CEO-Board relationships in a Post Sarbanes-Oxley Era. The Moderating Effect of the Board of Directors in the CEO Power-Firm Performance Relationship

Research on upper echelons consistently tried to identify relationships between top executives’ characteristics and different kinds of corporate outcomes. Along this line, we focus on the construct of CEO power to investigate the impact on firm financial performance. The reason motivating the choice to consider the CEO as the most appropriate level of analysis is twofold. From one side, we aim reconsidering the CEO power-firm performance relationship in a post Sarbanes-Oxley era. From the other side, moving from the evidence that prior research on top executives and boards of directors have often proceeded in separate streams, we investigate the moderating effect of board of directors on the relationship between CEO power and firm performance. To this purpose, we consider board independence, directors’ incentives and board activity as potential moderators of the relationship between CEO power and firm financial performance. We tested our hypotheses using a sample of 288 large US industrial firms. Results indicate that CEO power has a strong positive impact on firm financial performance, and that the board of directors moderates such relationship. Specifically, our findings suggest that enhanced board activity negatively moderates the CEO power-firm performance link, while a higher proportion of outsiders strengthens the relationship above. The article has several implications both for theory and practice, and supports that the new regulatory context in the US has a potential to reverse predictions of positive agency theory about CEOs’ misbehaviours, rather favouring novel interpretations of the principal-agent paradigm. In other terms, CEOs will be more reluctant to misuse their power to expropriate shareholders for their own personal interests. The Sarbanes-Oxley context has, in our opinion, constrained the opportunity for managerial opportunism.