Turbulence at the Top: A New Perspective on Governance Structure Changes and

Strategic Change
Author(s): Jerry Goodstein and Warren Boeker
Source: The Academy of Management Journal , Jun., 1991, Vol. 34, No. 2 (Jun., 1991),
pp. 306-330
Published by: Academy of Management

Stable URL: https://www.jstor.org/stable/256444

REFERENCES
Linked references are available on JSTOR for this article:
https://www.jstor.org/stable/256444?seq=1&cid=pdf-
reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Academy of Management is collaborating with JSTOR to digitize, preserve and extend access to
The Academy of Management Journal

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
? Academy of Management Journal
1991, Vol. 34, No. 2, 306-330.

TURBULENCE AT THE TOP: A NEW PERSPECTIVE

ON GOVERNANCE STRUCTURE CHANGES AND
STRATEGIC CHANGE

JERRY GOODSTEIN
Washington State University, Vancouver
WARREN BOEKER
Columbia University

Organizational theorists have traditionally focused attention on the re-

lationship between chief executive officer (CEO) succession and strate-
gic change. This study extends that perspective and explores the effects
of changes in an organization's management, ownership, and board of
directors on the process of strategic change. The results of this research
suggest that changes in ownership and board have significant indepen-
dent and interactive effects on strategic change.

Over the past 15 years, the dialogue concerning the dynamics of

nizational change has shifted from a focus on controversy about
organizations can adapt (Aldrich & Pfeffer, 1976; Child, 1972) to
profitable focus on the conditions under which organizations are
make fundamental changes in strategies, structures, and internal pr
(Boeker, 1989; Carroll, 1984; Ginsberg & Buchholz, 1990; Hannan
man, 1984; Meyer, 1975; Pfeffer & Salancik, 1978; Tushman & R
1985). A central assumption for the theorists cited is that inertial fo
constrain change exist in organizations. Researchers have focused
tention, however, on the specific conditions under which organizati
overcome inertial forces.
A number of theorists (Carlson, 1961; Helmich & Brown, 1972; Meyer,
1975; Pfeffer & Salancik, 1978; Tushman & Romanelli, 1985) have argued
that the process of executive succession provides an important mechanism
through which organizational inertia can be overcome, particularly when

This research was supported in part by grants from the Investors in Business Education,
School of Commerce and Business Administration, University of Illinois, and the Executive
Leadership Research Center, Graduate School of Business, Columbia University. We would like
to thank Ellen Auster, James Fredrickson, Donald Hambrick, Ming Jer Chen, Huseyin Leblebici,
Joseph Mahoney, Michael Tushman, David Whetten, and two anonymous reviewers for this
journal for their helpful suggestions and comments. In addition, we wish to thank John Delaney
for providing methodological advice and Bert Cannella, Sara Keck, Sue Clark, and Rick Metzger
for their research assistance.

306

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 307

the successor is an outsider. Through overcoming internal resistance a

strategic myopia, new executives are able to facilitate an organization's re-
sponse to environmental changes.
Prior studies have uniformly emphasized the importance of the power
vested in a company's CEO without concomitant attention to the power its
owners or board of directors might independently hold. Although focusin
on CEO dynamics may be necessary for understanding organizationa
change, a more complete and sufficient explanation requires that executive
succession be examined in the context of other changes in a corporatio
governance structure. We significantly extend previous work by consideri
how the broader governance structure, defined as ownership and board in-
terests, (1) provides an important context that moderates the effect of CE
succession on organizational change and (2) exerts effects on organizational
change that are independent of CEO succession. Expanding the focus b
yond CEOs provides an opportunity to identify alternative mechanisms th
can overcome organizational inertia.
Although there are different ways of defining organizational inert
(Hannan & Freeman, 1984), clearly one of its more important indexes is th
extent to which an organization is able to initiate strategic change. Followi
Ginsberg (1988), we adopted a definition of strategic change that emphasiz
changes in product and service domains. Through both adding and divestin
new products and services, organizations alter their domains. These pr
uct-service changes represent critical decisions that not only affect th
boundaries of the organizations, but also the allocation of resources within
them. For these reasons, changes in governance structure are likely to hav
an important effect on the magnitude of major changes in products a
services.
In order to explore these relationships and capture the dynamics
strategic change over time, we examined changes in hospital services
over 300 hospitals during a six-year period, 1980-86. We related changes
the governance structures of hospitals to subsequent changes in the scop
services they provided. Changes in the health care environment, hosp
performance, and administrative structure were also incorporated into th
research design in order to examine explicitly the importance of governa
structure changes in the context of other critical causal forces. Our focu
the hospital sector reduces the risk of overgeneralization noted by Ginsb
(1988) and yet allows for examining the dynamics of strategic change in
industry that has experienced significant turbulence as a result of regulat
changes, increased competition, and pressure for more efficient performa
(Fennell & Alexander, 1989).
In the following section we elaborate the theoretical arguments that li
governance structure changes to strategic change. Because the relationshi
between ownership and board changes as determinants of strategic ch
has received little attention, we first develop these relationships. We the
incorporate the effect of CEO succession into the arguments, specific

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
308 Academy of Management Journal June

addressing its interaction with changes in ownership and the board of di-
rectors. We then apply these arguments to the hospital industry in order to
develop specific operational hypotheses.

THEORETICAL FRAMEWORK

Governance Structure as a Context for Strategic Change

Theorists have long argued that organizations can and do
important changes in their environment by initiating strate
(Child, 1972; Pfeffer & Salancik, 1978; Tushman & Romanelli, 1
in regulatory (Smith & Grimm, 1987) or technological environme
man & Anderson, 1986) motivate important strategic changes
tions. In addition to environmental changes, declines in perfo
also motivate changes in strategy (Schendel, Patton, & Riggs,
man, Virany, & Romanelli, 1989), particularly if changes in t
environment accompany changes in performance (Harrigan, 1
1982).
Although environmental and performance conditions may motivate
strategic change, there are also important external and internal barriers to
change. For example, industry barriers may preclude both a firm's entry into
new markets and its exit from current markets (Harrigan, 1981; Oster, 1982).
There are also important causal forces in organizations that increase resis-
tance to change and make adaptation problematic; those forces include
vested interests and political resistance (Hannan & Freeman, 1984; Pfeffer &
Salancik, 1978; Tushman & Romanelli, 1985).
One important internal source of political resistance may be the pre-
vailing distribution of power in an organization. Over time, individuals and
groups gain power through their ability to cope with important environmen-
tal contingencies (Crozier, 1964; Hickson, Hinings, Lee, Schneck, & Pen-
nings, 1971; Pfeffer & Salancik, 1978). The perpetuation of power, although
providing continuity and stability, also constrains the flexibility with which
an organization can respond to new environmental contingencies or changes
in performance. Those individuals or groups most likely to lose power and
resources resist changes in the existing distribution of power (Pfeffer &
Salancik, 1978). Stability in a firm's executive structure also increases insu-
lation, emphasis on cohesion, and commitments to previous courses of ac-
tion (Brady & Helmich, 1984; Meyer, 1975; Tushman & Romanelli, 1985).
What then allows organizations to overcome these constraints? Theo-
rists have argued that executive change, in particular change in a company's
CEO and top management team, provides an important mechanism for over-
coming inertia and political resistance (Pfeffer & Salancik, 1978; Tushman &
Keck, 1989; Tushman & Romanelli, 1985). The process of executive succes-
sion-particularly one in which an outsider becomes CEO-provides an
opportunity for existing power relationships to be altered and for new stra-
tegic perspectives to be introduced. Empirical research findings (Carlson,

