Defections from the Inner Circle: Social Exchange, Reciprocity, and the Diffusion of Board
Independence in U.S. Corporations
Author(s): James D. Westphal and Edward J. Zajac
Source: Administrative Science Quarterly, Vol. 42, No. 1 (Mar., 1997), pp. 161-183
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Defections from the
InnerCircle:Social
Exchange, Reciprocity,
and the Diffusionof
Board Independence in
U.S. Corporations
James D. Westphal
Universityof Texas at Austin
Edward J. Zajac
Northwestern University
This study seeks to reconcile traditional sociological
views of the corporate board as an instrument of elite
cohesion with recent evidence of greater board activism
and control over top management. We propose that
CEO-directorsmay typically support fellow CEOs by
impeding increased board control over management but
that CEO-directorsmay also foster this change if they
have experienced it in their own corporation. Drawing on
social exchange theory, we develop and test the argument that these CEO-directorsmay experience a reversal
in the basis for generalized social exchange with other
top managers from one of deference and support to one
of independence and control. Using data from a large
sample of major U.S. corporations over a recent ten-year
period, we show (1) how CEO-directors"defect" from the
network of mutually supportive corporate leaders, (2)
how defections have diffused across organizations and
over time, and (3) how this has contributed to increased
board control, as measured by changes in board structure, diversification strategy, and contingent compensation. We also provide evidence that a social exchange
perspective can explain the diffusion of these changes
better than more conventional perspectives on network
diffusion that emphasize imitation or learning.'
With few exceptions, organizational researchers and corporate governance experts have historically viewed corporate
boards of directors as "rubber stamps" for management
initiatives (Herman, 1981) or as "tools" of top management
(Pfeffer, 1972: 219). From this viewpoint, boards are populated either by (1) inside directors who can ill afford to
criticize their superiors or themselves, (2) uninformed
outsiders who are unable to evaluate top management, or
? 1997 by Cornell University.
0001-8392/97/4201-01 61/$1 .00.
Both authors contributed equally to the
paper. The helpful comments of Ron
Burt, Jerry Davis, Ranjay Gulati, Paul
Hirsch, Mark Shanley, and Brian Uzzi are
appreciated.
(3) more knowledgeable outside directorswho are CEOs
themselves and whose empathy for their fellow chief
executive officers may diminishtheir willingness to monitor
them actively. Interlockingdirectorshipsamong top managers have also traditionallybeen viewed as contributingto a
cohesive "innercircle" of organizationalelites accountable
only to themselves (Useem, 1984). Fromthis traditional
perspective, overlappingboardmemberships providea
communicationnetwork for managerialelites that helps to
preserve their corporatepower (Useem, 1984; Davis, 1991;
Mizruchi,1996).
More recently, however, the business press has used
numerous vividcases to illustratea dramaticshift toward
increased boardactivism and controlover top management
(e.g., Fortune,1993; Business Week, 1994). This apparent
change among large corporationsis not easily reconcilable
with the depiction of corporateboards as a passive group
representinga cohesive innercircle of corporateleaders,
since it suggests that boards are increasinglylikelyto act
independentlyof top management's preferences. Recent
attempts to explainthe causes of this change toward
increased boardmonitoring,or internalcorporatecontrol
(Walshand Seward, 1990), have usuallyreferredto external
forces, notablyincreased activism by large, institutional
investors (Fortune, 1993; Davis and Thompson, 1994).
Several recent empirical studies suggest, however, that the
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magnitudeof institutionalinvestor ownership does not
necessarily increase the willingness of boards to challenge
management (e.g., Daily,1996; Kimand Ocasio, 1995;
Sundaramurthy,1996; Westphal and Zajac,1997). While
institutionalinvestors may be able to exert their will on
specific issues where they have voting power, it is not clear
whether and how they can overcome longstandingsocial
relationshipsand norms of mutualsupportthat are assumed
to exist between managers and directors.
The present study proposes a more comprehensive explanation of the rise in boardindependence that takes into
account the social exchange relationshipsamong corporate
leaders, bringinginto question the cohesiveness of the inner
circle. While we do not deny that macro-socialforces such
as institutionalshareholderactivism may have played a role
in sparkinggreater boardindependence from management in
large U.S. corporations,we suggest that the diffusionof
boardindependence may have resulted from micro-mechanisms relatingto social and psychologicaldynamics within
the innercircle of corporateleaders.
Outside directorswho are themselves CEOs of other large
corporationsmay play a pivotalrole in determiningwhether a
board has a passive or an active orientation(Lorschand
MacIver,1989: 18), and they may thus have a more complex
role in corporategovernance than previouslyassumed in the
literature.Specifically,we propose that althoughCEOdirectorsmay typicallysupportfellow CEOs by impeding
increased boardcontrolover management, CEO-directors
experiencingincreased boardcontrol in their own corporations may also experience a reversalin their perceived basis
for social exchange with other top managers. This change in
the norms of reciprocityunderlyinggeneralizedexchange
could then lead CEO-directorsto "defect" from the network
of corporateleaders. This study shows how these specific
instances of "defection"from a previouslymutuallysupportive network have diffused across organizationsand over
time, and how this has created the currentsituationof
increased boardindependence in large U.S. corporations.
When priorgovernance research has examined diffusion
processes, it has been to establish the spread of mechanisms for increased managerialentrenchment such as
poison pills or golden parachutes(e.g., Davis, 1991, 1992;
Westphal and Zajac,1994). Governanceresearchers have
not considered how mechanisms for increased board
independence or control may diffuse throughan interorganizationalnetwork.This may be attributableto the fact that
most researchers typicallyview boardinterlocksin terms of
a social cohesion model or "a general communication
system" that "allows firms to learnabout their business
environment"(Davis, 1992: 8). With respect to corporate
governance, networkties are thought to spread information
about mechanisms that protect the innercircle of business
elites from marketdiscipline(Useem, 1984). Increasedboard
independence, however, can weaken ratherthan protect the
innercircle, and thus its diffusionmay not be easily explainedby traditionalnetwork perspectives.
In this study we develop a new perspective on network ties
among corporateelites that emphasizes the generalized
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Defections
social exchange relationshipsthat exist between CEOdirectorsand top managers and how social and psychological factors may affect the dynamics of that relationship.This
perspective suggests that generalized norms of reciprocity
among corporateleaders and changes in those norms can
impede or foster the diffusionof boardindependence. We
also controlfor the conventionalcommunicationperspectives on diffusiondescribed above, thus enabling us to
distinguishsupportfor the social exchange perspective on
diffusiondeveloped in this study from alternativeexplanations. We then examine the generalizabilityof our framework
to explainthe diffusionof two other changes reflecting
increased boardindependence that have generallybeen
considered inimicalto managerialpreferences and thought to
have been drivenby external pressures: decreased corporate
diversificationand increased compensation contingency. We
test hypotheses using event historyanalyses of changes in
boardstructure,corporatestrategy, and CEOcompensation
among the largest U.S. corporationsover a ten-year period.
