Corporate governance and generalist CEOs: Evidence from board size

Abstract

Purpose

We contribute to the debate in the literature about generalist CEOs by exploring the effect of board governance on CEO general managerial ability, focusing on one of the most crucial aspects of the board of directors, board size. Prior research shows that smaller boards constitute a more effective governance mechanism and therefore are expected to reduce agency costs.

Design/Methodology/Approach

We estimate the effect of board size on CEO general managerial ability, using a fixed-effects regression analysis, propensity score matching, as well as an instrumental-variable analysis. These techniques mitigate endogeneity greatly and make our results much more likely to show causality.

Findings

Our results show that firms with smaller board size are more likely to hire generalist CEOs. Specifically, a decline in board size by one standard deviation raises CEO general managerial ability by 15.62%. A lack of diverse experiences in a small board with fewer directors makes it more necessary to hire a CEO with a broad range of professional experiences. Furthermore, the agency costs associated with generalist CEOs are greatly diminished in firms with a smaller board. Hence, firms with a smaller board are more inclined to hire generalist CEOs.

Originality

Although prior research has explored the effects of board size on various corporate outcomes, strategies, and policies, our study is the first to investigate the effect of board size on CEO general managerial ability. Our study contributes to the literature both in corporate governance and on CEO general managerial ability.

Keywords: CEO general managerial ability, board size, corporate governance, generalist CEOs, specialist CEOs, CEO general managerial skills.

JEL Classification: G32, G34