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How Directors’ Prior Experience with Other Demographically Similar CEOs Affects Their Appointments Onto Corporate Boards and the Consequences for CEO Compensation

Academy of Management Journal, Vol. 57, No. 3, pp. 791-813, 2014

51 Pages Posted: 15 Apr 2014 Last revised: 15 Aug 2015

David H. Zhu

Arizona State University (ASU) - W. P. Carey School of Business

James D. Westphal

University of Michigan - Stephen M. Ross School of Business

Date Written: 2014

Abstract

In recent years, new director appointments have increasingly posed a dilemma for corporate leaders: while CEOs prefer individuals who have similar backgrounds to them, they face increased pressure to appoint new directors who have a different demographic profile. We suggest that CEOs may resolve this dilemma by appointing new directors who have prior experiences working with other demographically similar CEOs. We then explain why this tendency is stronger when new directors are demographically more different from CEOs. Moreover, we posit that new directors’ prior experiences with other similar CEOs will reduce the negative effect of their demographic differences from the CEO on CEO compensation. Longitudinal analysis of Fortune 500 companies’ new director appointments and subsequent CEO compensation provided support for our theoretical expectations. This study identifies an important new role that interlock ties to other CEOs can play in corporate governance and leadership. In particular, we suggest that such ties are a means by which CEOs evaluate whether a new director will support their leadership and decision making. In explaining the role of directors’ ties to other CEOs in influencing director appointments and CEO compensation, this study also highlights the important influence of triads on CEO-director dyadic relations.

Keywords: board of directors, corporate governance, CEO, top management team, social networks, interlocks, triads, tie formation, social structure, social comparison, social inference, demography, demographic similarity, minority, diversity, power, experience, executive compensation

Suggested Citation

Zhu, David H. and Westphal, James D., How Directors’ Prior Experience with Other Demographically Similar CEOs Affects Their Appointments Onto Corporate Boards and the Consequences for CEO Compensation (2014). Academy of Management Journal, Vol. 57, No. 3, pp. 791-813, 2014. Available at SSRN: https://ssrn.com/abstract=2425309

David Hongquan Zhu (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States
4807278737 (Phone)

HOME PAGE: http://my.wpcarey.asu.edu/directory/people/profile.cfm?person=2227202

James D. Westphal

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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