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 309

1961; Helmich & Brown, 1972; Meyer, 1975; Tushman et al., 1989) in genera
have supported the significance of executive succession and top-
management-team changes in stimulating major organizational changes.
However, it is unlikely that chief executive change is the only factor that
might create conditions for strategic reassessment and change. Surprisingly,
very few studies (Carroll, 1984, and Boeker, 1989, are exceptions) have
looked beyond the CEO to consider how changes in the broader governance
structure of a firm, specifically its ownership and board of directors, affect
strategic change. Therefore, although there is some degree of knowledge
about how CEO succession affects strategic change, very little is known
about the independent effects of ownership and board changes on strategic
change.
This lack of attention may reflect a bias of organizational researchers
toward the assumption that ownership interests and a firm's board of direc-
tors have relatively little influence over the process of strategic change.
Decisions about altering products or services and changing market position
are seen as falling within the purview of the CEO and top management team
(Ginsberg, 1988). This is not an unreasonable assumption, but it may be a
limiting one. There are compelling reasons why the board of directors and
owners of a company might be likely to directly and indirectly influence
strategic decisions on products and services.
First, as Mizruchi (1983) noted, a company's board of directors is in a
position to establish the parameters within which strategic decision making
occurs. The board of directors is legally liable for strategic outcomes and
hence must evaluate strategic performance in light of shareholder interests.
Baysinger and Hoskisson (1990) posited two major vehicles for controlling
managerial performance with respect to strategic decisions: strategic con-
trols and financial controls. Strategic controls involve the evaluation of man-
agement performance on the basis of both the desirability of initial strategic
plans and the degree to which management has met strategic objectives.
Financial controls involve evaluation of the extent to which management
has met financial targets. Baysinger and Hoskisson further argued that the
choice of controls is likely to be based on the composition of a company's
board. Strategic controls require extensive knowledge of the internal strate-
gic decision-making process of a firm and hence are more likely to be im-
plemented when a significant number of board members are insiders. Fi-
nancial controls require more objective information for evaluating strategic
performance and hence are more likely to be used when outsiders predom-
inate. A board's composition and control emphasis will motivate manage-
ment to adopt specific strategies. For example, where outsiders dominate
and financial controls are emphasized, there will be an incentive to maxi-
mize short-term financial performance, through, for instance, high levels of
diversification.
Second, a board of directors may directly intervene in a company's
strategic planning and decision-making process. In numerous organizations,

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
310 Academy of Management Journal June

ownership interests or the board of directors may be actively involved in

issues of strategy and organization. Hospitals and voluntary organizations,
for example, have a relatively small management component. In essence, the
management team is the CEO and board of directors. In these organizations,
owners and boards of directors are likely to be as concerned with strategic
direction as with monitoring managerial performance (Fennell & Alexander,
1989).
Finally, there are critical periods, even in major corporations, when
boards of directors may assume a more direct role in strategic issues affecting
products of services. When an organization is young (Brady & Helmich,
1984; Schoonhoven, Eisenhardt, & Lyman, 1990) or encountering crises in
its evolution (Fennell & Alexander, 1989; Mizruchi, 1983; Zald, 1969), its
board of directors may play a particularly important and direct role in in-
fluencing strategic change. Boards of directors may also be directly involved
in major shifts in corporate strategy, such as those associated with strategic
reorientations (Tushman & Romanelli, 1985). At these important periods of
organizational evolution, changes in ownership, the composition of the
board of directors, or both may have a critical impact on the kinds of strategic
changes examined in this study. It is therefore critical to view the influence
of owners and boards of directors on strategic change as variable across
different organizational sectors and different stages of organizational growth
and decline.
Given the possibility of an important link between ownership intere
boards of directors, and strategic change, it is critical to outline the und
lying mechanisms through which changes in those groups may affect st
tegic change. Our central argument is that ownership and board changes
substantially alter the context within which strategic decisions are m
Following Tushman and Romanelli (1985), we argue that in organizat
social structures are created on the basis of patterns of interdepende
These social structures exist not only within top managements and throu
out organizations, but also among executives, owners, and boards of dire
tors. The "reciprocation of mutual favors among directors and execut
(Kosnik, 1987: 167) furthers the degree of interdependence and stab
within a company's governance structure. In turn, governance structure
bility promotes convergence on an established strategic orientation and r
sistance to change, even when environmental changes or performanc
clines occur (Pfeffer & Salancik, 1978; Tushman & Romanelli, 1985).
Therefore, as can CEO succession, changes in its ownership or board
directors can significantly alter an organization's social structure thr
two major mechanisms. First, changes in the composition and structure
ownership or board can overcome internal political resistance and dis
existing bases of power. Second, such changes can increase responsive
to environmental changes or performance conditions. New perspectives m
be introduced into the strategic decision-making process, thereby facilitat
an increased awareness of changing environmental and performance cond

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 311

tions. We discuss each process in greater depth, focusing on how it pertain

specifically to ownership and board changes.
Ownership Change
There are a number of ways in which changes in ownership can directl
affect a strategic decision-making context and hence, strategic change.
particular interest is the extent to which ownership changes lead to more
less concentration of control in the hands of management. Theorists ha
argued that managerial control insulates management (Berle & Means, 1932
it weakens "the linkage between environmental conditions and organiz
tional behavior, and is associated with increased executive tenure, increased
stability of the executive team, and idiosyncratic perceptions of enviro
mental opportunities and constraints" (Tushman & Romanelli, 1985: 21
When a company's ownership control is concentrated among its top ma
agers, they can act opportunistically (Williamson, 1975) and have little or n
accountability for their performance. For example, Salancik and Pfeff
(1980) found that in firms in which management ownership was compara-
tively high, CEOs were able to maintain their positions even when fir
performance was poor. Changes in ownership that reduce the degree o
control managers exercise will allow a company to consider a broader range
of strategic options, even options not necessarily in management's interest
(Salancik & Pfeffer, 1980).
A second consideration is changes in ownership involving fundamental
transfers of control, such as occur when one firm merges with or acquire
another firm. Although there has been relatively little empirical research
the implications of major changes in control, the existing work suggests tha
they have some important consequences. Carroll (1984) found that transfer
of control in newspaper organizations-particularly those involving a sh
from control by an owner-manager to a more corporate form of ownershi
increased failures. More recently, Walsh (1988) examined the consequen
of mergers and acquisitions on top management teams and found th
changes in ownership significantly increased top-management-team tur
over, particularly among high-level executives. Walsh did not directly
amine subsequent changes in strategy following ownership changes, but it
plausible that the top-management-team changes accompanying ownership
changes may have been an outcome of new strategic priorities that threat-
ened incumbent CEOs. In a study of semiconductor companies, Boeke
(1989) found some evidence that ownership changes resulting in a transfer o
control away from founders were more likely than other ownership chang
to be associated with fundamental changes in strategic orientation. Finally
Ginsberg and Buchholz (1990) found some anecdotal evidence suggestin
that in response to important changes in federal policies in 1983, som
health maintenance organizations were able to convert from nonprofit
for-profit status, alter their distribution of ownership through using em-
ployee stock options and other means, and facilitate important changes
organizational performance.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
312 Academy of Management Journal June