THEORY
Reciprocity and Board Independence
Preventing increased board independence. One reason
why boards have traditionallybeen characterizedas rubber
stamps or tools of top management is that outside directors
who are also CEOs of their own firms may be reluctantto
challenge or criticizeCEOs on whose boards they sit (Mace,
1971; Lorschand MacIver,1989; Lawler,1990). We propose
that generalizednorms of reciprocityamong CEOswho also
serve as outside boardmembers may represent a primary,
social psychologicalmechanism hinderingincreased board
independence. The principleof reciprocityrefers to a rule of
behaviorin social exchange situations, and the more commonly used phrase "normof reciprocity"highlightsthe
social obligationunderlyingthe principle.Gouldner(1960)
used the term to refer to the mutual reinforcementby two
parties of each other's actions, but as Ekeh (1974: 48) noted,
generalized norms of reciprocityrefer to the situationin
which "an individualfeels obligatedto reciprocateanother's
action, not by directlyrewardinghis benefactor, but by
benefiting another actor implicatedin a social exchange
situationwith his benefactor and himself." In such generalized social exchange relationships,reciprocationsare also
generalized, involvingmultipleactors (ratherthan just two)
and indirect(ratherthan direct)benefits.1
1
There are several alternative theoretical
explanations that are sometimes invoked
in prior governance research to explain
why boards would generally defer to
CEOs. One is that outside directors feel
indebted to a CEO who has offered them
a directorship position and are therefore
likely to support the CEO (Main, O'Reilly,
and Wade, 1995). Such a cooptation view
differs from ours in that it takes a strictly
dyadic and intraorganizationalfocus (i.e.,
a specific director owes a CEO for the
board appointment) and thus does not
address the spread of greater or lesser
board control across firms.
In such a system of social interaction,A may help B,
expecting reciprocationnot from B but, rather,from another
actor, such as C or D, sometime in the future. This implies
that such a system relies on the existence of sufficient trust
that the giver believes he or she will be reciprocatedby
someone else, somewhere else in the future. Levi-Strauss's
(1969: 266) research on social exchange and reciprocity
suggests that "fora system [of generalizedexchange] to
function harmoniously,"exchange partnersneed to be "of
equal status and prestige." In addition,social psychological
research has shown that high levels of group solidarityor
cohesion facilitatecooperative behavioramong group
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members (cf., Dawes, 1992) and that individualsbenefitting
from an altruisticor prosocialact are more likelyto engage
in similarbehaviortoward others, so that helping behavior
spreads througha social structure(Krebsand Miller,1985;
Komorita,Hilty,and Parks,1991).
The CEO-directornetwork is an arena likelyto be characterized by a generalized reciprocityamong top managers and
CEO-directors.First,given that corporateCEOs are a
relativelyhomogenous and cohesive group (Useem, 1984),
they may feel a generalizedobligationto supportfellow
CEOs in boardmeetings and duringperiods of poor firm
performance(Mace, 1971). Thus, CEOs enjoying minimal
boardindependence at their home companies may, as
CEO-directors,hinderany attempts to increase the independence of other boards on which they sit. In the context of
the present study, the preceding discussion suggests the
following proposition:
Proposition 1: The greaterthe proportionof CEO-directorson a
board,the lower the likelihoodof an increase in boardindependence.
The diffusion of increased board independence. While the
discussion thus far has emphasized how generalized
reciprocitycan result in cooperative behavioramong individuals, other possible outcomes, such as mutualnoncooperative
behavioror defection, are also possible (Axelrod,1984).
Similarly,while social solidaritymay promote generalized
reciprocalcooperationamong individuals,it can likewise
providea context for generalized reciprocal"retaliation,"
defined broadlyas the repaymentof injuriousor otherwise
undesiredacts, regardless of emotional content (i.e.,
retaliationsimply represents one category of exchange
reciprocity)(Gouldner,1960: 172; Walster, Berscheid, and
Walster, 1973). Where CEO-directorshave experienced an
increase in boardindependence at their home companies,
their felt obligationto supportfellow CEOs (i.e., by resisting
increased independence) may diminishor even reverse
itself. When generalizedexchange partnersare no longer of
equal status and prestige, such inequalitymay "force a
rupture"in the system of exchange (Levi-Strauss,1969:
266). As Ekeh (1974: 48) noted: "the principleof reciprocity
has a built-inchange-generatingfactor," since equalityin
social exchange is needed for continuityof social interaction;
when this expectation is frustrated,the social exchange
situationis threatened. Giventhat a CEO's power and
influence is closely tied to his or her status among CEOs, a
CEO-directorwho has lost power to the boardin his or her
home company may perceive himself or herself as unequal
in status to those CEOswho enjoy greater controlover their
boards and thus greater influence over strategy, compensation, or perquisites. While disempowered CEOs may
alleviatethe resultantinequalityin several ways, one
response is to diminishtheir supportfor CEOs in other
organizationswhere they serve as outside directors,thus
reducingthe power and status of fellow corporateleaders
and returningbalance to the social exchange relationship.
The preceding discussion suggests that CEO-directors
subjected to increased boardindependence at their home
companies may not only decrease their resistance to greater
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Defections
boardcontrol but may actuallyinduce such changes in other
boards on which they sit. Thus, while CEO-directorsmay
typicallyhelp sustain CEOdominance over the board,
effectively preventinggreater boardindependence, they may
spur increased independence when they have experienced it
themselves, resultingin "chains of negative reciprocity"or
retaliation(Collins,1990: 419). In this way, increased board
independence can spread throughthe directornetwork of
corporateleaders. As the prevalence of directorexperience
with greater boardindependence increases, the board's
orientationshould tend toward greater independence and
activism ratherthan passivity.This suggests the following
proposition:
Proposition 2: The greaterthe proportionof CEO-directorson a
boardwho have experienced an increase in boardindependence at
their home companies, the greaterthe likelihoodof such change in
the focal company.
Hypotheses
Reciprocity and change in board structure. While it is
difficultto observe and measure directlythe level of board
independence in large corporations,a numberof structural
variableshave been used in the governance literatureto
assess differences in levels of boardindependence across
organizations.We consider three such variables.Managerial
hegemony theorists, agency theorists, and the business
press have generallyall argued that separationof the CEO
and boardchairpositions (i.e., allocationof each position to
separate individuals)enhances the board's independent
monitoringcapacity (Crystal,1991; Beatty and Zajac,1994;
Finkelsteinand D'Aveni,1994). In contrast, CEOs holding
both positions are thought to possess greater formal
authorityand heightened informalpower over board members (Harrison,Torres,and Kukalis,1988). More generally,
given that the boardchairmanis responsible for monitoring
and evaluatingCEOdecision making,unitingboth roles in
one person represents a formalizedconflict of interest.
Similarly,separatingthese roles indicates an increase in
boardindependence. This logic suggests the following
hypotheses, consistent with propositions1 and 2:
Hypothesis 1 (Hi): The greaterthe proportionof CEO-directorson
a board,the lower the likelihoodof a separationof the CEOand
boardchairpositions in the firm.
