Corporate Governance & Organization Life Cycle: The Changing Role ...

Within this perspective, the board of directors can be considered an instrument for dealing with the organization’s environment. Business organizations use it as a vehicle to co-opt, or partially absorb, important external entities with which the organization is interdependent (Pfeffer, 1972). Co-optation may be utilized when a total absorption, such as a merger, is legally proscribed or impossible due to resource constraints. Furthermore, if co-optation is used as a rational response to environmental exigencies, some propositions can be developed to predict its expected use. Indeed, organizations with larger capital or debt requirements are more likely to have a greater percentage of their board composed of representatives from financial institutions (Miwa & Ramseyer, 2005; Mizruchi & Stearns, 1988), while organizations that operate in regulated industries tend to have a greater percentage of their boards composed of directors from outside the management of the company, such as lawyers and lobbyists (Pfeffer, 1972; Stearns & Mizruchi, 1993).

Other articles have expanded on this concept of co-optation and the impact of the environment on board composition by attempting to link board composition with firm performance. Salancik and Pfeffer (1980) examined the two conditions that might affect the control or tenure that an incumbent executive has over the organization: the distribution and structure of ownership and firm performance. In this study, two measures of firm performance were analyzed. Operating performance was measured by net income as a percentage of sales, or profit margin, and performance in the capital market was measured by a combined rate of return on common stock over a certain period. Overall, the authors found that tenure is related only slightly to performance but quite strongly to ownership. However, their data also suggest that executive retention is correlated with operating profit performance in the case of externally controlled firms, with stock-price share appreciation for management-controlled firms, and neither performance measure is dominant in owner-managed firms.

Hillman and Dalziel (2003) integrated the agency with the resource dependence perspective and attempted to find a linkage with firm performance. For these authors, agency theory suggests that incentives