Journal of World Business 38 (2003) 385–396

Corporate governance and firm performance in Russia:

an empirical study$
William Q. Judgea,*, Irina Naoumovab,1, Nadejda Koutzevolc,2
a
College of Business Administration, 411 Stokely Management Center,
University of Tennessee, Knoxville, TN 37996-0545, USA
b
College of Business Administration, 408 Stokley Management Center,
University of Tennessee, Knoxville, TN 37996-0545, USA
c
Department of Management, Kazan State University, Kremlevskaya 18, Kazan 420008, Russia

Abstract

Using the agency and institutional perspectives, this study advances several hypotheses about the board structure–firm
performance relationship within Russia. We tested these hypotheses using survey data. Despite a relatively small sample size,
predictions from both theoretical perspectives were supported. Specifically, we found a negative relationship between
‘‘informal’’ CEO duality and firm performance. This finding is noteworthy given the 1996 Russian Federal law which prohibits
the CEO from also serving as board chair. Also, we found that the more vigorously the firm pursues a retrenchment strategy, the
more negative the relationship between proportion of inside directors and firm performance. Overall, these findings suggest that
effective corporate governance may be essential to firm performance in Russia.
# 2003 Elsevier Inc. All rights reserved.

Keywords: Russia; Firm performance; CEO duality; Board composition; Retrenchment

1. Introduction One of the ways that governance is judged to be

Effective governance is critical to all economic
transactions, especially in emerging and transitioning
economies (Dharwadkar, George, & Brandes, 2000).
$
An earlier version of this paper was presented at the
Gorbachev Foundation Conference on Corporate Governance in
Transition Economies held at Northeastern University in Boston,
Massachusetts in April, 2003.
*
Corresponding author. Tel.: þ1-865-974-1668;
fax: þ1-865-974-3163.
E-mail addresses: judge@utk.edu (W.Q. Judge),
nvi2000@mail.ru (I. Naoumova),
nadezhda_k@inbox.ru (N. Koutzevol).
1
Tel.: þ1-865-974-3161; fax: þ1-865-974-3163.
2
Tel.: þ7-8432-315-507; fax: þ7-8432-364-304.
effective is through the systemic collection of data
by the government and the publication of this data for
outside sources to review and analyze. Unfortunately,
in transitioning economies, much of this data are
not collected or published, and what data that are
published are not reliable or valid.
To address this void, we collected and analyzed
primary data within a globally important transition
economy—Russia. Specifically, we administered sur-
veys to Russian managers located in the industrial
heartland of Russia in December, 2002. While these
data were not subjected to psychometric rigor, these
data do provide a glimpse into the perceptions of mid-
to high-level managers who are ‘‘in the trenches’’ and
have little to gain or lose from sharing their current