Hypothesis la (Hia): The greaterthe proportionof CEO-directors
on a boardwho have experienced a separationof the CEOand
boardchairpositions at their home companies, the greaterthe
likelihoodof a separationof the CEOand boardchairpositions in
the firm.
Agency theorists and advocates of board reform have also
long maintainedthat outside directorsare better able to
control management decision making(Zahraand Pearce,
1989). Since insiders are "beholdento CEOsfor their jobs"
(Fredrickson,Hambrick,and Baumrin,1988: 262), they may
be less willingto challenge or overrideCEOinitiativeswhen
shareholderinterests are threatened (Famaand Jensen,
1983; Kosnik,1987). Outsiders may also be better positioned
to evaluate managerialperformanceimpartially(Beattyand
Zajac,1994). Thus, increases in the ratioof outside to inside
directorscan be viewed as reflectingincreased board
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independence from management. This suggests the following hypotheses:
Hypothesis 2 (H2):The greaterthe proportionof CEO-directorson
a board,the lower the likelihoodof increases in the ratioof outside
to inside directors.
Hypothesis 2a (H2a):The greaterthe proportionof CEO-directors
on a boardwho have experienced increases in the ratioof outside
to inside directorsat their home companies, the greaterthe
likelihoodof such an increase in the firm's board.
While the two manifestationsof boardindependence
discussed above are based on the prevalence and allocation
of formal boardroles, independence may also be enhanced
or reduced through more subtle, demographicmechanisms.
Abundantevidence suggests that demographicsimilarly
produces bias in evaluationdecisions. For instance, Wayne
and Liden(1995) showed how demographicsimilarity
enhanced mutualaffect in superior-subordinatedyads,
resultingin more positive performanceappraisals(see also
Turbanand Jones, 1988). By contrast, demographicdissimilaritybetween boardmembers and top managers should
minimizebias and enhance independence and objectivityin
decision controlactivities. Recent empiricalevidence
indicates that greater demographicdistance between the
CEOand the boardcan increase the tendency for directors
to challenge managerialpreferences on behalf of shareholder
interests (Westphaland Zajac,1995). Accordingly,the
appointmentof demographicallydissimilarnew directors
should enhance the board'sattitudinaland social independence from management. In general, therefore, CEOdirectorswho have experienced a reductionin demographic
similaritywith the boardat their home companies should
undergo changes in their perceived social exchange relationships with CEOs of other companies on whose boards they
sit who have not experienced this reduction.This suggests
the following hypotheses:
Hypothesis 3 (H3):The greaterthe proportionof CEO-directorson
a board,the lower the likelihoodof an increase in demographic
distance between the CEOand the board.
Hypothesis 3a (H3a):The greaterthe proportionof CEO-directors
on a boardwho have experienced an increase in demographic
distance from the boardat their home companies, the greaterthe
likelihoodof such an increase in the firm's board.
Reciprocity and unrelated diversification. Social exchange
processes may also influence the diffusionof other changes
that are thought to reflect greater boardindependence and
that have generallybeen considered aversive to top management, includingreductionin unrelateddiversificationand
greater compensation contingency. The pursuitof diversification as a corporatestrategy has been the subject of increasing debate. Accordingto both managerialistand agency
researchers, top managers have personal incentives to
pursue diversificationbeyond the level at which shareholder
wealth is maximized(Hilland Snell, 1988; Jensen, 1989;
Baysingerand Hoskisson, 1990). Fromthese perspectives,
top managers may diversifyinto largelyunrelatedbusinesses
to enhance their personal power, compensation, and status
(Marris,1964), while stabilizingincome streams and minimizing employment risk (Amihudand Lev, 1981). Since stock166/ASQ, March 1997
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Defections
holders can diversifytheir investment portfoliosmore easily
than CEOs can diversifytheir employment, shareholders
should favor lower levels of unrelateddiversification.One
would expect that boards of directors,as representativesof
shareholderinterests, would resist management's attempts
to diversifyinto largelyunrelatedbusinesses and would
encourage the reductionof existing levels of diversification
where possible.
Jensen (1989) has suggested that passive boards have been
unwillingto question or resist top management's preferences for unrelateddiversification.Fromour perspective,
such passivity may be understood in terms of the existence
of generalized norms of reciprocityamong corporateleaders.
To the degree that CEO-directorsfrequentlyempathize with
the focal CEO's desire to minimizeemployment riskand
stabilize income, while also perceivinga general obligationto
supportthe preferences of fellow CEOs,the presence of
CEO-directorson the boardmay inhibitboard-initiatedefforts
to minimizeor reduce unrelateddiversification.At the same
time, however, CEOs who have been forced into reducing
unrelateddiversification,thus sacrificingtheir personal
preferences for risk reduction,power, and status, may seek
to rectify perceived inequities by reducingtheir supportfor
unrelateddiversificationor even actively advocatingdivestiture in those firms on whose boards they sit as directors.As
a result, while CEO-directorsmay, under normalcircumstances, typicallyhelp sustain strategies of unrelated
diversification,they may foster reductions in it when they
have experienced it themselves. Takentogether, and
parallelingthe discussion of boardindependence, we
propose the following hypotheses:
on a
Hypothesis 4 (H4):The greaterthe proportionof CEO-directors
board,the lower the likelihoodof a decrease in unrelateddiversification.
Hypothesis 4a (H4a):The greaterthe proportionof CEO-directors
on a boardwho have experienced a reductionin unrelateddiversification at their home companies, the greaterthe likelihoodof such
change in the focal company.
Reciprocity and compensation contingency. Contingent
compensation contracts that linkpay to firm performance
serve to align the interests of CEOs as agents with the
preferences of shareholdersas principals,thus promoting
shareholderwealth (Jensen and Murphy,1990). Froman
agency theory perspective, the provisionof long-term
incentives such as stock options, performanceshares, or
restrictedstock is a primarymechanism by which corporate
boards effect incentive alignment (Kerrand Kren,1992;
Gibbs, 1993; Beatty and Zajac,1994). But a significant
numberof large U.S. corporationsmake only limiteduse of
long-termincentive compensation in designing CEOcompensation contracts (Jensen and Murphy,1990), which Westphal and Zajac(1994) have attributedto managerialentrenchment. Froma normativeagency theory perspective, CEOs as
risk-averseagents prefer less risk in their compensation
contracts (Harrisand Raviv,1979). By makingcompensation
contingent on future firm performance,long-termincentives
add uncertaintyto a CEO'scompensation. Moreover,
stock-based compensation effectively increases the CEO's
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non tradeableinvestment in the firm and reduces the
diversificationof his or her investment portfolio(Beatty and
Zajac,1994).
To the extent that generalized norms of reciprocityamong
corporateleaders constitute a relativelyfundamentalsource
of CEOpower over the board(as suggested above), having
sympathetic CEO-directorson the boardmay be a primary
mechanism by which CEOs avoid contingent compensation,
thus inhibitingincreased incentive alignment. By contrast,
just as CEOs experiencinga decrease in unrelateddiversification at their home companies may reduce their opposition
to those changes elsewhere, CEO-directorssubjected to
greater compensation contingency may likewise reduce their
resistance to incentive compensation at other companies.
