ‘manage an overseas subsidiary’ and deal with the business environment in that setting (Cox & Cooper, Reference Cox and Cooper1989: 242). These assignments can provide the future CEO with unique knowledge, professional contacts outside their organisation, valuable international experience and a different, broader world perspective that may help them to better manage the organisation, especially if the organisation is a multinational corporation (Maruca, Reference Maruca1994; Athanassiou & Nigh, Reference Athanassiou and Nigh1999; Carpenter, Sanders, & Gregersen, Reference Carpenter, Geletkanycz and Sanders2001). This type of professional background can be a valuable firm resource over time whether the CEO’s employer is a national or an international business, though we note the requirement for this type of international experience is likely to be stronger for an organisation with international operations. Hence:
Proposition 3 A CEO with international work experience is positively associated with organisation performance.
Studies that link directly CEO education to organisation performance are still rare. However, there is a strong relationship between education level, the capacity to identify, prioritise and process useful decision-making information, and the ability to engage in complex thinking making the CEO a better steward of company resources (Wally & Baum, Reference Wally and Baum1994). Past research also shows that there are strong positive relationships between executive education level, product differentiation and organisational innovation (Bantel & Jackson, Reference Bantel and Jackson1989; Thomas, Litschert, & Ramaswamy, Reference Thomas, Litschert and Ramaswamy1991; Wiersema & Bantel, Reference Wiersema and Bantel1992; Datta & Rajagopalan, Reference Datta and Rajagopalan1998). Innovation and differentiation have been correlated positively with organisation performance (Cottrell & Nault, Reference Cottrell and Nault2004; Nerkar & Roberts, Reference Nerkar and Roberts2004; Nadkarni & Narayanan, Reference Nadkarni and Narayanan2007). Number of degrees received from elite education institutions are perceived as an indication of the standing or status of the CEO (Finkelstein, Reference Finkelstein1992; Bigley & Wiersema, Reference Bigley and Wiersema2002). When the CEO receives a degree from an elite university, the prestige of the university can be extended or transferred in the form of executive status (D’Aveni, Reference D’Aveni1990). MBA degree offerings are some of the most ranked and surveyed in the academic world with rankings prepared by a range of publications and bodies (e.g., The Economist, Forbes, Academic Ranking of World Universities). Elite degrees, such as an MBA degree from an elite academic institution will increase the chance of the executive to obtain board appointments and enhance their social and business status, helping the CEO to build elite executive and company director networks (Useem & Karabel, Reference Useem and Karabel1986; Westphal & Stern, Reference Westphal and Zajac2006). The CEO’s elite social and business networks can be a very useful resource for the company. Applying stewardship and resource dependence theory it is expected that:
Proposition 4 The presence of a CEO with an MBA degree from an elite academic institution is positively associated with organisation performance.
CEO and chairperson duality has been argued to offer a distinct point of advantage in company leadership (Anderson & Anthony, Reference Anderson and Anthony1986). This argument has been made especially strongly in the United States, though Australian experts identify agency theory concerns with this approach. Duality does create an image of firm stability, can increase confidence in company management and can provide better communication between management and the board of directors (Anderson & Anthony, Reference Anderson and Anthony1986; Donaldson & Davis, Reference Donaldson and Davis1991; Finkelstein & D’Aveni, Reference Finkelstein and D’Aveni1994; Iyengar & Zampelli, Reference Iyengar and Zampelli2009). However, Fama and Jensen (Reference Fama and Jensen1983) and Jensen (Reference Jensen1993) state that CEO duality is likely to result in the principal–agent problem occurring, and also hinder the board’s ability to monitor the CEO effectively. CEOs holding the position of the chairperson will widen their power base and weaken the board’s role of monitoring and evaluating performance of the TMT (Coles & Hesterly, Reference Coles and Hesterly2000). This provides a bigger opportunity for the CEO to pursue their personal interest at the expense of shareholder wealth. The empirical research exploring the impact of CEO duality on firm performance evidences mixed results. Boyd (Reference Boyd1995) found that CEO duality has a positive impact on subsequent firm performance. Yet, Iyengar and Zampelli (Reference Iyengar and Zampelli2009) found no evidence to support an argument that CEO duality is a structure intentionally selected for optimising performance. Other scholars (Rechner & Dalton, Reference Rechner and Dalton1991; Daily & Dalton, Reference Daily and Dalton1994) have found a negative relationship between CEO duality and firm performance. Rechner and Dalton (Reference Rechner and Dalton1991) conducted a longitudinal analysis of 500 Fortune companies and found that firms with independent leadership structures constantly outperform those with a duality structure. In their study, firm performance was specifically measured as return on investment, return on equity and profit margins. Many Anglo corporate governance reports (e.g., Cadbury, Reference Cadbury1992; Higgs, Reference Higgs2003; ASX, 2010) recommend the roles of chair and CEO to be exercised by a different individual to avoid the principal–agent problem emerging. This choice is also widely accepted by business and government in Australia and the United Kingdom and is a distinct point of difference to the prevailing United States practice of duality. Giving priority to agency theory and institutional theory on this point we propose that:
Proposition 5 Separation of the CEO and chairperson role is positively associated with organisation performance.