1090-9516/$ – see front matter # 2003 Elsevier Inc. All rights reserved.
doi:10.1016/j.jwb.2003.08.023
386 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
understanding of their board’s governance structure
and overall firm performance.
2. Theoretical development
2.1. Theoretical perspectives
There is a long and developed research tradition that
examines the relationship between boards of directors’
composition (i.e., proportion of insider directors) and
leadership (i.e., CEO/chairperson roles held jointly or
separately) with firm performance within Anglo-
American firms. The notion here comes from the
agency perspective which is concerned that the inter-
ests of owners and managers may not coincide (Jensen
& Meckling, 1976).
The agency perspective asserts that the delegation
of managerial responsibilities by principals (owners)
to agents (managers) requires the presence of mechan-
isms that either align the interests of principals and
agents or monitors the performance of managers to
insure that they use their delegated power to generate
the highest possible returns for the principals. Stated
another way, the owners of the firm bear residual risk
efficiently, but only to the extent that their collective
interests are safeguarded by effective governance
mechanisms (Baysinger & Hoskinson, 1990). It has
been argued that weak governance and limited protec-
tion of minority shareholders intensify the traditional
principal–agent problems in transitioning economies
(Dharwadkar & associates, 2000).
Despite the fact that the agency perspective is
central to research on the board structure–firm per-
formance relationship in developed economies, it has
been criticized extensively for being incomplete and/
or unrealistic (Band, 1992; Cannella & Monroe,
1997). Nonetheless, theories on the problems asso-
ciated with the separation of ownership and control are
central to transition economies. Indeed, recent
research suggests that there is not only a principal–
agent problem in transition economies, but also prin-
cipal–principal (i.e., majority–minority shareholder)
problems (Young, Peng, Ahlstrom, & Bruton, 2002).
Since the board of directors is a primary mechanism
within the corporate governance literature and agency
theory is a prevailing theory, we will cautiously build
upon that literature in this study.
To strengthen our theoretical argument, however,
we also employ insights from the institutional per-
spective (North, 1990). Recent research suggests that
the institutional perspective holds great promise for
describing and explaining what happens in transition
economies because these economies by definition are
trying to shed their former institutions and replace
them with new ones (Peng, 2003).
Although the institutional perspective is relatively
untested in the area of corporate governance research,
it has shown great promise in the study of other key
organizational processes within transition economies.
For example, Peng (2003) revealed how ‘‘deinstitu-
tionalization’’ in transition economies fundamentally
impacts strategic choices at the firm level. Relatedly,
Newman (2000) argued that extremely high and low
levels of institutional change thwart organizational
change within transition economies. Hoskisson, Eden,
Lau, and Wright (2000) argued that institutional the-
ory is particularly relevant for understanding strategy
formation in transition economies. Therefore, this
study will employ the logic and insights from both
the agency and the institutional perspectives to better
understand the board structure–firm performance rela-
tionship as it exists today in transition economies.
2.2. Research context: Russia
Russia is one of the largest, most complex, and
dynamic of the transition economies (Litwak &
Sutherland, 2002). Furthermore, economic develop-
ment varies considerably from region to region with
Moscow the most advanced (and the most federal
government intervention) and the rest of the country
less advanced but quickly catching up. Finally, there is
considerable variation in corporate governance prac-
tices in Russia (Black, 2001) and there are many
lessons to be learned from Russia’s ‘‘governance
fiascoes’’ (Fox & Heller, 2000). Thus, Russia was
chosen as the research focus for this empirical study
which seeks to better understand the relationship
between corporate governance and firm performance
within transition economies.
2.3. Board leadership and firm performance
One key monitoring mechanism advocated by the
agency perspective is the separation of the roles of
 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
CEO from chairperson. When there is no separation,
the CEO also serves as chairperson. This situation,
known as ‘‘CEO duality,’’ is problematic from an
agency perspective where the CEO chairs the group
of people in charge of monitoring and evaluating the
CEO’s performance.
Most of the empirical studies of this relationship
between CEO duality and firm performance have
focused on large corporations within America. Dalton,
Daily, Ellstrand, and Johnson (1998) performed a
meta-analysis of 69 samples (containing data on
12,915 organizations) that examined board leadership
structure and its relationship with firm performance.
They found no systematic relationship between these
two constructs, even after exploring moderator ana-
lyses exploring the impact of firm size and the nature
of the financial performance indicator (e.g., account-
ing versus market-based measures).
In a more recent and separate study, Rhoades,
Rechner, and Sundaramurthy (2001) performed a
meta-analysis of 22 samples (containing data on
5,751 companies) and found a weak, but significant
relationship between board leadership structure and
firm performance. In sum, even the meta-analyses are
equivocal on the relationship between board leader-
ship and firm performance within American firms.
Nonetheless, there have been some limited empiri-
cal studies of non-American boards suggesting that
these boards are structured and function quite differ-
ently from their American counterparts. For example,
Dalton and Kesner (1987) found that CEO duality is
