The Behavioral Theory of the (Governed) Firm: Corporate Board Influences on Organizations’ Responses to Performance Shortfalls

Vinit Desai
Academy of Management Journal, Volume 59 Issue 3, pp. 860-879

The Behavioral Theory of the Firm provides a well-evidenced perspective on organizational decision making that has influenced a wide array of literatures, including the substantial body of work on organizational change. This literature suggests that organizations are more likely to undertake major changes when their performance declines below aspirations or targets for acceptable performance, but few studies examine how multiple groups of organizational decision makers, each with potentially conflicting interests, might collectively influence this process. To that end, I incorporate theory regarding corporate boards and their role in organizational decision making. I use this integration to suggest that boards with particular characteristics may have interests that do not align with those of the management team when performance shortfalls occur, using their influence to force compromises or compel managers to reconsider particular changes. I find support for the related predictions that an increase in board size and equity ownership suppresses change when performance drops, although I find no support for similar arguments regarding board turnover. This approach blends the typically distinct but related literatures on performance feedback and corporate governance, and suggests the role that some boards might play in circumventing the momentum for organizational change.