The issue of the relationship between CEO tenure and firm performance is a matter of some controversy in the literature. There has been much research on this relationship in the listed company scene in the United States where there is a high frequency of the practice of chairperson–CEO duality. There has been notably less research on this relationship in legal jurisdictions such as the United Kingdom and Australia where there is strong institutional pressure for corporate governance best practice and separation of the chairperson and CEO tenure role, with implications for the use and interpretation of the CEO tenure measure (Kiel & Nicholson, Reference Kiel and Nicholson2003; O’Shannassy, Reference O’Shannassy2010).
An agency theory view of the CEO tenure and firm performance relationship is that early in the new CEO’s tenure firm performance increases as the new CEO responds to his or her mandate from the board of directors negotiated during the recruiting process. The new CEO establishes his or her enduring strategic contribution in these early years of tenure until firm performance peaks, then firm performance declines as the entrepreneurial instincts, risk-taking propensity and interest level of the CEO decline with time (Hambrick & Fukutomi, Reference Hambrick and Fukutomi1991; Shen, Reference Shen2003). This results in the inverted U-shape in the CEO tenure and firm performance relationship discussed in the agency theory literature (Hambrick & Fukutomi, Reference Hambrick and Fukutomi1991; Miller & Shamsie, Reference Miller and Shamsie2001; Simsek, Reference Simsek2007).
Coles, McWilliams, and Sen (Reference Coles, McWilliams and Sen2001) discredited this agency theory argument noting that there is far more evidence in support of a linear relationship between CEO tenure and firm performance reflecting the influence of a CEO who is a good steward of firm resources. The CEO who is a good steward will have an alignment between his or her interests and those of the firm, internal and external stakeholders. A good steward will gain much personal, social and professional fulfillment from his or her executive role. This helps to sustain the CEO’s interest in the firm for the long run. Applying resource dependence theory long tenure in the role will provide the CEO with opportunities to develop and nurture his or her professional network giving the CEO and the firm access to a wider range of resources (Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996). Given the preceding discussion applying stewardship theory and resource dependence theory it is expected that:
Proposition 6 There is a positive association between CEO tenure and organisation performance.
A significant CEO percentage share of ownership or equity ownership can serve as an effective means for reducing the different priorities that can emerge between the principal and the agent (Jayaraman, Khorana, Nelling, & Covin, Reference Jayaraman, Khorana, Nelling and Covin2000). Specifically, since their personal fortunes are tied to those of their firms, it is likely that these CEOs work more diligently and invest more time in developing their managerial skills ultimately enhancing firm performance. Thus, a significant CEO percentage share ownership encourages the CEO to act as a good steward. Buchholtz and Ribbens (Reference Buchholtz and Ribbens1994) found evidence that CEO share ownership leads to a lower likelihood of takeover resistance. Buchholtz and Ribbens (Reference Buchholtz and Ribbens1994) conclude that CEO stock ownership is an important means for protecting shareholders’ interests. Hence, applying stewardship theory it is expected that:
Proposition 7 Higher CEO percentage share ownership is positively correlated to organisation performance.
The appropriate balance of inside directors and outside directors on a company board is another matter of contention in corporate governance research and practice. The agency theory view on board composition is that there should be a majority of outside directors to keep the influence of the CEO and any other inside directors in check. There has been some empirical backing for this view from Ezzamel and Watson (Reference Ezzamel and Watson1993) and Baysinger and Butler (Reference Baysinger and Butler1985) and certainly the institutional view in Australia supports this agency theory prescription (Bosch, Reference Bosch1995). This institutional theory position is based on the view that outside directors are best placed to ensure the CEO and inside directors prudently and efficiently manage firm resources. Resource dependence theory predicts that outside directors improve firm performance as they often bring access to needed resources such as accounting, legal and/or management consulting experts (Pfeffer, Reference Pfeffer1972). However, an alternative stewardship theory view with support in the empirical literature is that there is a need for an appropriate skill mix on a company board and this can require more inside directors and fewer outside directors on the board (Kiel & Nicholson, Reference Kiel and Nicholson2003; Kroll, Walters, & Le, Reference Kroll, Walters and Le2007). Inside directors who are good stewards with sound entrepreneurial instincts can make a favourable difference to company performance. These inside directors who are good stewards are likely derive professional, personal and social fulfilment from their role and are likely to have similar goals and objectives as shareholders and other external stakeholders. Other research finds that board composition has no effect on performance. This is a complex relationship and the most robust Australian evidence finds a negative correlation between the outsider ratio and firm performance reflecting stewardship theory suggesting inside directors deliver better value (Kiel & Nicholson, Reference Kiel and Nicholson2003). Hence:
Proposition 8 There is a negative association between the outsider ratio and organisation performance. A low outsider ratio correlates with better organisation performance.