Thus, norms of retaliationamong CEO-directorsmay
facilitatethe spread of incentive alignmentthroughthe
directornetwork of corporateleaders. This suggests the
following hypotheses:
Hypothesis 5 (H5):The greaterthe proportionof CEO-directorson
a board,the lower the likelihoodof an increase in compensation
contingency.
Hypothesis 5a (H5a):The greaterthe proportionof CEO-directors
on a boardwho have experienced an increase in compensation
contingencyat their home companies, the greaterthe likelihoodof
such a change in the focal firm.
METHOD
Sample and Data Collection
The populationfor this study includedthe largest U.S.
industrialand service firms, as listed in the 1982 Forbes and
Fortune500 indexes The Forbes 500 uses multiplelists
whose overlapdepends on the specific size measure used;
we includedthose firms that qualifiedaccordingto two or
more size measures. Firmswere excluded from the final
sample if complete demographicdata were unavailablefor
more than one-quarterof the outside directorsin each year
or if complete diversificationor compensation data were
unavailable.This procedureyielded 422 companies. T-tests
revealed no significantdifferences in size, measured as log
of sales, or profitabilitybetween the initialand final samples.
Data were collected for the years 1982 to 1992, inclusive.
Academic research and anecdotal evidence suggest that
increases in boardindependence, as manifested by controlenhancing changes in boardstructure,greater compensation
contingency, and reductionsin corporatediversification,may
have accelerated duringthis period (Davisand Thompson,
1994; Westphal and Zajac,1994). While the spread of such
changes has been attributedto increased activism by
institutionalinvestors duringthe 1980s, we analyze the
effect of social exchange factors internalto the network of
corporateleaders duringthis period.
Informationon CEOand boardmember characteristics,
includingthe affiliationsof CEO-directors,was obtainedfrom
the Dun and BradstreetReference Book of Corporate
Management, Standardand Poor's Register of Corporations,
Directors,and Executives, and Who's Who in Financeand
Industry;data on boardstructureand compensation were
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Defections
collected from proxystatements. Finally,we obtained
diversificationdata from Standard& Poor's COMPUSTAT
Business Segment Tapes; size and performancedata were
and the Center for Research in
providedby COMPUSTAT
Security Prices (CRSP).
Dependent Variables
Board structure. To analyzethe likelihoodof a separationof
the CEOand boardchairpositions (separation),we created a
dichotomous variable,coded as 1 in a given year if the
positions were separate in that year but not in the prioryear,
and 0 otherwise. Separationof the CEOand boardchair
positions often occurs when the CEOis replaced (Vancil,
1987; Harrison,Torres,and Kukalis,1988). As a result, a
CEO-director'sexperience with separationmay involve (1)
havinglost the CEOposition as well as the boardchair
position, (2) havinglost only the CEOposition and remaining
as boardchair,or (3) having lost only the boardchairposition
and remainingas CEO. In all three scenarios, however, the
CEOwitnesses separationof the two positions, experiences
the associated increase in boardpower, and loses the status
associated with holdingboth positions. Thus, we combined
all three varieties of separationexperience. A separate
analysis indicatedthat when cases of separationaccompanying CEOsuccession are removed (scenarios 1 and 2 above),
the results reportedbelow remainunchanged.
Increases in the ratioof outside to inside directors(increased
outsider ratio)were also measured dichotomously,coded 1
if the ratioof outside to inside directorswas greater in the
currentyear than in the prioryear, and 0 otherwise.
To analyze the likelihoodof increased demographicdistance
between the CEOand the board(increased dissimilarity),we
first measured CEO-boardsimilarityacross several dimensions for each year. Similaritywas assessed in terms of
three characteristicscommonly employed in the top management team literature(Hambrickand Mason, 1984).
Functionalbackgroundsimilarityand education similarity
were measured with a variantof Blau's (1977) index of
heterogeneity, defined as (pi)2, where Pi is the proportionof
CEO-boardmember dyads sharingthe ith category (Murray,
1989). Forfunctionalbackground,this measure indicates the
squared proportionof CEO-boardmember dyads in which
both individualshave primaryexperience in the same core,
functionalarea (Hambrickand Mason, 1984); for educational
background,it represents the proportionof such dyads in
which both individualspossess the same type of degree.
Followingpriorresearch (Wiersemaand Bantel, 1992), we
measured degree type as the highest universitydegree
obtained in five categories: arts, sciences, engineering,
management or economics, and law. When specialties were
not listed, B.S. and M.S. degrees were classified as science
degrees. Age similaritywas measured with an analog of the
coefficient of variation(Tsuiand O'Reilly,1989):
ny
(Si_
Sj)
211
where S is the CEO's
SI
age,
indicates the age of directori
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(excludingthe CEO),and n represents the numberof board
members. This measure was converted to an indicatorof
similarityby subtractingeach firm's coefficient from the
highest value in the sample. We then created a dichotomous
measure of increased demographicdistance, coded 1 if
CEO-boardsimilaritydecreased across all three dimensions.
The results were also unchanged using increased similarity
along one or more dimensions. To the extent that each of
the three demographiccharacteristicsindicates different
attitudes and behavioraltendencies (Hambrickand Mason,
1984), this composite measure indicates relativelybroadly
based increases in demographicdistance between the CEO
and the board.
While it is possible to use continuous ratherthan dichotomous measures of some of the dependent variables,we
chose to use dichotomous measures for two reasons: (1)
our theoreticalargument implies that the increase in board
independence itself (i.e., even a small one) is a meaningful
event, since it requiresa fundamentalchange in how
CEO-directorsperceive the CEO-boardrelationship;and (2)
the range of size in such increases is very restrictedfor
most of our dependent variablesand highlycorrelatedwith
the dichotomous measures. Forinstance, boards rarely
increase the outsider ratioby adding more than two individuals to the board,so that the magnitudeof such increases is
very similaracross cases.
Compensation contingency. Compensationcontingency
was calculatedfor each year as the total value of long-term
incentive grants dividedby total direct compensation. Stock
options were valued using the Black-Scholes(1973) method,
which estimates option value based on the historicalprice
volatilityof the underlyingsecurity. Other grants (e.g.,
restrictedstock, performanceshares) were valued according
to the marketprice at date of grant (Crystal,1984). All
compensation values were adjusted for inflationto represent
1990 constant dollarsusing the Consumer Price Index.To
analyzethe likelihoodof increased compensation contingency (increased contingency),we created a dichotomous
measure, coded 1 in a particularyear if compensation
contingency increased from the prioryear, and 0 otherwise.
Diversification. To test hypotheses on change in unrelated
diversification,we used Palepu's (1985) entropy measure,
which takes into account the numberof segments in which
a firm operates and weights each segment accordingto its
contributionto total sales. It is defined as follows:
n
XPi *ln(1/Pt),
i= 1
where P is the dollarvalue of sales attributedto segment i
and In(1I/P)is the weight for each segment i, or the logarithmof the inverse of its sales. Reduced diversificationwas
operationalizedas an absolute decrease in the entropy
measure of .10 or more, to capture relativelysignificant
change and to exclude change that reflects randomalterations in segment sales levels. The results were similar
when we operationalizedreduced diversificationas an
absolute decrease in the entropy measure of .05 or more.