Although the above arguments suggest that changes in ownership struc-

tures affect the process of strategic change primarily through altering an
existing distribution of control, strategic change may also occur because
ownership changes allow the introduction of new perspectives into a stra-
tegic decision-making process. The longer ownership concentration and
control has been stable, the more likely it is that there will be convergence
among owners regarding norms, values, and decision-making procedures
(Tushman & Romanelli, 1985). Over time, owners may become insulated
from environmental and performance changes and fail to perceive and react
to critical environmental and organizational changes. Important changes in
ownership can disrupt this stability and increase owner vigilance with re-
spect to environmental change and organizational performance.
Directorial Change
Changes in a company's board of directors can also influence strategic
change independent of change in CEO. Of particular importance are changes
in board composition and structure that alter the mix of inside and outside
board members. Through its governance role, a board of directors safeguards
the interests of organizational stakeholders (Baysinger & Butler, 1985;
Williamson, 1975, 1985). A board is expected to exert control over important
organizational decisions, some of which may not be in management's inter-
est (Baysinger & Hoskisson, 1990; Fama & Jensen, 1983).
The composition of a board is a critical determinant of its ability to carry
out its governance responsibilities effectively (Baysinger & Butler, 1985;
Fama & Jensen, 1983; Williamson, 1975, 1985). Outside board members are
more likely than insiders to act in a manner representative of stockholder
interests (Fama & Jensen, 1983; Kosnik, 1987). The greater the representation
of management on the board, the greater the degree of managerial discretion
(Williamson, 1964, 1975) and the likelihood that executives will act oppor-
tunistically. With regard to strategic change, opportunism may imply that
managers will initiate strategic changes not necessarily in shareholders' in-
terests, such as unrelated diversification (Amihud & Lev, 1981), or pay
"greenmail" (Kosnik, 1987). In a greenmail transaction, a company repur-
chases stock from a dissident shareholder or group of shareholders who
threaten top management's position of control (Kosnik, 1987). Managerial
opportunism may also take the form of lack of strategic change, as when
managers persist in existing courses of action and strategic directions and,
for example, fail to divest themselves of unprofitable entities (Harrigan,
1983).
Changes in board composition, specifically, increases in outsider rep-
resentation, may motivate strategic changes as new actions initiated by the
board overcome managerial opportunism and persistence. CEOs clearly do
influence the selection of outside board members (Herman, 1981; Mace,
1971; Pfeffer, 1981), but boards of directors still hold final authority with
respect to major organizational and strategic changes like acquisitions and
replacement of the CEO. There is evidence that outsider-dominated boards

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 313

will initiate substantial changes, even if they are in conflict with the
ests of incumbent CEOs (Brady & Helmich, 1984; Kimberly & Zajac,
Mizruchi, 1983).
Like changes in insider-outsider composition, turnover on a boa
directors may affect the strategic change process. As Brady and He
noted, "The tendency of boards not to change at all is in itself a th
constructive change strategies" (1984: 88). Turnover on a board may lea
the incorporation of new interests and perspectives into the board'
sion-making process, which may reduce the risk of strategic myopia as
ated with excessive stability and homogeneity of perspectives (Hambric
Mason, 1984; Staw, 1980; Tushman & Romanelli, 1985).
The Interactive Effects of Governance Structure Changes on
Strategic Change

Having presented separate arguments that changes in ownershi

boards of directors have important independent effects on strategic ch
we now consider the interactive effects of those changes, especially
they occur in conjunction with CEO succession. As noted above, an
have tended to view the effects of CEO succession on strategic chan
isolation from other governance structure changes, creating a serious g
the literature. Given that a CEO's power is an important function of a
pany's existing ownership and board structure (Kimberly & Zajac,
Mizruchi, 1983; Salancik & Pfeffer, 1980), at a minimum organizational
searchers should be concerned with how board and ownership cha
might affect a new CEO's ability to either initiate or deter strategic ch
Concurrent changes in the governance structure of an organization can
nificantly alter the context within which a new CEO shapes and implem
strategic change.
Where ownership and board interests have been stable, it is likely t
relationships have formed and interests become vested in maintaining
tain patterns of organizational activities (Pfeffer & Salancik, 1978; Tush
& Romanelli, 1985). Even if a new CEO proposes strategic changes, they
be resisted if they are not consistent with the interests of other execu
owners, and board members. Persistence of ownership and board int
therefore represents a potential barrier to a CEO's effectiveness in init
strategic change.
For example, we noted above that insider control of a board of dire
may deter strategic change. Inside board members are likely to have a gr
vested interest than outside board members in maintaining existing pa
of organizational policies and structures: "History, precedent, and
spread commitments to the status quo are reinforced by those exec
whose career interests are best served by stability and incremental cha
(Tushman & Romanelli, 1985: 212). Therefore, within a board where ins
dominate, a new CEO may face resistance to organizational changes
disrupt the prevailing distribution of power. Changes in the compositi
the board that increase outsider representation may allow the new C

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
314 Academy of Management Journal June

overcome insiders' resistance and create greater latitude for the new CEO's
initiation of strategic change.
Ownership and board changes also increase a new CEO's latitude for
initiating change by supporting new perspectives on strategic change. Just as
a new CEO often enters an organization with a mandate for change (Brady &
Helmich, 1984), new owners and board members may also be predisposed to
initiate strategic changes. The new CEO may therefore be able to gain both
political and philosophical support for recommendations to initiate strategic
change.
Timing critically affects the potential impact of these joint changes. To
the extent that governance structure changes occur concurrently, or in the
same year, there is a greater opportunity for a cohort effect to arise among the
new members of that structure (McCain, O'Reilly, & Pfeffer, 1983; Wagner,
Pfeffer, & O'Reilly, 1984). As McCain and colleagues suggested, "Within co-
horts there exists the opportunity for the development of group solidarity
and sponsorship in the contest for resources and control" (1983: 623). Con-
current changes in owners, directors, or both may provide a new CEO with
important allies to support strategic change.

HYPOTHESES

Our hypotheses concern the hospital industry, which has ch

matically in the past ten years. In contrast to earlier periods, t
degree of competition and extreme pressure from public and p
ests to control costs characterize that environment (Fennell
1989). Those pressures intensified as a result of the implement
Medicare Prospective Payment System (PPS) in 1983, a change i
that established ceiling rates on specific medical procedures,
the burden of cost control to hospitals. Hospitals were previous
from poor performance, but these environmental changes exac
lematic hospital performance resulting from poor use of resou
ciencies and the high costs of providing hospital services.
These competitive and regulatory changes acted as importan
mental jolts (Meyer, 1982) and motivated hospitals to make imp
tegic changes in services, both through additions and divestitu
diversified and developed new lines of business (Shortell,
Hughes, Friedman, & Vitek, 1987). In addition, they consolid
services by divesting themselves of those they could no longer
itably or efficiently.
Despite the importance and pervasiveness of these service ch
tle is known regarding the role played by governance structur
determining their scope or magnitude. Hospital governance str
underwent significant changes during this period. As the envir
came more turbulent and uncertain, volatility in hospital mana
ership, and board structures increased.
As noted earlier, organizations may initiate strategic change

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 315

market position-both by adding new products and services and by wit

drawing from specific markets. Both actions are therefore important inde
pendent components of strategic change. It is also important to differenti
additions and divestitures since these independent types of changes may b
subject to different internal pressures. A series of studies on the dynamics
organizational change (Freeman, 1979; Freeman & Hannan, 1975; Hannan
Freeman, 1978) first pointed out that there are important differences in t
political dynamics underlying organizational expansion and contraction
Although expanding the domain of a hospital is likely to engender compar
atively little resistance, a decision to subtract services may generate confli
as specific interest groups attempt to consolidate and retain acquired
sources and control. Administrative interests may attempt to centralize co
trol and prevent changes that reduce their influence in an organization (H
nan & Freeman, 1978). Resistance to change may increase as groups perceiv
the threat of a potential loss of resources and power (Staw, Sandelands
Dutton, 1981).