The theory in this paper argues that stewardship theory and resource dependence theory provide the basis for the view that high CEO tenure predicts better organisation performance and this theory is supported by robust research evidence (Coles, McWilliams, & Sen, Reference Coles, McWilliams and Sen2001). However, we have seen that the value to the firm of outside directors is a more contentious issue with the Australian evidence showing a negative correlation between outside directors and firm performance reflecting stewardship theory (Kiel & Nicholson, Reference Kiel and Nicholson2003). These insights create some intrigue on the matter of the joint effects of CEO tenure and the outsider ratio. Combs, Ketchen, Perryman, and Donahue (Reference Combs, Ketchen, Perryman and Donahue2007) tested but did not prove that CEO tenure and the outside director ratio jointly correlate with a stock market measure of firm performance in the event that a company experiences the unexpected death of their CEO. We argue that based on the available empirical research evidence the influence of a strong performing long tenured CEO who is a good steward is maximised with a lower outside director ratio. A high outsider ratio would have the counter-productive effect of constraining the entrepreneurial instincts of a CEO who is a proven performer. An experienced CEO who is a proven performer is more valuable to the company than a high ratio of outside directors. Hence:
Proposition 9 The influence of CEO tenure on firm performance is moderated by the outsider ratio, such that long CEO tenure and a low outsider ratio jointly predict better organisation performance.
A unique contribution in this paper is integration of insight on CEO professional development, CEO work context and organisation performance. We have discussed the value to the firm of high CEO tenure where that CEO is a good steward of firm resources (Coles, McWilliams, & Sen, Reference Coles, McWilliams and Sen2001). We have also highlighted the value to the firm of hiring a CEO with an output-oriented functional background such as marketing, product development or sales. These executives will have a well-developed sense of the requirements for product and/or service innovation, an awareness of how to differentiate their firm’s offering from that of a rival, and an ability to manage environmental uncertainty (Hambrick & Mason, Reference Hambrick and Fukutomi1984). It is logical to take the next step and connect length of CEO tenure with a CEO having an output-oriented functional background as having a joint effect on organisation performance. Hence, we suggest the following joint multiplicative moderation relationship that draws on stewardship theory and upper echelon theory:
Proposition 10 High CEO tenure where that CEO has an output-oriented functional background jointly predicts better organisation performance.
We have emphasised in this paper the value to the firm of high CEO tenure (Coles, McWilliams, & Sen, Reference Coles, McWilliams and Sen2001). We have also explained the value to the firm of a CEO who has the benefit of international work experience. We argue here that it is logical that there is a joint effect of the work context choice the board of directors makes of continuing to hire a long serving CEO who is a good steward of firm resources with the CEO professional development selection decision of continuing to hire a CEO who has international work experience. Such a CEO will have developed over time, and given to his or her employer the benefit of, company knowledge, well developed and mature networks among internal and external stakeholders, and a different world perspective compared with a CEO without international experience. Hence, we posit the following joint multiplicative moderation relationship:
Proposition 11 High CEO tenure where that CEO has prior international work experience jointly predicts better organisation performance.
In terms of the dependent variable (i.e., organisation performance) for a study such as this Newbert (Reference Newbert2008) identified three types of performance measures that are used frequently in the strategy literature: objective financial performance, subjective financial performance and subjective non-financial performance. There is a strong preference in the corporate governance research literature to use archival data where the variables of interest are available from archival sources (e.g., average return on assets, Tobin’s Q). The literature indicates there is a need to look more closely at non-financial aspects of performance to obtain a keener understanding of strategic performance and sustainability (Galbreath, Reference Galbreath2012). Given this background use of a perceptual organisation performance survey measure could be justified for corporate governance research if perceptual insight into strategic performance or corporate social performance or financial performance was required and sufficient survey responses were available. The minimum desirable number would be ~100 responses or 10% of the survey database and obtaining some correlation between the perceptual measure and the archival measure would enhance the predictive validity of the study (O’Shannassy, Reference O’Shannassy2005).