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Independent Variables
The proportionof outside directorswho were CEO-directors
was assessed simply as the numberof outside directors
currentlythen also serving as chief executive at another
Fortuneor Forbes 500 company, divided by the total number
of outsiders on the board.To measure the proportionof
outside CEO-directorswho had experienced increased board
independence in their home companies, we created five
independentvariables,three for boardstructureand one
each for diversificationand compensation contingency. Each
indicates the numberof outside CEO-directorsserving as
CEOat another Fortuneor Forbes 500 company who have
also experienced change along the relevantdimension within
the past two years, dividedby the total numberof outsiders
on the board.The results were generallyrobust to different
lags, such as one year or three years.
In separate analyses we operationalizedthe presence of
CEO-directorsas the absolute numberof such directorson
the board,ratherthan as the proportionof outsiders. The
results were substantivelyunchanged. Because our argument implicitycompares the social obligationsof CEOdirectorsto those of other outsiders, we used the proportional measure in the final models presented below.
Controls
We controlledfor the possibilitythat more traditionalnetwork
diffusionprocesses involvingimitationor social learning
could influence the diffusionof increased boardindependence (e.g., Galaskiewiczand Wasserman, 1989; Davis, 1991;
Haunschild,1993; Palmer,Jennings, and Zhou, 1993).
Accordingto this perspective, organizationsare more likely
to adopt an innovationwhen they have directorties to prior
adopters, because such contacts help resolve uncertainty
about the consequences of adoption(Davis, 1991). As noted
by Palmer,Jennings, and Zhou (1993), directorswho have
participatedin a particularstructural,strategic, or policy
change at other firms may become more forceful advocates
of such change because they have behaviorallycommitted
themselves to it. These directorsmay also be more persuasive in advocatingchange because they can providevivid,
firsthandaccounts of how the innovationaffected organizational processes and outcomes (Davis, 1991). Overall,
accordingto this perspective, directorties serve as "information conduits" that facilitateimitationand learning,largely
because informationprovidedby fellow corporateleaders
may be trusted more than informationderivedfrom other
sources (Davis, 1991: 594; Haunschild,1993; Mizruchi,
1996). This would suggest that CEO-directors'experience
with increased boardindependence at other firms may
increase the likelihoodof such change at the focal firm
simply by providinginformationthat encourages imitation.
Thus, to distinguishthe social exchange explanationfor
diffusionfrom this more traditionalexplanation,we controlled
for the priorexperience CEO-directorshad with increases in
boardindependence while serving as outside directorson
other boards. Specifically,we developed a set of variablesto
indicatethe numberof outside CEO-directorswho experienced change along the relevantdimension as an outside
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directorat a Fortuneor Forbes 500 company other than their
home company within the previoustwo years, dividedby
the total numberof outsiders on the board.Significant
effects for these variableswould provideevidence consistent with the typicalimitationor learningperspective on
diffusionthroughinterlocks.The absence of significant
effects for these variables,together with supportfor the
hypotheses, would provideevidence consistent with the
social exchange perspective on diffusiondeveloped in this
study.
Because pressure from institutionalinvestors is commonly
considered a primaryexternaldeterminantof increased
boardcontroland reduced diversification,as discussed
above, we includedinstitutionalinvestor ownership as a
controlvariablein all models (Bethel and Liebeskind,1993).
Institutionalownership was defined as equity held by
pension funds, banks and trust companies, savings and
loans, mutualfund managers, and laborunionfunds divided
by total common stock (Hansen and Hill,1991).
There is some research suggesting that poorlyperforming
organizationsare more likelyto separate the CEOand board
chairpositions (Harrison,Torres,and Kukalis,1988) and to
appointoutsiders to the board(Hermalinand Weisbach,
1988). Priorfirm performancemay also be relatedto
subsequent changes in compensation contingency (Westphal
and Zajac,1994) and diversification(Wiersemaand Bantel,
1992). Thus we includedtwo measures of firm performance
(returnon assets and excess stock returns)as control
variablesin all analyses.
In addition,because there is some evidence for relationships
between firm size and variousdimensions of boardstructure
(Beatty and Zajac,1994; Finkelsteinand D'Aveni,1994),
diversification(Bergh, 1995), and compensation contingency
(Beattyand Zajac,1994), we includedlog of sales in all
analyses. Also, since changes in boardstructuremay affect
changes in compensation contingency and diversification,we
controlledfor changes in boardstructurein these specific
analyses. Finally,we also controlledfor industryand time
effects by includingdummy variablesindicatingprimary,
two-digitStandardIndustrialClassificationcodes, as well as
dummies for each year in all analyses. To conserve space,
coefficients for these variablesare not reportedin the tables.
Analysis
Hypotheses were tested using discrete-time event history
analysis (Allison,1982, 1984; Yamaguchi,1991). Event
history models are especially appropriatefor analyzing
longitudinaldata with time-varyingcovariateswhen the
dependent variableis a discrete event. In this case, the
events of interest are (1) control-enhancingchanges in board
structure(measured by separationof the CEOand board
chairpositions, increases in the ratioof outside to inside
directors,and increased demographicdistance between the
CEOand the board);(2) increases in compensation contingency; and (3) decreases in corporatediversification.Thus
we developed five models. Changes in boardstructure,
compensation contingency, and diversificationwere observed from 1983 to 1992, yielding4,220 firm-yearsof data.
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Defections
The discrete-time model can be expressed in the following,
logistic regression form (Allison,1984):
= a + bkXik(t-1),
log{P,(t)I/1-P,(t)1}
where Pft) is the probabilityof change in CEOcharacteristics
or increased CEO-boardsimilarityin year t-1, Xls are
time-varyingindependent variableshypothesized to influence
the riskor likelihoodof change, and bks are the estimated
coefficients. Pi is defined as:
exp[bkXjk(t-1)I/{1
+ exp[bkXjk(t-1)I},
such that Pj(t)increases monotonicallywith bkXjk(t-1)and can
assume any value between zero and one. Giventime-varying
covariates, a firm's likelihoodof change is updated over time
as the values of independent and controlvariableschange.
As the model indicates, all independent and controlvariables
were lagged by one year.
Since the dependent variablesof interest represent relatively
fundamentaland long-lastingalterationsin boardorientation
toward the CEO,we model only the likelihoodof the first
event duringthe time period (i.e., the firm is removed from
the riskset following adoptionof the changes). This is
consistent with our interest in explainingwhen and why
boards began to assert their independence from top management; subsequent continued increases in boardindependence are less centralto the study, and we assume they
represent continuanceof the board's new orientation.Also,
significantreversals across the five dependent variablesin
this study were quite rare. Moreover,for the model of
CEO-boardchairseparation,the initialriskset excludes
cases for which the two positions are alreadyseparate.
