University of Arkansas

Walton College

The Sam M. Walton College of Business

Above Board: How Independent Directors Facilitate Strategic Change

Group of young professionals working on project with "CHANGE" written across it
April 21, 2022  |  By Mitchell Simpson, Michael Cummings

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Even though CEO tenure – at least at large public companies – has increased over the past few years, executives will eventually move on. However successful the former CEO was, a successor CEO offers a reason to be optimistic about a firm’s future. And theoretically, an outsider CEO provides the jolt a lagging firm needs to rediscover its success.  
The University of Arkansas’s Michael Cummings noticed, however, that other researchers found outsider CEOs had much more mixed results than initial research predicted. With his coauthors, J.P. Eggers and Richard Wang, Cummings identifies a possible source of friction for a new outsider CEO: the predecessor.  
Forty-seven percent of firms hold onto the former CEO as the chair of the board of directors to maintain institution experience (and to put checks on any outlandish strategy). That means, however, that new CEOs are being monitored by the very person they replaced. This under-explored dynamic happens about a quarter of the time during corporate shake-ups, making it a dynamic worthy of research attention.  
After all, the CEO alone does not institute a firm’s strategy. Rather, the ability for a firm to change (or not) emerges from a host of relationship interfaces. In short, although CEOs are often the most visible representatives of a company, we should not view the upper echelons of management as a monolith with either only one perspective or even as a set of very similar perspectives. To add to the potential complexity, a former CEO retained as a board member is not immune to cognitive biases or self interest. Cummings, Eggers, and Wang draw on prior research that observes the dampening effect that retaining a former CEO has on strategic change, due partly to the predecessor’s desire to protect their legacy. 
So, firms seemingly face a tradeoff: hold onto organizational knowledge at the risk of reduced dynamism or permit a successor CEO to implement their own strategies at the cost of withholding important perspective and experience. But that either/or tradeoff may not be the full story. In “Monitoring the monitor: Enabling strategic change when the former CEO stays on the board,” Cummings, Eggers, and Wang found that firms also rely on the input and perspective of independent board members. By leveraging their independent board members well, firms that avoid the either/or tradeoff trap can reap the benefits of both the change-seeking successor and the legacy-preserving predecessor.  
Put another way, while the incoming CEO may be the catalyst for a firm’s strategic change, it is the independent board members that ensure the firm can actually institute those changes.  

CEO Changes 

Cummings, Eggers, and Wang’s research tests the flexibility of a firm to pursue new strategies post-CEO succession. Although it does not delve into the success of these strategic maneuvers, their research does provide insight into how firms make decisions to allocate capital and resources after a CEO transition. For example, they tested strategic changes by measuring corporate acquisitions and divestitures around CEO transition. Before testing their data, they suspected divestitures were more likely than acquisitions to be mediated by the interactions between insider/outsider CEOs and the predecessor as board director, because divestiture more directly affects the former CEO’s legacy.  
Indeed, there was wide deviation in acquisitions during CEO transition, so the researchers do not identify corporate acquisitions as being strongly meditated by the input of outside board members. They did find, however, that increasing outside board members by one standard deviation (i.e., going from 6 to 7 on a 9-person board) did have significant effects on both divestiture and resource reallocation.  
Specifically, when boards had more independent members, the researchers saw a greater shift in both corporate transactions and resource reallocation by around a third and a half above the norm, respectively. If, say, any given CEO transition usually prompted a million-dollar resource reallocation, with most firms falling within $200 thousand of that number, firms with more independent board members would then normally reallocate about $1.1 million. With similar divestiture numbers, such firms would be able to strategically divest about $1.07 million. In both cases, firms with independent boards had more flexibility when operationalizing their new strategies. 
Regarding resource allocation specifically, the researchers found that strategic actions, such as advertising and asset investment, rather than financial actions drove the difference, supporting their overall hypothesis that independent board members help ensure strategic change during CEO transitions. Having that extra outside perspective on the board allowed companies to make crucial decisions quicker, whether to divest larger and/or more struggling assets and reallocate more resources to change the firm’s trajectory. The firm can therefore be more financially nimble, which is important because many of these changes have a short window of opportunity for their success
There are a couple of caveats Cummings, Eggers, and Wang want us to read these results with. First, even when the new CEO is an outsider, they are not entirely newcomers to the board and former CEO’s circles. The board had to find and decide to hire them, so the new CEO has likely already encountered (and possibly worked with) the board and predecessor CEO in some capacity. To call them outsiders is more a term of convenience than a perfect reflection of the situation. 
The researchers also consider there may be something different about CEOs hired by boards dominated by independent members. For example, potential CEOs who want to reorient a firm’s strategy may decline job offers made by boards that are closely held by a small group of insiders, although, as they say, this is a “twist” not a refutation. Rather, such a scenario emphasizes the importance of having outside influence when firms need fresh perspectives in the wake of a CEO transition.  
It is also possible that outside directors represent a fundamentally better system of corporate governance. But the researchers do not expect that to necessarily be the case, because other CEO succession scenarios do not seem to have the same dampening effect on strategic change. This dampening is particularly acute when the new, outsider CEO is paired with a predecessor board chair.   

