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The effects of institutional investors and munificence on board chair orientations

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Abstract

In today’s corporate landscape, the separation of the board chair and CEO roles is increasingly prevalent among public firms. Understanding this leadership dynamic, particularly the board chair-CEO working relationship, is critical. This study delves into the influence of divergent behaviors among institutional investors on the board chair-CEO interaction and explores how environmental munificence moderates these effects. We ascertain that high levels of dedicated institutional investor ownership tend to prompt board chairs to exhibit both control and collaboration orientations with CEOs. Conversely, in instances of elevated transient institutional investor ownership, board chairs are less inclined toward collaboration with CEOs. Of notable interest is our investigation into how environmental munificence shapes these relationships. We discover that the abundance or scarcity of resources in the environment can significantly recalibrate the impact of institutional investor ownership structures on board chair orientations toward CEOs. This study not only contributes to the broader realm of corporate governance research but also offers practical insights for practitioners navigating the intricate dynamics between institutional investors, board chairs, and CEOs. Our findings underline the nuanced interplay between investor behaviors, leadership orientations, and environmental contexts, enriching the understanding of effective corporate governance strategies.

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Notes

  1. The mean inter-rater reliability for control orientation is 0.88 and the mean inter-rater reliability for collaboration orientation is 0.92.

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  1. Department of Management, HRM, and Law, Sorrell College of Business, Troy University, Troy, USA

    Ying Schwarte & Ping He

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Appendices

Appendix A. Coding instruction for board chair orientations (Krause, 2017)

1.1 Control

This orientation is based on the belief that a separate individual should act as Board Chair so that the chair can monitor, oversee, and if necessary, discipline the CEO. Boards exhibiting this orientation will often use the words ‘oversight’ and ‘independence’ or explain that a separate Board Chair facilitates holding the CEO and management accountable, evaluating the management, or introducing greater objectivity and integrity in board decision-making. The underpinning assumption of this orientation is that the role of the Board Chair is to help the board control the CEO.

Example: CMA Energy Corporation, Proxy Statement, 2012.

“The Boards have determined … it is in the best interest of the Corporation to keep the offices of CEO and Chairman of the Board separate to enhance oversight responsibilities. The Boards believe that this leadership structure promotes independent and effective oversight of management on key issues relating to long-range business plans, long-range strategic issues and risks.”

1.2 Collaboration

This orientation is based on the belief that the Board Chair’s role is to advise and guide the CEO, as well as to help the CEO perform his or her job by reducing the demands on the CEO’s time. This orientation often involves distinguishing the role of the CEO (day-to-day leadership of the firm) from that of the Board Chair (leading the board and providing broad strategic direction), and suggests that by filling different roles, the CEO and Board Chair can specialize in their responsibilities. Boards exhibiting this orientation will often note that a separate Board Chair enables the CEO to devote all his/her attention to managing the firm, improves communication between the board and management, or helps the board to provide advice and guidance to the CEO. The underpinning assumption of this orientation is that the role of the Board Chair is to help the board collaborate with the CEO.

Example: Fiserv Inc, 2012.

“Our board recognizes the time, effort and energy that our chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman. Our board believes that having separate positions provides a clear delineation of responsibilities for each position and enhances the ability of each leader to discharge his duties effectively which, in turn, enhances our prospects for success.”

Appendix B. Bushee’s institutional investor classification data (1998)

Porter (1992) suggested that institutional investors vary in their behaviors and incentives. He described “dedicated” investors as institutional investors that maintain large, long-term stocks concentrated in a small number of firms. Conversely, he depicted “transient” investors as institutional investors that hold stakes in many different firms and frequently trade in and out of firms on the basis of changes in short-term financial return. Accordingly, we classify institutional investors in our sample using Bushee’s (1998) classification data.

Bushee’s classification begins with nine variables that describe the institutional investors’ investment behavior (See Table below) and these nine variables are condensed into three factors portfolio diversification, portfolio turnover, and trading sensitivity (Connelly et al., 2010a, 2010b). A k-means cluster analysis on these three factors allows institutional investors to be classified into dedicated, transient, and quasi-indexers. Following prior research (e.g., Connelly et al., 2010a, 2010b; Connelly et al., 2016), we eliminated the quasi-indexers from our sample and only explored two major types of institutional investors, dedicated and transient, as they are clearly differentiated. Bushee’s classification database has been used in accounting research (e.g., Abarbanell et al., 2003; Bushee & Noe, 2000; Ke & Petroni, 2004). Recently, strategy scholars have applied it in the management research (e.g., Connelly et al., 2010a, 2010b; Connelly et al., 2016; Shi et al., 2020). In sum, this classification holds value for strategic management research.

Factors

Variables

Measurements

Diversification

Concentration

The average percentage of the institutional investor’s total equity holdings that resides in each firm in its portfolio

 

Average Percentage Holding

The average size of the institutional investor’s ownership position in firms in its portfolio

 

Large Block Percentage Holding

The percentage of the institutional investor’s total portfolio that is invested in firms in which it has greater than 5 percent ownership

 

Herfindahl

The sum of the squared percentage of ownership in each firm in the institutional investor’s portfolio

Portfolio Turnover

Turnover

The absolute change in the institutional investor’s ownership positions in each quarter divided by the change in its total equity for all firms in its portfolio

 

Stability

The percentage of the institutional investor’s total portfolio holdings that reside in firms it has held continuously for two years

Trading Sensitivity

Earnings Sensitivity 1

The ratio of change in the institution’s holdings in a given firm in each quarter, divided by that firm’s change in quarterly earnings announced during the quarter, for each firm in the institution’s portfolio

 

Earnings Sensitivity 2

The difference between the average change in the earnings of firms in which the institution increased and decreased its holdings

 

Earnings Sensitivity 3

The difference between the institution’s change in its holdings of firms with positive quarterly earnings and negative quarterly earnings

Appendix C. Model equation, key variables, and data sources

The model equation for a GLM with a binomial family and logit link function can be expressed as follows:

$$ {\text{logit}}\left( p \right)\, = \,\log \left( {\frac{p}{1 - p}} \right) = \beta_0 + \beta_1 X_1 + \beta_2 X_2 + \, \ldots \, + \,\beta_p X_p $$

Where p is the probability of the binary outcome, β is the model coefficient, and X is the predictor variable. The table below shows the dependent variables, independent variables, and the control variables used in our model and their sources.

Key variables

Data sources

Control Orientation

Proxy Statement

Collaboration Orientation

Proxy Statement

Dedicated Institutional Investors

Thomson Reuters database on institutional (13F) holdings

Bushee’s institutional investors’ classification dataset

Transient Institutional Investors

Thomson Reuters database on institutional (13F) holdings

Bushee’s institutional investors’ classification dataset

Firm size

COMPUSTAT

Prior Performance

COMPUSTAT

Independence

Boardex

Minority

Boardex

Appointments

Boardex

CEO demographics (i.e., age, gender, race, firm tenure, and CEO tenure)

Boardex, Execucomp, Proxy Statement

Dynamism

COMPUSTAT

Munificence

COMPUSTAT

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Schwarte, Y., He, P. The effects of institutional investors and munificence on board chair orientations. J Manag Gov (2024). https://doi.org/10.1007/s10997-024-09698-9

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