Télécharger: Guedri Eminet CGIR 2010
A rich stream of research in organization theory and the sociology of corporate elites has challenged the perspective suggesting that directors who exercise their monitoring duty with due diligence are rewarded by the market for directors while those who do not accomplish this duty appropriately are sanctioned by the market.
Indeed, several empirical studies have shown that powerful individual CEOs influence the director selection process by pushing for the appointment of directors who are less likely to challenge their decisions and by denying nomination or reelection of directors who are likely to do so (Lorsch & MacIver, 1989; Shivdasani & Yermack, 1999; Zajac & Westphal, 1996). Such CEOs also facilitate the appointment of directors having similar sociological and demographic characteristics as themselves; since these directors are likely to exercise less stringent control (Westphal & Zajac, 1995).
Moreover, several empirical studies have indicated that social ties among members of the elite class have a higher predictive power on director appointment than director inclination to increase monitoring and control over management (Davis & Greve, 1997; Hermalin & Weisbach, 1998; Mizruchi, 1996; Palmer, 1983; Pettigrew, 1992). Faced with evidence indicating the inefficiency of the labor market for directors and in the context of shareholder capitalism in which shareholders’ demands for greater power are increasing (Davis & Thompson, 1994; Monks & Minow, 2004), it has been necessary to reform the way in which directors are appointed. In particular, various reports on corporate governance stressed the need to modify the process of director appointment through the creation of nominating committees within boards of directors (AMF, 2004; Bouton, 2002; Cadbury, 1992; Cuervo-Cazurra & Aguilera, 2004; The Combined Code, 2000; Vienot, 1995, 1999). The mission of these specialized committees is to define the profiles of directors needed on the board and to suggest future director candidates. The need to create nominating committees is in line with the logic established by agency theory (Fama, 1980; Jensen & Meckling, 1976), which underlines the need to separate the firm’s control and management functions. From this perspective, nominating committees should be able to reduce the influence of firm CEOs on the process of director selection. Despite the widespread presence of nominating committees on corporate boards, only a few studies have examined the impact of these committees on the functioning of the labor market for directors.
This paper attempts to fill this gap by examining whether the presence and the independence of nominating committees moderate the relationship between a candidate director’s reputation for increasing control over management and the number of his or her subsequent appointments. More specifically, we suggest that if nominating committees reduce the influence of the CEO on the process of director selection, then it is expected that director reputation for exercising monitoring duty with due diligence will be positively linked to director’s number of subsequent appointments to boards having a nominating committee. On the other hand, such reputation is expected to be negatively linked to or disconnected from director’s number of subsequent appointments to boards without a nominating committee; as the CEO’s influence on the selection process will hinder such appointments. However, the CEO may interfere in the designation of new directors if the nominating committee is not independent, for instance, if the CEO is a member of the nominating committee or if this committee is dominated by executive directors.
Therefore, it is likely that the stronger a director’s reputation for actively fulfilling the monitoring mission the larger the number of his or her subsequent appointments to boards in which the CEO is not a member of the nominating committee and to boards in which the nominating committee is dominated by non-executive directors. Conversely, such director’s reputation will be negatively linked to or decoupled from his or her number of subsequent appointments to boards in which the CEO is a member of the nominating committee and to boards in which the nominating committee is dominated by executive directors.
We examined the moderating impact of the presence and independence of nominating committees on the relationship between a director’s reputation and his or her number of subsequent appointments using a sample of 7,135 directoryear observations related to board members of 200 public French firms over the 2001–04 period. Our results indicate that the presence and the independence of nominating committees reinforce the link between director reputation for being active in monitoring the CEO and the number of subsequent appointments. These results highlight the conditions under which the labor market rewards directors fulfilling their monitoring duty with due diligence, and hence, provides incentives for directors to adopt valued behaviors and control practices.
This paper contributes to the literature in several ways. First, this study extends previous research by highlighting the need to take into consideration the conditions under which directors nominating process occurs in order to fully understand the effect of reputation on the operation of the labor market for directors. Indeed, our results indicate that the outcome of the CEO-directors power struggle during candidate selection process, captured by the presence and independence of nominating committees, determines the extent of association between a director’s reputation and his or her future appointments. Therefore, our paper provides a possible explanation for the mixed results shown in previous studies that examined gain of appointments to boards without considering the selection context within boards. Indeed, a number of those studies have shown that external labor market rewards directors who exercise their monitoring duty with due diligence and sanctions directors who do not accomplish this duty appropriately. For instance, Coles and Hoi (2003) found that non-executive directors that rejected Pennsylvania Senate Bill 1310 antitakeover provisions are nearly three times more likely to gain new board seats than non-executive directors that retained all antitakeover provisions. Similarly, Fich & Shivdasani (2007) found that outside directors of firms accused of fraud bear a large decline in the number of their subsequent appointments. However, other studies have indicated that lax directors are not sanctioned by the external labor market and that, in some cases, they are actually rewarded with additional board seats. For example, Agrawal, Jaffe, & Karpoff (1999) found little evidence suggesting that directors of firms suspected or charged with fraud suffer a reputational impact reducing the number of their subsequent appointments, while Helland (2006) found that outside directors of firms facing class action lawsuits actually increase their net number of new board positions. Such mixed results may be attributed to methodological considerations such as differences in the way reputation was measured or in sample characteristics. They may, however, be also attributed to the failure to capture the impact of the power struggle between CEOs and directors occurring during the nomination process. Hence, the first contribution of this study is to take into account the balance of power between the CEO and directors, through the presence and independence of nominating committees, in uncovering the reputation-subsequent director appointments relationship. Second, this study extends previous research that has considered the moderating role of the context in which director nominations occurs. For example, Zajac andWestphal (1996) showed that the balance of power between the CEO and directors during the selection process, reflected by the ratio of outside directors, CEO/board chair separation, firm diversification, and CEO compensation design, moderates the impact of a director’s reputation and the likelihood of subsequent appointments. Our study extends Zajac and Westphal (1996) research by considering the moderating impact of another important dimension that defines the balance of power between CEO and directors in the selection process–the nominating committee. This dimension is particularly important since nominating committees, which are nowadays highly diffused across firms, lie at the heart of the directors’ selection process and are very likely to influence its outcome. Finally, this paper complements other studies that have examined the impact of nominating committees on director selection process and outcome. For example, Shivdasani & Yermack (1999) showed that when a focal CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Our study extends Shivdasani and Yermack (1999) research by adopting a different level of analysis as well as an action-oriented operationalization of director reputation. More specifically, in this study we consider new board appointment at the individual level of analysis (vs. firm level) and we operationalize director reputation using the number of actual actions increasing control over management initiated by the director instead of directors’ potential conflict of interests (insider, outsider, gray).
This paper is structured as follows. First, we describe the role of director reputation in the operation of the labor market for directors. Next, we discuss how the introduction of nominating committees has brought about changes in the market for directors. Then, we present the moderating impact of the composition of nominating committees on the relationship between director reputation and the number of subsequent appointments. Next, we describe the empirical context and methodology we used to test our hypotheses and present the main results of our empirical study. We conclude by a discussion of major implications of our findings to agency and institutional theories.