Discussion
Improvement of theory and practice in the corporate governance field has been of interest to business researchers over the last 3 decades with a growing literature evident (Shleifer & Vishny, Reference Shleifer and Vishny1997; Cadbury, Reference Cadbury2000; Kiel & Nicholson, Reference Kiel and Nicholson2003; Hambrick, Werder, & Zajac, Reference Hambrick, Werder and Zajac2008; Dowell, Shackell, & Stuart, Reference Dowell, Shackell and Stuart2011). A better understanding of the degree to which CEOs influence organisation performance and how this happens is crucial to providing scholars and practitioners with a better understanding of how organisations actually work (Mackey, Reference Mackey2008; Galvin & Arndt, Reference Galvin and Arndt2014). There remains scope to improve understanding of these important linkages that can make a real difference to firm profitability (Clarke, Reference Clarke2014). This situation inspired this study.
Overall, the Anglo and American corporate governance scene is characterised by deep rooted regulatory institutions and laws, democratic political systems, active share markets, separation of ownership and control of corporations, a high number of institutional investors, corporate boards more often with a majority of outside directors and regular company reporting requirements (Clarke, Reference Clarke2004). In Australia, research focusing on the influence of the CEO on firm performance is limited but developing (O’Shannassy, Reference O’Shannassy2010). As corporate governance practices evolve and develop around the world understanding of the influence of the CEO on firm performance in empirical research continues to evolve as well. We have seen in Table 1 and in the theoretical background there is now a wide corporate governance literature including a strong and rigorous body of United States research conducted in a business community where traditionally there has been wide practice of duality. There is an opportunity to complement these completed studies by building research knowledge in other countries, especially countries with strong corporate governance institutional leanings to best practice such as Australia (Kiel & Nicholson, Reference Kiel and Nicholson2003). For example, the practice of chairman–CEO duality is less common in Australian business compared with the United States (Kiel & Nicholson, Reference Kiel and Nicholson2003; Carter & Lorsch, Reference Carter and Lorsch2004; O’Shannassy, Reference O’Shannassy2010) and Australia has a bigger proportion of outside directors than either the United States or United Kingdom (Kiel & Nicholson, Reference Kiel and Nicholson2003).
In relation to a contribution to theory we have endeavoured to link agency theory, stewardship theory, resource dependence theory, institutional theory and upper echelon theory as relevant in the development of a series of research propositions (Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996). This gives the paper a multi-theoretic perspective. The research propositions consisting of relationships between independent, moderating and the dependent variable are summarised in the conceptual framework as shown in Figure 1. We argue these research propositions as a whole make a contribution to theory by addressing the under researched connection between CEO professional development variables and CEO work context variables and identifying new joint multiplicative relationships between certain of these variables that have not been considered before (Hambrick & Mason, Reference Hambrick and Fukutomi1984; Johnson, Daily, & Ellstrand, Reference Johnson, Daily and Ellstrand1996). We argue that propositions 9–11 are important as they draw attention to the circumstances where continued CEO tenure adds value to organisation performance in the context of other decisions on the outside director ratio, selection of a CEO with an output functional background and CEO international work experience. Sound choices here can be a source of competitive advantage to the firm.
In terms of practical implications these research propositions are relevant to a wide range of stakeholders inside and outside the firm. Inside the firm the chairperson, inside directors and TMT members, outside directors, C-level executives and managers will all benefit from clearer understanding of the application of the when, where, who and how agency theory, stewardship theory, resource dependence theory, institutional theory and upper echelon theory influence the CEO hiring decisions with implications for firm performance. This clearer understanding within the firm can enhance the ‘soft’ processes of leadership selection and development, adding to the dynamic change capability of the firm and giving better long run strategic performance from a better selected and trained CEO (Nicholson & Newton, Reference Nicholson and Newton2010; O’Shannassy, Kemp, & Booth, Reference O’Shannassy, Kemp and Booth2010; Clarke, Reference Clarke2014). Outside the firm bodies including the Organisation for Economic Co-operation and Development, the World Bank, the Australian Securities and Investment Commission and the Australian Institute of Company Directors all have an interest in the findings of this study. Further the legal profession, the accounting profession, the stockbroking profession, the management consulting profession, the banking industry, public servants and politicians all have an interest in the matters discussed here in the interests of making companies and boards of directors work better (Hambrick, Werder, & Zajac, Reference Hambrick, Werder and Zajac2008; Clarke, Reference Clarke2014).