most common in the fifty largest firms in the USA
(82%); it is less common in the fifty largest firms in the
UK (30%), and least common in the largest Japanese
firms (11%).
Demb and Neubauer (1992) argue that two-tier
boards prevalent in Western European nations are
theoretically more independent than Anglo-American
one-tier boards. However, Massan and Van den Bosch
(1999) report in their study of 50 large Dutch firms,
that Dutch directors by-pass formal structures by
means of informal and semi-formal arrangements
to avoid true board independence from execu-
tive directors. An institutional perspective suggests
that the board leadership structure outside of the
USA might be more varied and, hence, may have a
different relationship with firm performance. This
perspective also suggests that informal behind the
387
scenes, boardroom dealings are more important than
formal structural arrangements.
This phenomena is particularly true for transition
economies experimenting with Western forms of gov-
ernance and market mechanisms. We simply do not
know what the power of the CEO is to control the board
in transition economies; nor do we know what the
relationship between board leadership structure and
firm performance is. However, North (1990) argued
that when formal institutions are in flux, informal
norms dominate personal and organizational behavior.
It is logical to assume that given the enormous
complexity of the changes in Russia and the need
to separate ownership from control, ‘‘two heads may
be better than one’’ from an agency perspective needs
to be tested. From the institutional perspective, it is
reasonable to predict that informal norms will take
precedence over formal structures. Anecdotal evi-
dence, agency theory, and institutional theory suggest
that when the CEO also ‘‘informally’’ controls the
board for firms in transition economies, firm perfor-
mance will likely suffer. As discussed previously, even
when the CEO and chairperson roles are formally
separated, the CEO sometimes still controls the board
through informal means, what we refer to as ‘‘informal
CEO duality.’’ This suggests the following hypothesis:
Hypothesis 1: Informal CEO duality will be nega-
tively related to firm performance within the Russian
economy.
2.4. Board composition and firm performance
A second common monitoring mechanism advo-
cated by the agency perspective is a board composed
of a majority of independent directors. These non-
executive or ‘‘outside’’ directors are believed to provide
superior benefits to the firm as a result of their inde-
pendence from firm management. Under this organiza-
tional design, conflicts of interest can be avoided and
executive leaders can be evaluated more objectively.
In their recent meta-analysis of the relationship
between board composition and firm performance,
Dalton and associates (1998) reviewed 54 empirical
studies (159 samples, n ¼ 40,160). Once again, they
found no systematic relationship between these two
constructs studied within large American firms. More
recently, Rhoades and associates (2001) examined 59
388 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
published and unpublished empirical studies (37 sam-
ples, n ¼ 7,644). They found a small, but significant
negative relationship between proportion of insiders
on the board and firm performance. More specifically,
board composition explained less than 1% of the
variance in firm performance in large American firms.
Nonetheless, firms outside of the USA are com-
posed of different individuals and have different
institutional expectations than American boards,
and this institutional context may lead to a different
relationship with firm performance. For example, in
their study of the fifty largest firms in USA, UK, and
Japan, Dalton and Kesner (1987) found that the
proportion of insiders of boards varied significantly
between these three countries (30%, 34%, and 49%,
respectively). The institutional context and make-up
of corporate boards vary considerably around the
world.
Regardless of board composition, non-executive
directors may or may not function independently of
executive management in non-US companies. For
example, Clifford and Evans (1997) found that even
though Australian boards are composed of a majority
of non-executive directors, 35% of those non-execu-
tive directors were involved with financial transactions
which potentially threaten their independence. They
conclude that a combination of insider and affiliated
outside directors would constitute a majority of board
members in almost all Australian firms.
Within developing and transition countries, board
composition and functioning is particularly important
for bringing in badly needed foreign direct investment
and managing scarce domestic investment wisely and
efficiently (Rueda-Sabater, 2000). For example, Mal-
lin and Jelic (2000) report that Hungary has pushed the
farthest and fastest in corporate restructuring and
adoption of internationally applauded corporate board
structures as compared to Poland and the Czech
Republic, but all three countries are struggling to
resurrect their banking systems admidst a plethora
of non-performing loans.
Gillies, Leimann, and Peterson (2002) hold up
Estonia as a relatively successful transition economy,
and they point to a relatively corruption-free corporate
governance system for overseeing that process. In the
well performing Hungarian oil company known as
MOL, seven of the eleven board members are non-
executive directors. However, little is known just how
much the board actually contributes to or hinders
MOL’s performance (Corporate Governance, 1998).
In sum, agency theory predicts that an inherent
conflict of interest is present when insiders dominate
the board’s composition and as a result, firm perfor-
mance is likely to suffer. Furthermore, from an insti-
tutional perspective, insider directors are more likely
than outside directors to resist change due to institu-
tional inertia. This suggests the following hypothesis:
Hypothesis 2: The board’s proportion of inside direc-
tors will be negatively related to firm performance
within the Russian economy.