All Hands on Deck: Board Recommendation 

If there is a wide gulf between the motivations and perspectives of the board chair and the new CEO, the characteristics of the other board members more likely affect the firm’s strategic outcomes. Cummings, Eggers, and Wang argue for a fuller account of other actors in these executive-level interactions. The research shows that in a three-actor arrangement, outside board members were best situated to mitigate the potential consequences of keeping the predecessor CEO as the chairperson. 
When firms keep their former CEO as board chair, they maintain valuable institutional experience but at the cost of reduced firm dynamism.  Should the new CEO’s strategic perspectives threaten the former’s personal successes, however, the outside board directors can minimize any resulting friction. Firms can, therefore, hold onto experience and bring in fresh perspectives. In order to do so, board members must expand their roles beyond traditional expectations. They must also monitor fellow board members, not just executive management. 
Other researchers have argued it may be time that we start to think of board service as collaboration with the CEO, and Cummings, Eggers, and Wang show that corporate governance, which only monitors the executive, potentially misses the consequences of other actors’ motivations on the firm’s long-term success and adaptability. Their research, then, is not measuring direct conflict but the second order results of interactions between board members and both the new and old CEOs –dynamics that are “likely to remain obscured from the public eye.” 
In the short-term, as more research is conducted on CEO succession, Cummings, Eggers, and Wang’s research proves promising: we may be able to have our cake and eat it too. Especially if you’re a board member, it would seem you can both hold onto the deep experience of your former CEO while adapting the firm for new challenges by bringing on a new CEO. But when the former CEO stays on, you shouldn’t stop monitoring them because their job title changed. If fact, now’s the time to ensure these former CEOs become good faith collaborators themselves. Everyone is on the same crew, after all. 

Post Researcher/Author:

Michael CummingsMichael E. Cummings is an Assistant Professor at the University of Arkansas Walton College where he teaches entrepreneurship at the undergraduate and graduate levels. In addition to the paper summarized above, Michael’s research has appeared in outlets such as Journal of Business Venturing, Entrepreneurship Theory and Practice, Global Strategy Journal, Small Business Economics, the Journal of International Business Policy, and Academy of Management Discoveries. Michael received his PhD (strategic management and entrepreneurship) from the University of Minnesota's Carlson School of Management, his J.D. and M.P.A. (public administration) degrees from Brigham Young University, and his B.S. (English literature) from Utah Valley University.

Mitchell SimpsonMitchell Simpson is a doctoral student in the Department of English at the University of Arkansas. His research focuses on the Global Middle Ages and cross-cultural communication in the European Medieval and Early Modern Periods. When his nose isn't buried in a book (usually a Japanese textbook right now), he can be found hiking the Ozarks or at the gym improving his grappling. He lives with his wife, Rachel, and their small menagerie, two cats, Hildi and Winnie, and a goofy dog, Birch, in Fayetteville.