Limitations
This study is limited to a conceptual treatment only of a number of CEO professional development, CEO work context and organisation performance relationships. Completion of the research in Australia including plots of the multiplicative moderation relationships will give guidance on the when and in what situations the firm will benefit from the coming together of CEO professional development and work context issues with effect on organisation performance. The research propositions developed here could also be adapted in different cultural, business, financial, legal and social settings such as populous countries with high growth economies including China, India, Indonesia and Brazil reflecting the country context.
Future Research
This paper offers a substantial future research agenda. Theory is developed here to provide the basis for an empirical study examining the research propositions developed here in relation to the influence of the professional development and work context of the CEO on organisation performance. Such a study could be qualitative, quantitative or mixed method; such a study could be at a point in time or longitudinal. A longitudinal study could detect the effects of contemporary trends in improving corporate governance practice in particular legal jurisdictions (e.g., the trend to wider practice of separation of the chairperson and CEO role in the United States, inside director and outside director ratio trends). Single country research examining these issues would be useful and add to our empirical understanding of these issues. In addition, research gathering data in this area for a number of countries would allow comparison of results between countries and regions plus give interesting insight into the convergence or continuing divergence of international stock exchanges to or away from the Anglo-American model (Bonn, Yoshikawa, & Phan, Reference Bonn, Yoshikawa and Phan2004; Crossland & Hambrick, Reference Crossland and Hambrick2007). It should be noted on this point large populous countries including China, India, Indonesia and Brazil all have an evolving corporate governance scene influenced by a range of cultural, business, financial, legal and social influences providing an interesting research context in a quite different way to Australia, the United Kingdom or the United States (Clarke, Reference Clarke2014). Studies in and across these countries could provide valuable new theoretical and practical knowledge.
Conclusion
In fulfilling the objectives of this paper we have seen the practice of corporate governance is of great interest to a variety of stakeholders ranging from the Organisation for Economic Co-operation and Development, the World Bank, practicing company directors, C-level executives, senior executives, investors and politicians (Hambrick, Werder, & Zajac, Reference Hambrick, Werder and Zajac2008; Clarke, Reference Clarke2014). High profile corporate collapses in the 1980s, 1990s and 2000s have led to some significant changes in corporate governance practices, particularly board processes and procedures as governments, professional directors, the investment community, the legal community and the accounting community sought to rectify shortcomings in legal jurisdiction and the business environment (Kakabadse & Kakabadse, Reference Kakabadse and Kakabadse2007; Clarke, Reference Clarke2014). This paper undertakes a synthesis of the corporate governance literature and identifies the importance of applying agency theory, stewardship theory, resource dependence theory, institutional theory and upper echelon theory to understanding a range of choices in corporate governance practice (Boyd, Haynes, & Zona, Reference Boyd, Haynes and Zona2011).
In developing the theoretical arguments for our conceptual framework we have set out to carefully balance international insight, especially from Australia, the United Kingdom and the United States. The theoretically and empirically well-developed United States published research has an important place in the corporate governance field. Appreciation of the international importance of high Anglo governance standards as a benchmark for best practice also has a key place in the corporate governance field. We have taken an international perspective to the literature review, development of research propositions and discussion. We have the view that our unique Australian perspective as researchers helps to look impartially at important international corporate governance choices – including the practice of CEO duality and its connection to stewardship theory – and make suggestions on best practice in relation to CEO professional development and work context. Connecting CEO professional development and CEO work context variables in joint relationships is a further theoretical contribution. Solutions we offer here on CEO professional development and work context matters to improve organisation performance for consideration by practitioners, supported by our theoretical arguments, include preference for selection of:
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• An insider CEO.
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• A CEO with an output-oriented functional background.
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• A CEO with international work experience, especially for a business with international operations.
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• A CEO with an MBA degree from an elite academic institution.
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• Separation of the CEO and chairperson role.
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• A long tenured CEO (i.e., high CEO tenure).
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• Encouraging CEO share ownership.
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• A lower outsider ratio.
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• High CEO tenure and a lower outsider ratio in a moderation relationship (i.e., acting jointly).
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• High CEO tenure for a CEO with an output-oriented functional background in a moderation relationship.
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• High CEO tenure where that CEO has international work experience in a moderation relationship.
This study here has the limitation of being a theoretical study only. We make a number of suggestions for future research and look forward to seeing how our theory development impacts future research and business practice.
Acknowledgements
The authors are the sole authors of the manuscript. The manuscript is not under consideration at any other journal at this time. The authors own the copyright. The article has not been published before. The authors understand we have complied with all submission requirements of Journal of Management & Organization listed in your manuscript submission web site. No conflicts of interest, no funding.
