ch6.2khanna et al

ch6.2khanna et al - GETTING THEM TO THINK OUTSIDE THE...

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Unformatted text preview: GETTING THEM TO THINK OUTSIDE THE CIRCLE: CORPORATE GOVERNANCE, CEOS EXTERNAL ADVICE NETWORKS, AND FIRM PERFORMANCE MICHAEL L. M C DONALD University of Central Florida POONAM KHANNA Arizona State University JAMES D. WESTPHAL University of Michigan This article contributes to the social networks literature by examining how corporate governance factors influence CEOs external advice-seeking behaviors. We incorporate insights from social networks research into an agency theory perspective to predict, and demonstrate empirically, that governance factors recommended by agency theory increase CEOs tendencies to seek out advice contacts who are likely to offer perspec- tives on strategic issues that differ from their own; these advice-seeking behaviors ultimately enhance firm performance. Accordingly, this article also contributes to the corporate governance literature by describing how and why CEOs advice networks mediate the effects of governance factors on firm performance. This article examines how corporate governance factors influence CEOs informal social contacts with colleagues at other companies and how these networking behaviors mediate the effects that cor- porate governance factors ultimately have on firm performance. Although the firm-level performance implications of CEOs informal social contacts with executives at other firms have been only infrequently researched, McDonald and West- phal (2003) provided some preliminary evidence that these contacts can have important effects on firm-level success. The central focus of the Mac- Donald and Westphal study was on how CEOs external advice networks mediate firms strategic responses to recent poor firm performance. Never- theless, the study also reported supplementary ex- ploratory analyses that indicated that the firms of CEOs who frequently seek advice from executives at other firms with whom they do not share friend- ship ties or common functional backgrounds sub- sequently outperform the firms of CEOs who seek advice from such executives relatively infre- quently. Drawing on the wider networks literature (Granovetter, 1973; see Burt [2000, 2004] for re- views), these researchers explained these firm-level performance benefits by suggesting that exposure to alternative points of view enhances CEOs abili- ties to identify and develop high-quality solutions to the strategic challenges facing their companies. Although CEOs and their firms appear to benefit when the CEOs seek out alternative points of view on strategic issues, descriptive statistics from Mc- Donald and Westphal (2003) also showed that CEOs tend to consult with nonfriends and socially dissimilar advice sources relatively infrequently....
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This note was uploaded on 05/29/2011 for the course MAN 5721 taught by Professor Collins during the Summer '10 term at Florida A&M.

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ch6.2khanna et al - GETTING THEM TO THINK OUTSIDE THE...

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