Hospital Ownership
The hospital sector contains four primary types in terms of ownership
(1) government-owned and operated hospitals (e.g., state, district, an
county facilities); (2) hospitals owned and operated by religious denomin
tions, (3) private nonprofit hospitals, and (4) private for-profit hospita
Changes in hospital ownership involving shifts between these groups
extremely rare. Rather, ownership changes are more likely to occur a
function of other events. First, they may occur when hospitals merge. Ho
pital mergers have increased significantly over the past ten years (Nationa
Center for Health Services Research, 1988). Second, ownership changes may
occur as a result of acquisition by a multihospital system. Multihospit
systems, organizations that own or operate two or more hospitals (Nationa
Center for Health Services Research, 1988), have grown rapidly since t
mid 1970s and now control over 40 percent of the total hospital population
(National Center for Health Services Research, 1988). Third, ownership
changes may occur as ownership control is transferred from an individual
ownership group to a new owner, as might occur in a for-profit hospit
Finally, in for-profit hospitals the concentration of ownership can change
Following the arguments developed above, we posited that changes
ownership will affect changes in hospital services. Each ownership chan
can alter the strategic decision-making context in a hospital by shifti
power and control. This is particularly true when a fundamental ownershi
change-a transfer of control-occurs. For example, once a multihospit
system acquires a hospital, it may attempt to implement procedures, po
cies, and strategic changes consistent with the mission of the system as w
as the hospital. And the merging of hospitals may require a new strate
plan with new priorities for either one or both hospitals (Starkweather
Carman, 1988).

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
316 Academy of Management Journal June

Hypothesis 1: Changes in a hospital's ownership due to

fundamental transfers of control will increase the number
of service additions and divestitures the hospital ini-
tiates.

Hospital Boards of Directors

Although for the most part the governance role of corporate boards of
directors is fairly clear, the structure and role of hospitals' boards varies
depending on whether they have a corporate or a philanthropic structure
(Fennell & Alexander, 1989). Corporate hospital boards tend to be relatively
small, homogeneous with respect to their members' backgrounds, and ori-
ented toward strategic activity. Philanthropic boards are larger, more di-
verse, and oriented toward asset preservation.
As the health care environment has become more dynamic, hospitals
have been motivated to alter the composition and structure of their boards of
directors. In addition to their traditional function of linking facilities with
their external environments (Pfeffer, 1973), hospital boards have assumed a
strong role in rendering decisions affecting operations and strategic direc-
tions and have become more accountable for performance and operations
(Fennell & Alexander, 1989).
These fundamental changes in their role should increase turnover on
hospital boards as hospitals adapt to new environmental changes and per-
formance contingencies. Membership changes will increase the likelihood
that new perspectives will enter the strategic decision-making process.
Hypothesis 2: Turnover on a hospital's board of directors
will increase the number of service additions and dives-
titures the hospital initiates.
An important consideration is whether turnover leads to other changes
in the structure of a board, specifically in the representation of inside and
outside board members. For example, if five of nine board members leave
and insiders fill all the vacancies, turnover could lead to less strategic
change. It is therefore important to consider the extent to which changes in
composition due to turnover affect the underlying structure of a board. Im-
portant theoretical arguments support the importance of outside board mem-
bers as catalysts for strategic change. In the context of the hospital industry,
environmental changes have given hospitals a strong impetus to recruit stra-
tegically oriented outsiders, such as business executives.
Hypothesis 3: Increases in the proportion of outside board
members on its board will increase the number of service
additions and divestitures a hospital initiates.
Finally, the effects of changes in ownership and board composition will
be greatest when they interact with CEO succession.
Hypothesis 4: The interaction of changes in a hospital
ownership and a change of chief executive will increase

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 317

the number of service additions and divestitures the hos-

pital initiates.
Hypothesis 5: The interaction of changes in the composi-
tion of a hospital's board due to turnover and a change of
chief executive will increase the number of service addi-
tions and divestitures the hospital initiates.
Hypothesis 6: The interaction of changes in the structure
of a hospital's board due to an increase in outsiders and
a change of chief executive will increase the number of
service additions and divestitures the hospital initiates.
Finally, the changes in the health care sector noted above-notably, the
introduction of the prospective payment system-provide an importan
context for considering the effects of governance structure changes on hos
pital service additions and divestitures. We expected changes in compet
tion, governmental funding of health care, and variations in hospital perfo
mance associated with changes in hospital occupancy to exert direct effects
on strategic change in hospitals (Shortell et al., 1987).
Hypothesis 7: Increases in the degree of competition in its
market environment will increase the number of service
additions and divestitures a hospital initiates.
Hypothesis 8: The implementation of the Medicare Pro-
spective Payment System will increase the number of ser-
vice additions and divestitures a hospital initiates.
Hypothesis 9: Declines in hospital occupancy will in-
crease the number of service additions and divestitures a
hospital initiates.

RESEARCH DESIGN

Tests of our hypotheses were conducted in the period 198

hospitals in California. We obtained data from the California He
ties Commission's (CHFC) annual disclosure survey. The CHF
veyed all California hospitals since 1976 on such areas as ow
management, financial status, and service delivery. We directed
tion to hospitals in Standard Metropolitan Statistical Areas (SMS
to explore the issues discussed above in a market context (Fe
Although 398 SMSA hospitals were surveyed, it was necessar
inate 71 hospitals because data were incomplete. An investiga
hospitals indicated no systematic exclusion based on owners
size. We were also unable to use data from before 1980 as information on
boards of directors was not available.

Dependent Variables
As noted above, we adopted a definition of strategic change in this study
that is centrally concerned with changes in the breadth of products or ser-

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
318 Academy of Management Journal June

vices an organization offers. In order to determine the magnitude of those

changes, we assessed both the number of service additions and service di-
vestitures the hospitals studied initiated. The services examined varied
widely from direct, intensive ones such as providing acute care surgery to
ancillary ones such as providing a pharmacy. The CHFC survey included
data on the availability of 162 services.
Service additions were noted when a hospital indicated the availability
of a service not previously provided in the prior year. An addition could
occur either by the hospital directly providing the new service or by estab-
lishing a contractual relationship with another provider. For each year, we
determined the number of new services each hospital added and summed
them to create the dependent variable. In turn, a service divestiture was
noted when the survey indicated that a hospital no longer provided a service
either it or an external provider had previously offered. Once again, for each
year we developed a summary measure of the total service divestitures based
on the 162 services included in the CHFC survey.
It is important to note that our measures essentially treat each service
change equally. Instead, we could have attempted to determine the magni-
tude of service changes by determining the relative importance of services
for each hospital. It is possible that a given hospital's decision to add a single
service represents a highly significant change, but in terms of our measure,
this change would appear to be of less magnitude than another hospital's
addition of three comparatively minor services. Unfortunately, it is partic-
ularly difficult to determine the relative magnitudes of service changes. The
importance of a given service is a function of, among other things, a hospi-
tal's dependence on the service in terms of its revenue contribution, the
availability of the service through other hospitals or providers in a commu-
nity, the symbolic importance of the service to physicians in the hospital,
and the interdependence of the given service with other services.
This problem is, however, one that also applies to studies of corporate
strategic change involving diversification and divestiture activity. Typically,
researchers measure the extent of such activity using aggregate measures that
do not capture product-specific characteristics (e.g., Harrigan, 1983; Tush-
man & Keck, 1989). Despite the limitations of such broad measures, it seems
reasonable to assume that as the breadth of change-the number of product
or service changes initiated in a given year-increases, the overall strategic
change represented is likely to be more radical than incremental (Tushman
& Keck, 1989). It is with respect to such encompassing strategic changes that
the governance structure changes discussed above are particularly critical.
Independent Variables
We developed the following measures for each hospital to take into
account various changes in governance structure.
CEO change. CEO successions were coded for each year in the study.
Because we lacked data on the origins of new CEOs, we were not able to
distinguish between internal and external succession.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 319

