Principles derived from military service can substantially influence corporate governance, particularly executive accountability. A study published in the Strategic Management Journal underscored this, revealing that the inclusion of board members with military backgrounds could heighten the likelihood of CEO dismissals under circumstances of poor corporate performance.
The research, conducted by Stevo Pavićević from the Frankfurt School of Finance and Management in Germany and Thomas Keil from the University of Zurich, is part of a broader investigation into how directors’ backgrounds affect board decisions, specifically concerning the dismissal of CEOs. A detailed examination of director profiles highlighted a significant presence of individuals with military experience. While expecting to find military directors primarily in defence-related industries, the researchers were intrigued to discover their widespread presence across various sectors, prompting further investigation into the potential implications for board decision-making.
Pavićević and Keil posited that boards featuring military directors might be more prone to dismiss CEOs following subpar firm performance due to a different approach to executive accountability. To substantiate their hypothesis, they conducted a comprehensive quantitative study analysing director profiles and CEO dismissals across 865 public companies in the U.S. from 2010 to 2020. The study was complemented by interviews with military directors serving on these boards.
The findings from the data analysis and the interviews indicate that military directors are likely to attribute poor performance directly to the CEO and are more assertive in advocating for stringent CEO accountability, often leading to dismissals. Notably, the impact of military directors on CEO dismissal decisions was more significant when these directors were part of the board’s nominating committee. The researchers also discovered that military directors could influence the removal of even powerful CEOs, such as those who are major shareholders or have long tenures.
Through their interactions with military directors, Pavićević and Keil observed that the ingrained values of accountability not only shaped the directors’ decision-making processes but also encouraged other board members to adopt a stricter stance on CEO accountability, particularly in scenarios typically challenging for many boards.
However, the study also identified that the influence of military directors is somewhat diminished when the CEO also holds the position of board chair. This scenario, referred to as CEO duality, limits the effect military directors can have on CEO dismissals.
Pavićević highlighted a critical insight from their research: boards that aim to bolster CEO accountability might need to look beyond the individual backgrounds of directors and consider the overall board composition and structure. While appointing directors with military experience can enhance accountability measures, the effectiveness of such appointments is affected by factors like CEO duality. It is more pronounced when these directors are part of the nominating committee. This nuanced understanding of board dynamics and director backgrounds offers a strategic lens through which companies can better structure their leadership oversight and enhance governance efficacy.
More information: Stevo Pavićević et al, The role of military directors in holding the CEO accountable for poor firm performance, Strategic Management Journal. DOI: 10.1002/smj.3675
Journal information: Strategic Management Journal Provided by Strategic Management Society