Corporate Boards as Monitors: An Empirical Test of the Quad Model of Director Effectiveness

The extant board governance literature has generally examined the relationship between specific director attributes and their influence on the board's monitoring performance in isolation of other director attributes. To overcome the limitations of this one-dimensional approach in the pursuit of finding the 'ideal' director, Hambrick, Misangyi, and Park (2015, AMR) proposed the board quad model, which combines the four individual directors' attributes of independence, expertise, bandwidth, and motivation. The quad model essentially summarises the advances of prior literature, particularly concerning director task performance, the confluence of agency theory and resource dependence theory, and the social dynamics of groups. This thesis empirically investigates the validity of the model in the context of three monitoring tasks: CEO turnover, CEO compensation, and director appointment. The findings generally support the relevance of the quad model. Most prominently, they show that boards with quad-qualified directors make objective assessments of CEO performance and act accordingly. In particular, the results suggest that such boards are less reliant on public information, and assess CEO ability also based on private information and external contingencies. Concerning CEO turnover decisions, quad-qualified boards seem to rely as much on firm-specific stock market performance as on peer stock market performance. A CEO's job is particularly at risk when the board consists of three quad-qualified directors and firm performance deteriorates. As to CEO compensation, quad-qualified boards tend to overpay CEOs. On the one hand, this reflects the greater scrutinising ability and motivation of such boards, leading to the CEO facing a higher job risk, which in turn needs to be compensated. On the other hand, the same ability and motivation make quad-qualified less reliant on outcome-based incentives and instead directly monitor CEO actions for making informed pay decisions. Together, the insights regarding CEO turnover and compensation decisions provide evidence that decisions which are directly related to the CEO's employment, arise from a bargaining process between the CEO and the board about board composition, CEO compensation, and eventually CEO succession. Director appointments are an integral part of this process. This thesis shows that a quad-qualified board can resist managerial power and is likely to appoint another quad-qualified director. In sum, this thesis reinforces the quad model approach and provides a better understanding of the microfoundations of effective board monitoring. Most importantly, it offers extensive insights into the CEO-board relationship. Furthermore, it supports calls for an individual-based board assessment to uncover both the individual directors' contribution and the social dynamics within the board. In this regard, the selection of suitable measures for individual director quad attributes as well as the operationalisation of the quad model provide guidance for future studies on the quad model, and thereby add to the main contributions of this thesis