2.5. Moderating influence of strategic decision
context
In their meta-analysis of board leadership structure
and firm performance, Rhoades, Rechner and Saun-
daramurthy (2000) argued that decision context was a
clear moderator of the board structure–firm perfor-
mance relationship. Specifically, they found that the
relationship between board leadership structure and
firm performance was different when certain compen-
sation arrangements and anti-takeover situations were
considered. They encourage future researchers to
examine the contingent nature of these relationships
in other situations, such as restructuring situations
versus growth situations.
This study refines and extends previous research by
examining the contingent impact of the strategic deci-
sion context on board structure and firm performance.
One way to characterize strategic decision context is by
considering the firm’s grand strategy. Grand strategy
denotes an overall strategy for achieving a firm’s major
goals. The focus is on the entire firm’s goals rather than
those of a single division or unit (Glueck, 1980). The
four types of grand strategy are (1) stability, (2) internal
growth, (3) external acquisitive growth, and (4)
retrenchment. Several previous studies have found that
grand strategy moderates the relationship between
distinctive competencies and firm performance (e.g.,
Hitt & Ireland, 1985; Hitt, Ireland, & Stadter, 1982) as
well as prior performance and enterprise strategy scope
(e.g., Judge & Krishnan, 1994).
Of the four grand strategies, the retrenchment strat-
egy is the one that is most relevant to proper board
functioning within transition economies. Because
 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
these economies are quickly trying to restructure
existing organizations to become globally competi-
tive, many institutional practices that were common-
place in a centralized economy must be eliminated or
revised (Hoskisson and associates, 2000; Peng, 2003).
Furthermore, previous research in Western organiza-
tions has shown that the when a firm is retrenching,
firm performance is usually declining and firm survi-
val is often in question. Retrenchment is typically
achieved through cost or asset reductions, or both, and
these actions really test the officers and directors of the
firm (Robbins & Pearce, 1992).
More specifically, as organizations restructure or
retrench, they often experience dysfunctional beha-
vior. For example, Cameron, Whetton, and Kim
(1987) found that organizational decision making
often becomes more centralized, and as a result, turf
protection and competitive behavior within the orga-
nization all increases. In addition, retrenchment often
causes individuals to respond to the threat of down-
sizing through more rigid behavior and restriction of
information flow (Sutton & D’Aunno, 1989). Typi-
cally, retrenchment leads to the disempowering and
downsizing of middle management and frontline
workers (Krau, 1995). Most pertinent to this study,
the final arbiter of successful retrenchment decisions
is the board of directors (Johnson, Hoskisson, & Hitt,
1993).
Once again, not much is known about how the
retrenchment strategy is addressed by boards in transi-
tion economies. Using the agency and strategic change
perspectives, Filototchev, Buck, and Zhukov (2002)
found that outside shareholding failed to effectively
counterbalance managerial opportunism when faced
with retrenchment situations. Furthermore, manage-
ment ownership was negatively related to extent of
retrenchment, counter to the agency perspective but
consistent with the institutional perspective.
Anecdotal evidence suggests that organizational
dysfunction is as prevalent in retrenching firms within
transition economies as it is in developed economies.
Crow (1998) indicated that substantial retrenchment
activity was only pursued by the Russian oil industry
when faced with the shock of the 1998 Asian financial
crisis and that this activity was producing mixed
results. Furthermore, Horvath and Zsamboki (2000)
reported that when Hungarian banks started to
retrench due to foreign competition, they have tended
389
to avoid the painful cost reductions that are necessary
to be globally competitive.
In light of the communist legacy where the top
leaders were often unchallenged in their directives and
frequently self-serving in their motives, we expect that
firms pursuing the retrenchment strategy within Rus-
sian firms to operate similarly. Indeed, numerous
examples of governance dysfunction have been docu-
mented in Russian enterprises (e.g., Fox & Heller,
2000). Furthermore, the more aggressively the firm
retrenches without outsider checks and balances, the
less likely that the retrenchment activity will lead
to superior firm performance (e.g., Black, 2001).
This combined theory and research suggest the fol-
lowing moderated relationships within retrenchment
situations:
Hypothesis 3: The greater the emphasis placed on
retrenchment, informal CEO duality will be more
negatively related to firm performance in the Russian
economy.
Hypothesis 4: The greater the emphasis placed on
retrenchment, the proportion of inside directors will be
more negatively related to firm performance in the
Russian economy.
3. Methodology
3.1. Research design
In December, 2002, surveys were personally dis-
tributed to 116 Russian managers from the three
centrally located industrial regions of Russia (e.g.,
Tartarstan, Bashkortostan and Moscow regions). This
was a convenience sample of Russian managers inter-
ested in or already attending the Federal Program of
Retraining Managers (FPRM). FPRM was launched in
1997 by Presidential decree during the Yeltsin admin-
istration. Its aim was to increase the quality of man-
agement expertise throughout Russia to help its
competitiveness in the global economy. Its network
consists of the Secretariat in Moscow and 80 Regional
commissions and it is supported by a consortium of 16
foreign nations. The program is open, competitive,
and free of charge for managers. The State pays for all
academic costs, and local governments and sponsoring
390 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396

