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Principles ingrained via military service may influence corporate governance, especially when it comes to executive accountability. Research published in Strategic Management Journal found that when outside directors with military backgrounds are on a company's board of directors, it increases the likelihood of CEO dismissal under low-performance conditions.
Military science research shows that military service significantly shapes individuals' understanding of what constitutes appropriate behavior later in life. This culture instills a lifelong system of values and beliefs, including a strong emphasis on accountability in particular.
Researchers Stevo Pavićević of Frankfurt School of Finance and Management in Germany and Thomas Keil of University of Zurich previously launched a broader project examining director backgrounds and their potential impact on board decisions, with a focus on CEO dismissal. In analyzing directors' profiles in detail, they noted a substantial number with military service.
They expected to see military directors in industries like defense, but were surprised to see them on boards across a wide range of other industries. This observation inspired them to explore the effects these directors might have on board decisions.
For this study, Pavićević and Keil hypothesized that the presence of military directors on a board increases the likelihood of CEO dismissal following poor firm performance, given that they might approach executive accountability differently than their peers.
To test their theory, they designed a large-scale quantitative study on director profiles and CEO dismissals across 865 public firms in the U.S. between 2010 and 2020. In addition to their data collection and analysis, they also conducted interviews with military directors serving on the boards of firms.
The data analysis and interviews suggest that military directors are more inclined to attribute performance shortfalls to the CEO and advocate for more rigorous CEO accountability, resulting in CEO dismissal. Further, the researchers found that the influence of military directors on CEO dismissal is more pronounced when military directors serve on a nominating committee.
They also found that military directors might even facilitate the dismissal of powerful CEOs (i.e., an executive who owns stock or is long-tenured). In their interviews with military directors, Pavićević and Keil learned that these individuals' accountability values and beliefs not only influence their own decision-making, but may also inspire fellow directors to enforce stricter CEO accountability for poor performance—an area where many boards struggle.
When CEOs concurrently serve as board chair, however, the effects of having a military director on the board is less pronounced. CEO duality, the study authors found, acts as a boundary condition that limits the influence of military directors on CEO dismissals.
"A key takeaway from our study is that boards aiming to strengthen CEO accountability should consider not only the backgrounds of individual directors but also the broader composition and structure of the board," Pavićević says.
While appointing military directors may help boards enhance CEO accountability, the effectiveness of this approach is tempered by CEO duality and more pronounced when military directors serve on the board's nominating committee.
More information: Stevo Pavićević et al, The role of military directors in holding the CEO accountable for poor firm performance, Strategic Management Journal (2024). DOI: 10.1002/smj.3675
Provided by Strategic Management Society
Citation: Military director presence increases the likelihood of CEO accountability for poor firm performance, study finds (2024, December 9) retrieved 9 December 2024 from https://phys.org/news/2024-12-military-director-presence-likelihood-ceo.html
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