Board assessments of managerial performance

Abstract

One of the primary responsibilities of a board of directors is to assess management practices and to make sure that the organization is being run in a fashion that is consistent with the interests of shareholders. This responsibility becomes especially important when the firm is performing suboptimally. The current paper integrates corporate governance theory with attribution theory to examine the processes by which board members attribute poor firm performance to either external or internal causes. A framework is presented that suggests that inside directors and outside directors differ significantly in the constraints they face and in the ultimate attributions they make. Facing primarily social constraints, such as loyalty to the CEO and fear of retaliation, inside directors are more likely to consistently attribute poor performance to industry or environmental factors, as opposed to top management. Facing primarily cognitive constraints, outside directors will use specific informational cues to attribute poor performance either to industry/environmental factors or to top management. Implications and suggestions for future research are provided.

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