WHO SHALL GOVERN - CEO BOARD POWER, DEMOGRAPHIC SIMILARITY, AND NEW DIRECTOR SELECTION/

This study examines CEO influence in the board of director selection p rocess and the theoretical mechanism by which CEO influence is presume d to affect subsequent board decision making on CEO compensation. We a ddress both of these issues by linking political and social psychologi cal perspectives on organizational governance. We propose that powerfu l CEOs seek to appoint new board members who are demographically simil ar, and therefore more sympathetic, to them, Using a longitudinal rese arch design and data on 413 Fortune/Forbes 500 companies from 1986 to 1991, we examine whether increased demographic similarity affects boar d decision making with respect to CEO compensation contracts. The resu lts show that (1) when incumbent CEOs are more powerful than their boa rds of directors, new directors are likely to be demographically simil ar to the firm's CEO; (2) when boards are more powerful than their CEO s, new directors resemble the existing board; and (3) greater demograp hic similarity between the CEO and the board is likely to result in mo re generous CEO compensation contracts. We discuss the implications of the strong effect of demographic similarity for corporate control iss ues.