When in Rome.....tailoring CEO power for markets where individual power is respected

This research was featured in the LSE Business Review (2nd November 2016)

New research looks at the role the customer plays in determining CEO power, at a time when conventional thinking favours a strong board as being more representative of robust corporate governance.

Corporate governance scholars have long argued that a board of directors can serve a legitimising role for their organisation, whereas strong CEO power, in their view, can be de-legitimating because of its non-compliance with "good governance" principles. By legitimacy, in corporate governance terms, we mean that there is a perception that the actions of the organisation conform to or are appropriate within some socially constructed system of values. Whose perception is important here? Typically, scholars identify capital market participants and regulators as the key audiences.

However, there is a sense that the expectations of customers, especially those outside the firm's home country, may be equally important for its corporate governance development. Legitimacy in the eyes of customers becomes even more important to consider when their standards of legitimacy are not aligned with those enshrined in the firm's domestic institutional environment. At present, understanding of the link between governance characteristics and the demand-side legitimation process is limited. The dominant corporate governance logic has crowded out consideration of non-stockholder related external assessors. Yet this group possesses great power to confer legitimacy on a firm, and may potentially view CEO power very differently to financial market participants. Indeed, they may view a strong and powerful leader as more legitimate than one dominated by a strong board. Customer participation is indispensable to a firm's continued existence, and this research examines the role the customers can play in shaping the firm's governance.

The researchers hypothesised that firms selling their products in foreign markets characterised by respect for power will exhibit greater CEO power on their boards, because a strong CEO carries more legitimacy among the firm's customers. To test this hypothesis, data from 151 U.S. semiconductor and pharmaceutical firms over a ten year period was collected. The data generally supports the view that cultural-cognitive institutions prevalent in customers' home countries influence their judgments regarding a firm's legitimacy. So firms that compete heavily in high-power distance cultures are more likely to have powerful CEOs.

Ultimately, the aim of this research is to develop and test a theoretical model of CEO power and legitimation in the eyes of customers. It focuses on customers' home culture and how that culture will affect legitimacy judgments. The research proposes that U.S. firms will seek to match their CEOs' power with the legitimacy standards that are dominant in the geographic regions in which they compete for sales, even when high CEO power contradicts the agency-driven perceptions of the investor community at home.

It's hoped this study should prompt further consideration of demand-side legitimacy in theoretical research into board phenomena. The study challenges traditional views of governance as a main driver of the firm's strategy by suggesting that board configurations themselves may be an outcome of strategic decisions of the firm related to its choice of markets.