Finally,to ensure that the results were not dependent on
unspecified, time-specific factors, we includedyear dummy
variablesin all models (Allison,1982, 1984), as noted above.
In general, discrete-time models providean adequate
approximationof continuous-timemodels, which estimate
instantaneous rates of change, when the conditionalprobabilityof event occurrence is small, e.g., 0.1 or smaller
(Cloggand Eliason,1987). Inthis study, the likelihoodof
change in any given year is less than .1 for all dependent
measures.
RESULTS
Table 1 providesthe means, standarddeviations, and
bivariatecorrelationsfor all data pooled. The results of event
historyanalyses of changes in boardstructureare shown in
Table 2. Hi, H2, and H3 predicteda negative association
between the proportionof the boardcomposed of CEOdirectorsand the likelihoodof control-enhancingchanges in
boardstructure. In general, the results supportthese
hypotheses. Consistent with HI, the proportionof the board
composed of CEO-directorsis significantlyand negatively
relatedto the likelihoodof separationof the CEOand board
chairpositions. H3 is also supported:A greater presence of
CEO-directorson the boardsignificantlydiminishes the
likelihoodof a decrease in demographicsimilaritybetween
the CEOand the board. Finally,the results providesome
supportfor H2, in that the proportionof the boardcomposed
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of CEO-directorsis negatively relatedto increases in the
ratioof outside to inside directors.
Table 1
Descriptive Statistics and Pearson Correlation Coefficients (N = 4220)
Variables
1. CEO-directors on board
2. CEO-directors experiencing
change at home company:
(a) Separation
(b) Increased dissimilarity
(c) Increased outsider ratio
(d) Increased contingency
(e) Reduced diversification
3. CEO-directors experiencing
change as outside director:
(a) Separation
(b) Increased dissimilarity
(c) Increased outsider ratio
(d) Increased contingency
(e) Reduced diversification
4. Separation
5. Increased dissimilarity
6. Increased outsider ratio
7. Increased contingency
8. Reduced diversification
9. Return on assets
10. Excess stock returns
11. Log of sales
12. Institutional ownership
Variables
3. CEO-directors experiencing
change as outside director:
(d) Increased contingency
(e) Reduced diversification
4. Separation
5. Increased dissimilarity
6. Increased outsider ratio
7. Increased contingency
8. Reduced diversification
9. Return on assets
10. Excess stock returns
11. Log of sales
12. Institutional ownership
Mean
S.D.
1
2a
2b
.376
.245
.068
.071
.081
.090
.082
.166
.161
.157
.194
.162
.27
.23
.34
.22
.28
.21
.12
.19
.33
.13
.20
.15
.147
.167
.166
.219
.182
.041
.044
.064
.089
.060
.068
.013
7.8141
.356
.184
.172
.170
.206
.175
.198
.205
.245
.286
.238
.050
.135
.224
.208
.22
.29
.28
.26
.33
-.22
-.20
-.08
-.1 1
-.26
-.14
-.15
.07
-.08
.16
.13
.10
.13
.05
.25
.14
.05
.12
.15
.07
.03
-.02
.23
.08
.22
.11
.12
.09
.10
.34
-.13
.12
.07
.10
.08
.03
.12
2c
2d
-.29
-.25
2e
3a
3b
.10
.13
.12
.10
.18
.09
.07
-.13
.14
.32
-.03
-.1 1
.05
.15
.09
.13
.14
.17
.08
.07
-.02
.03
.02
.01
.02
-.01
.00
.10
.16
.14
.06
.05
.04
.02
.03
.04
.02
-.01
-.03
.12
.07
.13
.19
.11
.11
.02
-.01
.18
-.05
-.08
-.04
-.09
.03
-.02
.12
.10
.08
.16
.12
.11
.06
-.09
.24
.13
.10
.07
-.05
.19
3c
3d
3e
4
5
6
7
8
9
10
11
.07
.11
.03
.04
.09
-.01
.07
-.03
-.06
-.02
.01
.13
.05
.03
.06
.06
.01
.01
-.02
.03
-.01
.06
.05
.08
.07
.12
.00
.04
.08
-.04
.19
-.14
.22
.24
.09
.13
.02
.09
-.19
.15
.18
.04
.12
-.03
.13
-.25
-.20
-.06
-.08
.09
.16
.11
.07
.17
.00
.08
.05
.08
.18
.20
.32
-.1 1
.07
-.14
-.03
.15
Hla, H2a, and H3a predicteda positive relationshipbetween
the proportionof the boardcomposed of CEO-directorswho
experienced control-enhancingchanges in boardstructureat
their home companies and the likelihoodof such changes at
the focal company. The results shown in Table 2 provide
strong and consistent evidence for these hypotheses.
Consistent with Hia, separationof the CEOand boardchair
positions is more likelyin the presence of CEO-directors
who have experienced separationthemselves. The findings
also affordstrong evidence for H3a:The largerthe proportion of the boardcomposed of CEO-directorswho experienced an increase in demographicdistance from the CEOat
home, the greater the likelihoodof such change at the focal
company. Finally,the results also support H2a: Increases in
the ratioof outside to inside directorsare more likelywhen
the boardincludes CEO-directorswho have experienced
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Defections
Table2
Event History Analyses of Changes in Board Structure*
UnstandardizedCoefficients
Independent variables
1. CEO-directors
on board
2. CEO-directors
experiencing
change at home company
3. CEO-directors
experiencing
change as outside director
4. Returnon assets
5. Excess stock returns
6. Log of sales
7. Institutionalownership
Constant
Chi-square
Numberof firm-years
* p < .10; *- p < .05; 000p < .01; *-p
*
Separation
Dissimilarity
Outsider ratio
-4.100(1.938)
1.918--(.355)
-.319
(.570)
-4.934---(1.236)
-.089--(.034)
.064
(.124)
1.230
(.723)
2.548--(1.013)
109.120000
3170
-2.251-(1.062)
1.2740--(.239)
.189
(.403)
-4.523---(1.025)
-.023
(.028)
.057
(.115)
.543
(.411)
4.0360000
(.955)
97.440000
3801
-1.1 96(.878)
.593-(.346)
-.231
(.354)
-2.333(1.391)
-.049-(.022)
.187(.094)
.446
(.355)
4.5320000
(.767)
38.340000
3555
< .001.
Coefficientsfor industryand year dummyvariablesare not reported.Standarderrorsare in parentheses. T-testsare
one-tailedfor hypothesizedeffects, two-tailedfor controlvariables.
such a change at their home companies. In general, therefore, while the presence of CEO-directorstypicallyprevents
an increase in boardindependence, the presence of CEOdirectorswho experienced an increase in independence at
Table3
Event History Analysis of Reduced Diversification*
Unstandardized coefficients
Independent variables
1. CEO-directors
on board
2. CEO-directors
experiencingchange
3. CEO-directors
experiencing
change as outside director
4. Returnon assets
5. Excess stock returns
6. Separation
-2.499
(.730)---1.871
(.233)----.312
(.280)
-1.529
(1.119)
-.032
(.023)
.797
(.241 )---
7. Dissimilarity
8. Outsiderratio
9. Log of sales
10. Institutionalownership
Constant
Chi-square
Numberof firm-years
*p < .10; 0-p < .05;
seep
< .01; *---p < .001.