Ownership change. We determined changes in ownership involving the

transfer of control from one individual, group, or organization to another
individual, group, or organization. Comparing the names of owners from
year to year allowed us to see if a change had occurred, but we were not ab
to determine the exact nature of each ownership change from the CHFC data
For example, if XYZ Inc. acquired a hospital, we knew that an ownersh
transfer had occurred, but we didn't know if XYZ Inc. was a sole proprietor
a group of physicians, or a large, integrated multihospital system.
Board composition changes. We computed the proportion of new mem-
bers on a board of directors as a result of turnover from one year to the next
Hospitals vary with regard to restrictions on board member service. Hospi-
tals adopting what Fennell and Alexander (1989) called a corporate board
structure, which features small size, relatively low diversity, and a strong
focus on strategic issues, tend to limit the number of consecutive terms a
board member may serve. In contrast, hospitals with a philanthropic board
structure (e.g., larger size, greater diversity, and a stronger focus on resourc
acquisition and environmental linkage) tend to have no limits on the numbe
of consecutive terms a board member may serve. Therefore, the turnov
measure may in part reflect changes due to the expiration of terms of service
As the initial distribution of this variable deviated significantly from
normal assumptions, we used a square root transformation to make the dis-
tribution conform more closely to conventional statistical assumptions.
Change in the proportion of inside members. We computed changes in
the proportion of management staff members on boards of directors from
year to year. To differentiate the effects of a change in that proportion fro
the actual level of management representation, we also included a measu
of the proportion of managers represented following a change on a board o
directors. For example, if in 1981 management representation increased
from 25 percent (in 1980) to 40 percent, we included both the change score
(+ 15%) and the current level (40%).
It was possible to determine whether changes in governance structure
occurred in a given year, but it was not possible to determine the order in
which they occurred. Thus, we could not test whether the sequence of gov-
ernance structure changes occurring one year was an important determinan
of the scope of strategic change in the next year.
Environmental changes and hospital performance. The study include
two measures of market competition in Standard Metropolitan Statistic
Areas (SMSA).
The first was change in hospital bed capacity. In general, excess capac-
ity in a market increases competition (Harrigan, 1983). Growth in bed c
pacity puts pressure on hospitals to use facilities and services efficiently
Although regulation of bed capacity in California might reduce the like
hood of excess, hospitals can use a multitude of exemptions to expand their
numbers of beds (Simpson, 1986).
The second measure, PPS implementation, was a dummy variable in

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
320 Academy of Management Journal June

cluded to capture the 1983-85 period. During this period, the Medicare
Prospective Payment System (PPS) was introduced and implemented.
Control Variables

Finally, we included number of variables to account for differe

among hospitals.
Total services. We included this measure to control for variations in the
ranges of services offered and to capture differences in hospitals' sizes. Be-
cause the correlation between total services and hospital beds was high (.72),
we decided to include just the service measure.
Hospital form. Hospitals were differentiated on the basis of their own-
ership structures, with for-profit, not-for-profit, religious, and government
ownership as categories. Prior studies (Shortell et al., 1987) have shown that
patterns of hospital service changes vary with control structure.
Data Analysis
The data were analyzed using a pooled time series and cross-sectiona
structure. To test the causality of our arguments explicitly, we used a lagge
structure (one time period) for the independent variables. We analyzed data
on a total of 327 hospitals over four waves in the study, examining service
changes in the periods 1981-82, 1982-83, 1983-84, and 1984-85. The
analyses therefore included a total of 1,308 observations. Each model was
estimated using a weighted generalized least-squares procedure developed
by Kmenta (1986) that corrects for autocorrelation and heteroscedasticity.
Four sets of analyses were conducted for both service additions and
service divestitures. In the first model, we examined the independent effects
of ownership and board changes on service changes. With the other models,
we tested the interactive effects of CEO changes and (1) ownership changes,
(2) turnover among directors, and (3) changes in outsider representation. In
each of these models, we took environmental and performance characteris-
tics into account.
Although we were primarily interested in the effects of CEO success
and other changes in governance structure, we explored possible interact
effects with ownership and board changes. There were no interactive eff
posited for either additions or divestitures. We also confined the analyse
two-way interaction effects in order to reduce the problem of multicoll
earity among the variables.

RESULTS

Table 1 shows the descriptive statistics for the dependent, ind

and control variables.
Tables 2 and 3 present the analytic results. The four models presented
in each table correspond to the major sets of hypotheses outlined earlier.
first discuss these results with respect to the hypotheses regarding gove
nance structure changes.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
 TABLE 1
Descriptive Statisticsa
Standard
Variables Means Deviations 1 2 3 4 5 6 7 8 9 10
1. Total service
additions 7.31 8.17
2. Total service
divestitures 8.38 6.45 .23*
Governance structure
3. CEO change 0.25 0.43 .06* .09*
4. Ownership change 0.07 0.26 .14* .08* .20*
5. Board composition
change 11.81 10.44 .08* .01 .09* .05*
6. Change in percent-
age of managers
on board 0.01 0.15 .01 .01 .06* .01 .16*
7. CEO x ownership 0.04 0.20 .14* .12* .36* .73* .01 -.01
8. CEO x board
composition 3.44 8.22 .05* .07* .71* .13* .45* .12* .23*
9. CEO x percent-
age of managers 0.01 0.10 -.03 -.01 .09* -.01 .10* .65* -.01
Environment and
performance
10. Change in SMSA
bed capacity -0.01 0.01 -.01 -.01 -.02 -.03 .02 -.02 .01 .01 -.02
11. PPS implementation 0.50 0.50 -.01 -.02 .07* -.04 .05* .02 .03 .09* .01 -.06
12. Change in
occupancy -1.75 12.16 .04 -.01 -.01 -.16* .05* .02 -.16* .03 -.02 .05*
Control variables
13. Percentage of
managers on
board 0.23 0.32 .09* .15* .05* .05* .14* .27* .07* .09* .20* -.0
14. Total services 79.34 25.39 -.16* -.07* -.06* -.10* .02 -.01 -.09* -.05 -.01 .
15. Religious ownership 0.05 0.22 -.06* -.03 -.02 -.04 -.01 .03 -.03 -.03 .04
16. Not-for-profit
ownership 0.43 0.49 -.01 -.14* -.12* -.07* -.01 -.06* -.08* -.10* -.05 -.
17. For-profit
ownership 0.37 0.48 .10* .19* .15* .13* .11* .06* .14* .16* .04* -.0
aN = 1,308.
* p < .05

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
322 Academy of Management Journal June

TABLE 2
Weighted Generalized-Least-Squares Estimates of the Effects o
Governance Structure Changes on Hospital Service Additionsa
Variables Model 1 Model 2 Model 3 Model 4

