Determinants of board participation in the strategic decisions of small corporations.

Agency, strategic choice, and cognitive perspectives are used to examine the conditions under which chief executive officers (CEOs) of small private corporations involve the board of directors in strategic decisions. Logistic regression results (2,382 respondents to a cross-industry mail survey) indicate that board strategic participation is not the dominant practice in these firms but that boards are more likely to participate in strategic decisions when the firm is larger, the board has a critical mass of outside directors, the strategic issue under consideration involves an organizational transition or potential downturn, or CEO power (ownership) is low.

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Boards of directors can affect the strategy of their firms in two general ways. Boards influence strategy indirectly through "decision control" activities such as evaluating past decisions made by top management, performing high-level reviews of strategic plans, and monitoring executive and firm performance (Fama & Jensen, 1983). Boards can also influence strategy through "decision management" activities such as ratifying strategic proposals, asking probing questions about important issues, and helping to formulate, assess, and decide upon strategic alternatives (Judge & Zeithaml, 1992). Decision control is the board's most fundamental responsibility, but decision management is not traditionally considered a necessary board role (Fama & Jensen, 1983). Indeed, the results of past surveys of corporate directors affirm that while most boards review strategy and executive performance (Harrison, 1987), few boards play a significant role in strategic decisions (Mace, 1971; Vance, 1983). These norms of governance may be changing, as mounting pressures from shareholder litigation (Kesner & Johnson, 1990), potential takeovers (Judge & Zeithaml, 1992), and from directors themselves (Lorsch & MacIver, 1989) are pushing boards to become more directly involved in strategy. However, as relatively few studies have targeted board strategic involvement, our awareness of its antecedents and consequences is limited (Finkelstein & Hambrick, 1996).

The empirical research of board strategic involvement in small corporations lags even further behind. Although small corporations may have a greater need than large corporations for the board to perform its service role well (Daily & Dalton, 1992; Huse, 1990), including decision management activities, much anecdotal and clinical evidence suggests that the boards of small companies tend to be passive and uninvolved in strategy (Castaldi & Wortman, 1984; Dyer, 1986). Despite this gap between the governance needs and practices of small corporations, few studies have focused on board strategic involvement in this population of firms. As a result, most of what little we know about the topic is derived from a handful of studies of large corporations and venture-capital-backed firms, and this provides a weak foundation for understanding why the chief executive officers (CEOs) of small corporations engage their boards in strategic decisions.

To examine this issue, the present study proposes and tests a model that explains the occurrence of board strategic involvement in terms of precipitating conditions operating at three levels: organizational context, board context, and the context of a particular strategic decision confronting the firm. The results of this research make three contributions to the literature on board involvement in strategy. First. this research addresses board behavior in small private corporations. (1) Most empirical studies of boards have sampled from populations of large, publicly traded companies, and the results may have little applicability to small firms (Daily & Dalton, 1992). Furthermore, organizational processes and behaviors of privately held corporations may differ in significant ways from those of publicly traded corporations (Schulze. Lubatkin, Dine, & Buchholtz, 2001), but because private corporations are not legally required to disclose financial and operating information, researchers have undersampled this population. The research described here presents the results of a large-sample survey that documents governance structures and practices of this large and underresearched sector of the U.S. economy. Second, multiple theoretical perspectives are used to build the research model. Board involvement in strategy is a complex, multidimensional organizational phenomenon that may not be possible to comprehend adequately within a single theoretical perspective (Finkelstein & Hambrick, 1996; Judge & Zeithaml. 1992). Indeed, a particular weakness of the research devoted to small-firm governance is that individual studies tend to view their questions through narrow theoretical lenses and fail to integrate earlier results (Huse, 2000). By incorporating agency, strategic choice, and cognitive perspectives on governance within a multivariate analytical framework, this study disentangles the overlapping effects of a larger set of contextual factors and provides a more comprehensive understanding of the conditions that trigger board strategic involvement. Third, earlier studies conceptualize board involvement in strategy rather broadly its the degree to which directors influence strategy or perform various strategy-related activities (e.g., strategic planning, reviewing policies, providing advice). These broad conceptualizations obscure important distinctions between decision management and decision control, and between involvement by the board as a unit and by directors as individuals. As a result, our understanding of how an important board-level behavior emerges and becomes formal practice remains clouded. By adopting a more focused conceptualization of board strategic involvement, this study provides insight into the reasons why boards may come to be institutionalized as forums for strategic deliberation and decision.

Board Strategic Involvement

A weakness of past research concerning the board's involvement in various governance roles is that most empirical studies have imputed board involvement from its antecedents (e.g., board composition, director demographics, ownership patterns) or consequences (e.g., specific organizational decisions or outcomes), but have not directly assessed board involvement behavior (Finkelstein & Hambrick, 1996). That is, board involvement is usually treated as an intervening but unmeasured construct. Three studies of board strategic involvement in large firms have addressed this weakness by surveying CEOs and/or board members about their involvement activities. Judge and Zeithaml (1992) showed that organizational and board characteristics influence the level of board involvement in the formation of new strategic decisions and the evaluation of prior decisions: firms that are younger and have smaller boards, lesser representation by inside directors, and lower levels of diversification tend to have greater board strategic involvement. Johnson, Hoskisson, and Hitt (1993) showed that powerful boards (i.e., boards in which outside directors hold significant ownership and are highly represented on the board) are more heavily involved in corporate restructuring decisions, whereas the presence of powerful executives (i.e., high levels of executive ownership and lengthy tenure in the firm and on the top management team) tends to forestall board involvement in these decisions. Westphal (1999) investigated the impact of "social ties" between the CEO and outside directors on the board's provision of advice and counsel regarding strategic issues. In contrast to the prevailing notion, derived from the agency perspective, that affiliation between CEO and directors leads to dependent, less active boards, Westphal's (1999) findings suggest that social ties foster a more collaborative decision-making environment and thereby promote board strategic involvement.

There is reason to believe that boards of small firms behave differently than large-firm boards (Forbes & Milliken, 1999; Whisler, 1988) and, as a result, the nature and extent of board strategic involvement differ in small firms as well. Ward and Handy's (1988) findings indicate that small-firm CEOs are more inclined to seek advice and counsel from "outside boards"--that is, boards with two or more outside directors--and consider these boards to be more valuable. Huse (1990) found that small-firm CEOs are more likely to invite participation from boards that are smaller, have fewer inside directors, and have more equity stakes held by directors, and that boards composed in this manner tend to be more active in shaping the firm's mission. In a later study, Huse (1994) reports that boards that are simultaneously "independent" (i.e., three or more directors unrelated to the CEO) and "interdependent" (i.e., better board-management relations) have greater involvement in strategy formation and control. A recent study by Gabrielsson and Winlund (2000) shows that several indicators of the board's "working style" with the CEO--including director knowledge and skills, preparation and commitment, behavioral (not structural) independence, and the formality of board routines--are positively associated with the board's performance of its service role. On the other hand, Daily (1995) found no relationship between board composition and board performance of its strategic roles, and Ford's (1988) results suggest that inside directors are more effective than outside directors in performing these roles.