.514
(.293)1.019
(.526).018
(.097)
.758
(.377)-3.754
(.767)---108.870000
3639
* Coefficientsfor industryand year dummyvariablesare not reported.Standarderrorsare in parentheses. T-testsare one-tailedfor hypothesizedeffects,
two-tailedfor controlvariables.
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their home companies actuallystimulates such a change at
the focal company.
The next set of analyses show whether the presence of
CEO-directorshas a comparableeffect on two other examples of changes in large U.S. corporations:a decrease in
unrelateddiversificationand an increase in compensation
contingency. Table 3 providesthe results of event history
analysis of a decrease in diversification.In supportof H4, the
presence of CEO-directorson the board lowers the likelihood
of a reductionin diversification.The findings also support
H4a:The presence of CEO-directorsenduringreduced
diversificationat home enhances the likelihoodof such
change at the focal company. The results of event history
analysis of an increase in compensation contingency are
providedin Table 4. Consistent with H5, the proportionof
the boardcomposed of CEO-directorsis negatively relatedto
the likelihoodof an increase in compensation contingency.
Moreover,the findings affordstrong supportfor H5a:The
greater the proportionof the boardcomposed of CEOdirectorswho experienced an increase in compensation
contingency at their home companies, the greater the
likelihoodof such a change in the focal company.
Finally,the results also indicatethat variablesincludedto
controlfor more traditionalperspectives on interlockdiffusion are consistently nonsignificant.The results in Table 2
show that a CEO-director'sexperience with control-enhancing changes in boardstructureas an outside directoron
Table4
Event History Analysis of Increased Compensation Contingency*
Independent variables
Unstandardizedcoefficients
1. CEO-directors
on board
2. CEO-directors
experiencingchange
3. CEO-directors
experiencing
change as outside director
4. Returnon assets
5. Excess stock returns
6. Separation
7. Dissimilarity
8. Outsiderratio
9. Log of sales
10. Institutionalownership
Constant
Chi-square
Numberof firm-years
* p < .10; *- p < .05; *-- p < .01; .... p < .001.
-.906
(.603)
1.114
(.203)0
-.120
(.246)
-.829
(1.029)
-.045
(.022)0
.461
(.227)0
.659
(.274)0
.417
(.371)
-.087
(.076)
.520
(.306)
3.500
(.638)00
92.210
3353
* Coefficientsfor industryand year dummy variablesare not reported.Standarderrorsare in parentheses. T-testsare one-tailedfor hypothesizedeffects,
two-tailedfor controlvariables.
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Defections
other boards is not significantlyrelatedto such a change at
the focal firm. Similarly,as shown in Tables 3 and 4, the
likelihoodof a reductionin diversificationor an increase in
compensation contingency is not independentlyaffected by
the presence of CEO-directorswho have experienced such a
change as outside directorsat other firms. Overall,then, the
results providestronglyconsistent evidence that the diffusion of increased board independence and control,as
manifested by specific changes in boardstructure,greater
compensation contingency, and reduced diversification,is
affected by CEO-directors'experience at the CEOs' home
companies, consistent with the social exchange perspective,
but not by CEO-directors'experience as outside directorson
other boards, contraryto a traditionalnetwork diffusion
perspective.
DISCUSSION
The findings providestrong evidence that control-enhancing
changes in boardstructure,as well as related changes in
corporatestrategy and executive incentive compensation,
are influenced by social and psychologicaldynamics operating within the innercircle of corporateleaders. Empirical
analyses yielded a highlyconsistent patternof results
supportingthe theoreticalpropositionthat, althoughgeneralized norms of reciprocityamong corporateelites may
typicallylead CEO-directorsto inhibitorganizationalchanges
that are contraryto the preferences of fellow top managers,
CEO-directorsactuallyinduce such change when they have
experienced it themselves. Thus, it appears that the social
exchange frameworkcan explainthe specific conditions
underwhich a varietyof phenomena that are considered
aversive to CEOs can spread throughthe network of
CEO-directors.
The first set of findings revealed a negative relationship
between the proportionof the boardcomposed of CEOdirectorsand the likelihoodof changes in boardstructure.
This suggests that, consistent with a social exchange model
emphasizinggeneralizednorms of reciprocity,CEO-directors
perceive a generalizedobligationto support other CEOs. In
this system of social interactionamong status equals,
sufficient trust exists that CEO-directorsbelieve their
supportfor CEOs will be reciprocatedindirectlyby someone
else, sometime in the future. This findingis consistent with
social psychologicalresearch showing that group solidarityor
mutualidentificationcan generate cooperative behavior
(Dawes, 1992) and that individualsbenefitingfrom prosocial
acts frequentlyengage in similarbehaviortoward generalized
others, causing helping behaviorto spread througha social
structure(e.g., Krebsand Miller,1985; Komorita,Hilty,and
Parks, 1991). Thus the present study provides a theoretical
explanationand large-sampleempiricalevidence for how
boardnorms emphasizingdeference to the CEOthat are
common across firms (Whisler,1984) can be maintained
over time.
At the same time, however, our additionalanalyses indicated
that the relativeprevalence of directorswho experienced an
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increase in boardindependence actuallyincreased the
likelihoodof such a change at the focal firm, where they
appearedto spur, ratherthan resist, such change. This result
is consistent with the notion that when generalizedexchange partnersare no longer of equal status and prestige,
such inequalitymay "force a rupture"in the system of
exchange (Levi-Strauss,1969: 266), so that social solidarity
among corporateleaders can providea context for generalized retaliationor defection, ratherthan cooperation(cf.
Gouldner,1960; Axelrod,1984). The underlyingsocial
psychologicalmechanisms for such defection can also be
understoodfrom an equity or social comparisonperspective
(Festinger, 1954; Walster, Berscheid, and Walster, 1973:
152), wherein recently disempowered CEOs perceive their
status as havingworsened relativeto comparison-other
CEOs and thus act to reduce their support of other CEOs on
whose boards they sit. Overall,the results suggest that the
social and psychologicalfactors relatingto the CEO-directors'
perceived exchange relationshipwith top managers can
predictand explainthe diffusionof boardindependence in
large U.S. corporations.
Furtheranalyses demonstrate the generalizabilityof our
proposed frameworkfor understandingthe diffusionof
defection among a connected set of previouslycooperative
actors. The findings indicatethat while the presence of
CEO-directorstypicallyreduces the likelihoodof a decrease
in unrelateddiversification,the presence of CEO-directors
who have experienced a decrease in diversificationat their
own firms increases the likelihoodof such a change at the
focal company. Furthermore,a very similarpatternof results
emerges in analyses of increases in compensation contingency. Thus defection or retaliationamong corporateelites
appears to facilitatethe spread of reduced diversificationand
incentive alignment (both of which are manifestationsof
greater boardindependence), as CEO-directorssubjected to
such pressures in their home companies diminishtheir
resistance or even actively support such change elsewhere
so as to restore balance to their social exchange relationships.
