WHO SHALL GOVERN - CEO/BOARD POWER, DEMOGRAPHIC SIMILARITY, AND NEW DIRECTOR SELECTION

Abstract

This study examines CEO influence in the board of director selection process and the theoretical mechanism by which CEO influence is presumed to affect subsequent board decision making on CEO compensation. We address both of these issues by linking political and social psychological perspectives on organizational governance. We propose that powerful CEOs seek to appoint new board members who are demographically similar, and therefore more sympathetic, to them, Using a longitudinal research design and data on 413 Fortune/Forbes 500 companies from 1986 to 1991, we examine whether increased demographic similarity affects board decision making with respect to CEO compensation contracts. The results show that (1) when incumbent CEOs are more powerful than their boards of directors, new directors are likely to be demographically similar to the firm's CEO; (2) when boards are more powerful than their CEOs, new directors resemble the existing board; and (3) greater demographic similarity between the CEO and the board is likely to result in more generous CEO compensation contracts. We discuss the implications of the strong effect of demographic similarity for corporate control issues.