Constant 10.10 10.59 10.63 10.01

(0.70) (0.68) (0.70) (0.72)
Lagged service changes -0.14 -0.23 -0.13 -0.09
(0.15) (0.14) (0.16) (0.16)
Control variables
Percentage of managers on board 1.55* 1.81* 1.56* 1.60*
(0.56) (0.58) (0.58) (0.61)
Total services - 0.05* - 0.05* -0.05* - 0.05*
(0.01) (0.01) (0.01) (0.01)
Religious ownership -0.11 -0.51 -0.23 -0.23
(0.77) (0.74) (0.78) (0.79)
Not-for-profit ownership 2.19* 2.06* 2.13* 2.20*
(0.31) (0.28) (0.31) (0.32)
For-profit ownership 1.63* 1.58* 1.59* 1.51*
(0.38) (0.36) (0.38) (0.39)
Governance structure
CEO change 0.33* 0.11 0.11 0.24
(0.12) (0.12) (0.20) (0.13)
Ownership change 2.52* 0.89* 2.64* 2.50*
(0.22) (0.31) (0.23) (0.24)
Board composition change 0.03* 0.04* 0.03* 0.03*
(0.01) (0.01) (0.01) (0.01)
Change in percentage of
managers on board - 1.61* -2.02 -1.76* 0.03
(0.65) (0.68) (0.69) (0.82)
CEO x ownership
1.65*
(0.57)
CEO x board composition 0.01
(0.01)
CEO x percentage of managers -2.89*
(0.85)
Environment and performance
Change in SMSA bed capacity -0.56 -0.51 -0.34 -0.67
(3.97) (4.06) (4.08) (4.24)
PPS implementation 0.07 0.03 0.03 0.01
(0.09) (0.09) (0.10) (0.10)
Change in occupancy 0.02* 0.03* 0.02* 0.02*
(0.01) (0.01) (0.01) (0.01)
F 40.27* 32.63* 37.88* 36.60*

a Coefficients are unstan

p < .05

The first three hypotheses predicted that changes in hosp

board composition, and board structure would significan
scope of strategic change and service additions and divestitu
presented in model 1 provide partial support for these hyp
in ownership due to transfers of hospital control have a sig

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 323

TABLE 3
Weighted Generalized-Least-Squares Estimates of the Effects of
Governance Structure Changes on Hospital Service Divestituresa
Variables Model 1 Model 2 Model 3 Model 4

Constant 7.82 7.80 7.82 7.95

(1.12) (1.06) (1.12) (1.13)
Lagged service changes -0.22* -0.23* -0.22* -0.23*
(0.11) (0.10) (0.11) (0.11)
Control variables
Percentage of managers on board 2.08* 1.90* 2.09* 2.19*
(0.39) (0.38) (0.39) (0.40)
Total services -0.01* -0.01* -0.01 -0.01*
(0.01) (0.01) (0.01) (0.01)
Religious ownership -1.33* -1.36* -1.35* -1.41*
(0.49) (0.49) (0.49) (0.49)
Not-for-profit ownership -0.46 -0.57 -0.48 -0.46
(0.30) (0.29) (0.30) (0.30)
For-profit ownership 2.69 2.72* 2.69* 2.64*
(0.34) (0.32) (0.34) (0.34)
Governance structure
CEO change 0.60* 0.39* 0.57* 0.62*
(0.09) (0.09) (0.14) (0.10)
Ownership change 1.24* -0.05 1.24* 1.25*
(0.17) (0.21) (0.17) (0.16)
Board composition change 0.01 0.01 0.01 0.01
(0.01) (0.01) (0.01) (0.01)
Change in percentage of
managers on board - 0.42 -0.41 -0.43 - 0.23
(0.28) (0.25) (0.28) (0.36)
CEO x ownership 2.18*
(0.33)
CEO x board composition 0.01
(0.01)
CEO x percentage of managers -0.46
(0.68)
Environment and performance
Change in SMSA bed capacity -1.07 -2.54 -1.17 -1.18
(2.69) (2.33) (2.71) (2.71)
PPS implementation -0.23* -0.25* -0.24* -0.24*
(0.11) (0.10) (0.11) (0.11)
Change in occupancy 0.01 0.01 0.01 -0.01
(0.01) (0.01) (0.01) (0.01)
F 41.48* 36.65* 39.23* 39.05*

a Coefficients are unstan

p < .05

effect on service additions and divestitures. Changes in boar

due to turnover and increases in outsider representation on
significant, positive effect on service additions but not on dive
In addition to positing independent effects for each of thes
structure changes on hospital service additions and divestitures

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
324 Academy of Management Journal June

eses 4, 5, and 6 we predicted that there would be interactive effects between

CEO changes and ownership, board composition, and board structure. The
results in model 2 indicate that joint changes in CEO and ownership have a
significant, positive effect on service changes. Joint changes in board turn-
over and CEO do not appear to have an effect on service changes. Finally, the
results in model 4 suggest that joint changes in outsider representation and
CEO have a positive and significant effect on service additions but not on
divestitures.
The effects of environmental and performance changes were somewhat
mixed. Although changes in bed capacity had no effect on either additions
or divestitures (Hypothesis 7), regulatory change did influence strategic
change. The implementation of PPS (Hypothesis 8) significantly reduced
divestitures but did not have as strong an effect on additions. Declines in
hospital occupancy (Hypothesis 9), rather than motivating service additions,
had a significant, negative effect on additions. We found no relationship
between performance changes and service divestitures.

DISCUSSION

The major objective of this research was to explore an expan

of strategic change considering not only the effects of CEO suc
also the effects of changes in ownership and boards of director
diction was that changes in ownership and board independently
process of strategic change and create a context that moderates t
CEO succession. Researchers often view these elements in isolation, but
their interdependencies are critical in shaping the magnitude and direction
of strategic change.
This research indicated that the interaction of changes in ownership and
management have an important effect on strategic change. Concurrent
changes in hospital ownership and management were significant catalysts to
both service additions and divestitures. The ability of a hospital's new CEO
to initiate change, particularly with respect to expansion, also appeared to be
a function of changes in the structure of its board of directors. When an
increase in outsiders on a board accompanied chief executive change, there
was a significant expansion of hospital services.
These results provide support for viewing CEO leadership and discre-
tion as contingent variables that will vary across situational contexts and
specific outcomes (Gupta, 1988). A wide variety of environmental, organi-
zational, and individual characteristics (Gupta, 1988; Hambrick & Finkel-
stein, 1987) are likely to affect a CEO's influence on strategic change. Our
findings suggest that among the more important organizational variables
likely to influence the discretion of a new CEO are the structure and com-
position of an organization's ownership and board of directors and concur-
rent changes in those variables.
Joint changes in governance structures are important, but a compelling
additional insight of this study is that ownership and board changes can

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 325

directly influence strategic change independent of CEO succession. Change

in ownership associated with transfers of control had significant effects o
both service additions and divestitures. In addition, changes in board com-
position and structure also had independent effects on service additions.
These results provide strong support for incorporating ownership and
board changes into general models of strategic and organizational chan
(Pfeffer & Salancik, 1978; Tushman & Romanelli, 1985). In theory and
practice, organizational researchers have narrowly defined dominant orga-
nizational coalitions as primarily including CEOs and top managemen
teams. To the extent that researchers continue to focus solely on CEO a
top-management-team dynamics, they will continue to overlook important
alternative causal sources of strategic change.
In the case of the health care sector, researchers have traditional
viewed hospital boards as mechanisms for linkage to the external environ-
ment (Pfeffer, 1973). However, as the health care environment has become
increasingly competitive and dynamic, the role of hospital boards ha
shifted, and they have become much more directly involved in issues
strategic change (Fennell & Alexander, 1989). Changes in the structure and
composition of their boards have therefore assumed much greater signifi-
cance for hospitals' strategy.
Is it likely that the set of dynamics that influences the relationsh
between hospital boards and strategic change has similar influence wit
respect to corporate boards and strategic change? As noted earlier, there a
some important differences in the structures and functions of corporate an
hospital boards. A major difference is the locus of responsibility for initia
ing strategic change. Hospitals rely on their managements, physicians, and
directors to provide direction regarding strategic changes. But for most c
porate entities, the CEO and the top management team assume responsibili
for strategic changes like those discussed in this study. Therefore, it is re
sonable to expect that the kinds of relationships found in this study migh
not emerge in an examination of corporate boards and their influence
corporate strategic change.
The degree to which corporate boards influence strategic change m
depend on such factors as the age of an organization and whether it is in a
period of growth or decline. During such periods, the role and power o
corporate board may grow to cope with critical events. For example,
Schoonhoven and colleagues (1990) argued, board composition is particu
larly critical for recently founded high-technology companies. They argue
that having many outsiders on a board-particularly representatives of ven
ture capital firms-might influence the degree to which there is pressure t
develop products rapidly and get them to market. Therefore, although our
findings do not necessarily suggest a strict parallel between corporate a
health care organizations, they may point to a need to expand existing per
spectives on the dynamics of corporate board structure and compositi
with respect to strategic change.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
326 Academy of Management Journal June