Additionalresults providedfurtherevidence for this interpretation by allowing us to rule out alternativeexplanations.
While experience with increased boardindependence at the
CEO-directors'home companies consistently predictedthe
likelihoodof change at the focal firm, we found that CEOdirectors'experience as outside directorson other boards
was consistently unrelatedto such change (across five
different indicators).This findingis inconsistent with alternative, more conventionalperspectives on network diffusion
emphasizingthe role of imitationand social learning(e.g.,
DiMaggioand Powell, 1983; Galaskiewiczand Wasserman,
1989; Davis, 1991; Haunschild,1993; Palmer,Jennings, and
Zhou, 1993). The diffusionof control-enhancingchange in
boardstructuredoes not appearto result simply from the
spread of informationand awareness about such change
throughdirectorties to other boards.
The results also suggest that diffusioncannot be described
here as a process in which directorswho participatedin
increasingboardcontrol on other boards became socialized
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Defections
into believingthat such change is effective, leadingthem to
push for it at other companies (cf. Burt, 1987). Instead,
these additonalfindings are consistent with our generalized
social exchange perspective, accordingto which CEOdirectorswould not generallyseek to spread changes that
are aversive to CEOs' interests, even if their priorexposure
to such changes on other boards led them to believe that
such changes might be desirablefor other constituents.
Rather,CEO-directorswill spread such changes only as a
result of their own experiences as CEOs, which lead them
to restore balance to social exchange relationshipswith
fellow corporateleaders that have been disturbedby the
CEOs' loss of controlover their own boards. Moreover,our
focus on CEO-directorsenables a precise comparisonof
home company vs. outside directorexperience, since any
observed differences cannot be attributedto differences in
the kindof directorstudied.
We also conducted a separate test of the learning-based
alternativeexplanationfor our results. Conventionalperspectives on diffusionmight suggest that directorsexperienced
with increased boardindependence might spread such
practices to improvefirm performancewhere it is poor. To
test this notion, we estimated supplementarymodels that
includedinteractionsbetween CEO-directorexperience and
priorperformanceof the focal company. The results of these
analyses were consistently insignificantand thus did not
supportthe alternativeexplanation.These results provide
stronger evidence that the observed effect of CEO-director
experience reflects the proposed social exchange factors,
ratherthan economic considerationsor learning.
Ourfindings stress the importanceof social and psychological forces within the innercircle, ratherthan emphasizing
how externalforces influence a cohesive class of managerial
elites. The findings not only supportthe social exchange
mechanism, which operates within corporateelites, but they
also show that ownership by institutionalinvestors is only
weakly relatedto the governance and strategic changes
analyzedin this study. It may be that externalforces play a
more significantrole in precipitatingdiffusion(cf. Fligstein,
1991) by promptinginitialdefections. Further,the relatively
active marketfor corporatetakeovers of the earlyto mid1980s may have created a politicalatmosphere conducive
to diminishedelite solidarity(Davisand Thompson, 1994),
thus precipitatinginitialdefections. It is importantto note,
however, that we observe the spread of defection through
the network of heretofore mutuallysupportivecorporate
leaders continuingwell beyond the periodof widespread and
significanttakeover threat to large corporations.
Our perspective suggests an alternativebehavioralmechanism by which changes in governance arrangements,
corporatestrategy, and possibly other organizationalphenomena spread across organizations.While existing theoretical perspectives on network diffusionhighlightthe role of
communicationin facilitatingthe spread of organizational
phenomena (Rogers, 1983; Davis, 1991), our perspective
emphasizes the role of changing social obligationsin driving
diffusion:CEO-directorsdo not support greater boardcontrol
because they know it to be a legitimateor effective change
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in governance arrangementsfrom sitting on boards that have
made similarchanges but because their experience with
increased boardcontrol in their home corporationshas
changed their generalizedsocial exchange relationshipwith
fellow CEOs. Defection restores balance to the social
exchange relationship,while supportingother CEOs at the
same level would only maintainthe new and unequalstatus
quo.
Ourstudy also sheds light on the specific form of defection.
Gouldner(1960: 172) suggested that reciprocityis often
"homeomorphic" or "identical in form . . . with respect to
the things exchanged [and]the circumstances underwhich
they are exchanged." Additionalanalyses suggested that the
presence of CEO-directorswho experienced one kindof
increase in boardindependence at their home companies
generallydid not increase the likelihoodof different kinds of
increases elsewhere. CEOs experiencingthe separationof
CEOand boardchairpositions, for example, were likelyto
induce that specific change but not the other changes
examined in this study. Thus it appears that CEO-directors
tend toward homeomorphicretaliationas a response to
increased boardindependence at their home companies.
The network of CEO-directorsexamined in this study shares
certaincharacteristicswith a positive social exhange network, as conceived by Cook and Emerson (1978: 725), in
that exchange, or the use of power in one relation,is
contingent upon exchange in the other relation.Whereas
equity concerns are static and restrainthe use of power in
Cook and Emerson's model, however, we view equity as a
dynamic,social psychologicalmechanism that can facilitate
as well as inhibitthe exercise of power.
While the theory developed in this study is not concerned
directlywith the notion of trust, some might interpretour
findings as counter to the notion that trust governs most
relationships.Relationinterpersonaland interorganizational
ships with trust, however, are neither extremely fragile nor
imperviousto change, and we propose, consistent with
Axelrod(1984), that trust among exchange partnersis most
robust under stable environmentalconditions and least
robust under circumstances of substantialcontextual
disruptions.The latterconditionmore accuratelydescribes
the period under study. To the extent that there are fewer
externaldisruptionsin the corporategovernance arena over
the next ten years, there may be fewer defections.
This study does not suggest, moreover,that board independence has become universalamong large firms. Zajacand
Westphal (1996) providedevidence suggesting that, in
recent years, managers may have used their influence over
the directorselection process to avoid the potentialfor
increases in boardindependence. They found that powerful
CEOs favor the selection of directorswho have not experienced increases in boardindependence, thus avoiding
directorswho are at riskof defecting. Conversely,boards
that have alreadyasserted their independence are more
likelyto appoint new directorswho have experienced
increases in independence. Overall,then, it is not obvious
that board norms favoringindependence and control have
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Defections
universallyreplaced norms favoringpassivity and support.
Both sets of norms can be found across boards of large
firms, and mechanisms such as directorselection are used
to reinforcethem. Ironically,the emergence of boardcontrol
as a viable, competing norm may have raised solidarityor
group awareness among those boards adheringto the old
norms of support, even as it raises the prospect of defection. By recognizingthe existence of social forces for
stabilityand for change in corporategovernance practices, as
well as the role of the intercorporatenetwork in impeding
and impellingsuch changes, researchers can develop a
greater understandingof seemingly inconsistent arguments
and results regardingthe controlof U.S. corporations.
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