The results of this study did not confirm earlier arguments in some
important ways. First, changes in the composition and structure of boards of
directors had no interactive or independent effects on service divestitures.
Paradoxically, this research suggests that the level of management represen-
tation on a board is a catalyst to strategic change: the greater the proportion
of insiders on a hospital board, the greater was the number of both service
additions and divestitures.
Differences between hospitals and corporations may be importan
explaining this pattern of findings. Although researchers have directed
theoretical attention to the negative implications of managerial control i
corporate context, in other contexts insider control may be less problem
For example, hospitals, and more broadly, in the not-for-profit sector, ha
a high proportion of insiders on a board-and hence a unified coalit
can help reduce the fragmented board decision making that is associ
with unclear ownership, a high level of constituency politics, and va
measures of success (Fennell & Alexander, 1989). In addition, manage
control may help overcome resistance to change on the part of powe
internal groups, such as physicians in hospitals.
Such a dynamic may be particularly important in highly professi
organizations like hospitals in which there is a fragmented "politic
economy" (Zald, 1970) and the existence of multiple sources of power
hamper decision making. Although physicians are likely to support a
tions of services and the adoption of technological innovations (Lee, 1
Warner, 1978), they may resist service divestitures. Unless management
exert an influence at the board level, hospitals may not make controvers
decisions such as those concerning service divestitures and may not be ab
to adapt effectively to environmental and performance contingencies.
A number of extensions of this research can be suggested. Expand
existing models of strategic change to incorporate ownership and board
terests should provide researchers with an opportunity to broaden curre
research on top-management-team demography (Hambrick & Mason,
Wagner et al., 1984). We found evidence that demographic changes
turnover in a governance structure and associated cohort effects-were im
portant antecedents to strategic change. These results support focusing o
the demography of broad governance teams and relating dimensions of t
demography, such as turnover, to specific outcomes like product-ser
innovation and diversification (Hambrick & Mason, 1984; O'Reilly & F
1989; Staw, 1980).
An additional extension of this study would be explicit examination o
the implications of variations in the timing of these critical govern
structure changes. Researchers are becoming increasingly concerned
the political context affecting major organizational outcomes such as
succession (cf. Fredrickson, Hambrick, & Baumrin, 1988) and broad organ
zational change (Tushman & Romanelli, 1985). The timing of governa
structure changes, which we could not precisely determine here, can hav

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
1991 Goodstein and Boeker 327

significant effect on the political dynamics of strategic change, particular

with respect to a new CEO's ability to develop a broad coalition to supp
change.
Changes in board composition following succession may allow a new
CEO to make strategic board replacements that can complement changes the
CEO makes in the top management team (Tushman et al., 1989) and create a
powerful context for initiating strategic change. In other situations, the ef-
fects of CEO succession will be greater following a governance structure
change such as transfer of ownership. New owners are likely to have an
active role in selecting a new CEO, and this high level of vested interest in
the new CEO may enhance the owner's commitment to subsequent recom-
mendations for change.
Finally, we noted above the strong effects of joint CEO and ownership
changes on strategic changes in hospitals. What was not clear, given our data
limitations, was whether types of ownership change are differentially likely
to lead to strategic change. It would be useful to extend this research design
to explore joint ownership and CEO changes in the context of the current
wave of takeovers and acquisitions in the corporate sector. A prevailing
rationale for takeovers and ownership changes is that they will allow orga-
nizational restructuring and presumably improve performance. Although
some research has examined firm performance following acquisition (cf.
Walsh, 1988), little effort has been directed toward understanding what, if
any, strategic changes are likely to be initiated after changes in ownership.
Our results clearly suggest that ownership transfers have important inde-
pendent and joint effects in motivating strategic change.
This research should provide a strong impetus for researchers to move
beyond existing models of strategic change to begin extensively exploring
the effects of governance structure changes on strategic change. As is evi-
dent, important issues remain to be addressed.

REFERENCES

Aldrich, H. A., & Pfeffer J. 1976. Environments of organizations. Annual Review of

2: 79-105.

Amihud, Y., & Lev, B. 1981. Risk reduction as a managerial motive for cong
Bell Journal of Economics, 12: 650-667.
Baysinger, B. D., & Butler, H. N. 1985. Corporate governance and the board of
mance effects of changes in board composition. Journal of Law and Ec
124.

Baysinger, B.D., & Hoskisson, R. E. 1990. The composition of boards of directors and stra
control: Effects on corporate strategy. Academy of Management Review, 15: 72-87.
Berle, A. A., Jr., & Means, G. C. 1932. The modern corporation and private property. N
York: Macmillan.

Boeker, W. B. 1989. Strategic change: The effects of founding and history. Academy of Ma
agement Journal, 32: 489-516.
Brady, G. F., & Helmich, D. L. 1984. Executive succession. Englewood Cliffs, NJ: Prentice-Ha

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
328 Academy of Management Journal June

Carlson, R. 0. 1961. Succession and performance among school superintendents. Administra-

tive Science Quarterly, 6: 210-227.
Carroll, G. R. 1984. Dynamics of publisher succession in newspaper organizations. Adminis-
trative Science Quarterly, 29: 93-113.
Child, J. 1972. Organization structure, environment and performance: The role of strategic
choice. Sociology, 6: 2-21.
Crozier, M. 1964. The bureaucratic phenomenon. Chicago: University of Chicago Press.
Fama, E. F., & Jensen, M. C. 1983. Separation of ownership and control. Journal of Law and
Economics, 26: 301-325.

Fennell, M. L. 1980. The effects of environmental characteristics on the structure of

clusters. Administrative Science Quarterly, 25: 485-510.
Fennell, M. L., & Alexander, J. A. 1989. Governing boards and profound organizational
in hospitals. Medical Care Review, 46: 157-189.
Fredrickson, J., Hambrick, D. C., & Baumrin, S. 1988. A model of CEO dismissal. Acad
Management Review, 13: 255-270.

Freeman, J. H. 1979. Going to the well: School district administrative intensity and environ-
mental constraint. Administrative Science Quarterly, 24: 119-133.
Freeman, J. H., & Hannan, M. T. 1975. Growth and decline processes in organizations. Amer-
ican Sociological Review, 40: 215-228.
Ginsberg, A. 1988. Measuring and modeling changes in strategy: Theoretical foundations and
empirical directions. Strategic Management Journal, 9: 559-575.
Ginsberg, A., & Buchholz A. 1990. Converting to for-profit status: Corporate responsiveness to
radical change. Academy of Management Journal, 33: 445-477.
Gupta, A. K. 1988. Contingency perspectives on strategic leadership: Current knowledge and
future research directions. In D. C. Hambrick (Ed.), The executive effect: Concepts and
methods for studying top managers: 141-179. Greenwich, CT: JAI Press.
Hambrick, D. C., & Finklestein, S. 1987. Managerial discretion: A bridge between polar views of
organizational outcomes. In L. L. Cummings & B. M. Staw (Eds.), Research in organiza-
tional behavior, vol. 9: 396-406. Greenwich, CT: JAI Press.
Hambrick, D. C., & Mason, P. A. 1984. Upper echelons: The organization as a reflection of its top
managers. Academy of Management Review, 9: 193-200.
Hannan, M. T., & Freeman, J. H. 1978. Internal politics of growth and decline. In M. Meyer &
Associates (Eds.), Environments and organizations: 175-199. San Francisco: Jossey-Bass.
Hannan, M. T., & Freeman, J. H. 1984. Structural inertia and organizational change. American
Sociological Review, 49: 149-164.
Harrigan, K. R. 1981. Deterrents to divestiture. Academy of Management Journal, 21: 306-
323.

Harrigan, K. R. 1983. Strategies for vertical integration. Lexington, MA: D. C. Heath & Co.
Helmich, D. L., & Brown, W. B. 1972. Successor type and organizational change in the corporat
enterprise. Administrative Science Quarterly, 17: 371-381.
Herman, E. S. 1981. Corporate control, corporate power. New York: Cambridge University
Press.

Hickson, D. J., Hinings, C. R., Lee, C. A., Schneck, R. H., & Pennings, J. M. 1971. A strategic
contingencies theory of intraorganizational power. Administrative Science Quarterly, 16:
216-229.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
 1991 Goodstein and Boeker 329

Kimberly, J. R., & Zajac, E. J. 1

(Ed.), The executive effect: C
Greenwich, CT: JAI Press.
Kmenta, J. 1986. Elements of
Kosnik, R. D. 1987. Greenmail:
istrative Science Quarterly,
Lee, M. L. 1971. A conspicuous
Journal, 38: 48-58.

McCain, B. E., O'Reilly, C. A., III, & Pfeffer, J. 1983. The effects of departmental demography on
turnover: The case of a university. Academy of Management Journal, 26: 626-641.
Mace, M. L. 1971. Directors: Myth and reality. Boston: Harvard University Press.
Meyer, A. 1982. Adapting to environmental jolts. Administrative Science Quarterly, 27: 515-
537.

Meyer, M. 1975. Leadership and organizational structure. American Journal of Sociolog

514-542.

Mizruchi, M. 1983. Who controls whom? An examination of the relation b

and boards of directors in large American corporations. Academy o
view, 8: 426-435.

National Center for Health Services Research. 1988. The role of market forces in the delivery
of health care: Issues for research. Rockville, MD: U.S. Department of Health and Human
Services.

O'Reilly, C. A., III, & Flatt, S. 1987. Executive team demography, organizational innovat
and firm performance. Working paper, School of Business Administration, University
California, Berkeley.
Oster, S. 1982. Intraindustrial structure and the ease of strategic change. Review of Econom
and Statistics, 64: 376-383.

Pfeffer, J. 1973. Size, composition and function of hospital boards of directors: A study of
organization-environment linkage. Administrative Science Quarterly, 18: 349-364.
Pfeffer, J. 1981. Power in organizations. Boston: Pitman.
Pfeffer, J., & Salancik, G. R. 1978. The external control of organizations. New York: Harper &
Row.

Salancik, G. R., & Pfeffer, J. 1980. Effects of ownership and performance on executive tenure in
U.S. corporations. Academy of Management Journal, 23: 653-664.
Schendel, D. E., Patton, G. R., & Riggs, J. 1976. Corporate turnaround strategies: A study of profit
decline and recovery. Journal of General Management, 3: 3-11.
Schoonhoven, C. B., Eisenhardt, K. M., & Lyman, K. 1990. Speeding products to market: The
impact of organizational and environmental conditions on waiting time to first product
introduction in new firms. Administrative Science Quarterly, 35: 177-207.
Shortell, S. M., Morrison, E. M., Hughes, S. L., Friedman, B. S., & Vitek, J. L. 1987. Diversifica-
tion of health care services: The effects of ownership, environment, and strategy. In R.
Schefler (Ed.), Advances in health economics andhealth services: 76-94. Greenwich, CT:
JAI Press.

Simpson, J. B. 1986. Full circle: The return of certificate of need regulation of health facil-
ities to state control. Technical report, Western Consortium for the Health Professionals,
Inc., San Francisco.

Smith, K. G., & Grimm, C. M. 1987. Environmental variation, strategic change and firm perfor-
mance: A study of railroad deregulation. Strategic Management Journal, 8: 363-376.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms
330 Academy of Management Journal June

Starkweather, D. B., & Carman, J. M. 1988. The limits of power in hospital markets. Medical
Care Review, 45: 5-48.

Staw, B. M. 1980. The consequences of turnover. Journal of Occupational Behavior, 1: 253

273.

Staw, B. M., Sandelands, L. E., & Dutton, J. E. 1981. Threat rigidity effects in organizat
behavior: A multilevel analysis. Administrative Science Quarterly, 26: 501-524.
Tushman, M. L., & Anderson, P. 1986. Technological discontinuities and organizational
ronments. Administrative Science Quarterly, 31: 439-465.
Tushman, M. L., & Keck, S. 1989. Environmental and organization context and execu
team characteristics: An organization learning approach. Working paper, Gradu
School of Business, Columbia University, New York.
Tushman, M. L., & Romanelli, E. 1985. Organizational evolution: A metamorphosis mod
convergence and reorientation. In L. L. Cummings & B. M. Staw (Eds.), Research in o
nizational behavior, vol. 7: 171-222. Greenwich, CT: JAI Press.
Tushman, M. L., Virany, B., & Romanelli, E. 1989. A longitudinal study on the determinant
executive succession. Working paper, Graduate School of Business, Columbia Univers
New York.

Wagner, W. G., Pfeffer, J., & O'Reilly, C. A., III. 1984. Organizational demography and turnov
in top-management groups. Administrative Science Quarterly, 29: 74-92.
Walsh, J. P. 1988. Top management turnover following mergers and acquisitions. Strateg
Management Journal, 9: 173-184.
Warner, K. 1978. Effects of hospital cost containment on the development and use of medi
technology. Millibank Memorial Fund Quarterly, 56: 187-211.
Williamson, O. E. 1964. The economics of discretionary behavior: Managerial objectives
a theory of the firm. Englewood Cliffs, NJ: Prentice-Hall.
Williamson, O. E. 1975. Markets and hierarchies: Analysis and antitrust implications. N
York: Free Press.

Williamson, O. E. 1985. The economic institutions of capitalism: Firms, markets, and rel
tional contracting. New York: Macmillan.
Zald, M. N. 1969. The power and function of boards of directors: A theoretical synthe
American Journal of Sociology, 75: 97-111.
Zald, M. N. 1970. Political economy: A framework for analysis. In M. N. Zald (Ed.), Power
organizations: 221-262. Nashville: Vanderbilt University Press.

Jerry Goodstein earned his Ph.D. degree at the University of California, Berkeley. He is
an assistant professor of management at Washington State University, Vancouver. He is
currently examining the relationship between the demography of governance structures
and organizational/strategic change.
Warren Boeker earned his Ph.D. degree at the University of California, Berkeley. He is
an assistant professor of management at the Graduate School of Business, Columbia
University. His current research interests include strategic management, organization
theory, entrepreneurship, and organizational ecology.

This content downloaded from

37.203.152.178 on Sun, 05 Nov 2023 15:15:59 +00:00
All use subject to https://about.jstor.org/terms