firms cover the student’s costs. The program is adver-
tised through a website (www.informika.ru), as well as
newspaper and television advertising.
The primary criteria for selecting managers to
participate in FPRM are (1) current involvement with
a viable business, (2) within the age range of 25–40
years old, (3) language proficiency in one of the 16
affiliated nations as demonstrated by a written exam-
ination, and (4) openness to new ideas as demonstrated
by responses to a psychological instrument coupled
with an interview by a panel of psychologists.
Over the past four years, 19,000 trainees graduated
from courses in management, marketing and finance at
Russian educational and training institutions. In addi-
tion, more than 5,800 managers have completed man-
agement internships in 15 foreign countries. Notably,
new private companies have been created by 8.2% of
the graduates, and 65% of the companies that sent
executives to these training courses report enhanced
economic performance. So while this is a convenience
sample that is not randomly selected, it does capture
essential management perspectives from diverse
industries and geographic locations within Russia.
Completed surveys were collected from respon-
dents from 113 firms yielding an effective response
rate of 98%. As can be seen from Table 1, complete
data was collected from 45 of those firms because we
required the respondents to have first-hand knowledge
of their boardroom dynamics in order to complete the
survey. For this sub-sample, the average respondent
was 30.7 years old and had been working for their
current firm for 6.2 years. The government had an
ownership stake in only 10 of the 45 firms (22%)
studied. Furthermore, the average firm age was 27.8,
but firms ranged in age from 5 to 103 years old.
Regarding board structure and functioning, the
average board size was 9.6 members and the average
proportion of inside directors was 51%. Notably,
respondents indicated that in 16% of the firms, the
CEO functioned as the board chairman, even though
these two positions have been separated by Federal
law enacted by the Duma on January 1, 1996.
3.2. Variables and measures
3.2.1. Dependent variable
To obtain a robust measure of our dependent vari-
able (i.e., firm performance), retrospective data were
collected from the respondents on eight items. These
items were obtained from (Dess & Robinson, 1984)
and they ranged along five-point Likert scales ranging
from ‘‘performs much worse than the competition’’ to
‘‘performs much better than the competition.’’ The
precise eight items used in this study are listed in the
Appendix. Because these measures were highly inter-
correlated, we factor analyzed them and they all

Table 1
Descriptive statistics of the Russian managers and their organizations (N ¼ 45)

Demographic variable Mean Standard deviation Low value High value

Manager characteristics:
Manager’s age 30.7 2.2 27 35
Manager’s organizational tenure 6.2 2.8 1 11
Board characteristics:
Board size 9.6 4.2 5 17
Proportion of insiders (%) 50.7 28.0 6 100
Informal CEO duality (%) 16 36.7 0 100
Organizational characteristics:
Organizational size (emps.) 13,492.2 18,550.7 250 55,000
Organizational age (years) 27.8 18.8 5 103
Governmental ownership (%) 22 42 0 100
Strategies:
Maintain strategy (%) 43.3 17.9 5 90
Internal growth strategy (%) 23.7 11.1 5 60
External growth strategy (%) 15.2 10.7 0 50
Retrenchment strategy (%) 17.8 10.0 0 40
 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
Table 2
Factor analysis of firm performance (N ¼ 45)
Variables Factor loading Cum eigenvalue
Financial profitability 0.424 47.37
Growth in size/assets 0.587 65.06
Customer satisfaction 0.784 76.15
Product/service quality 0.757 83.89
Capacity utilization 0.777 90.16
Process improvements 0.843 94.75
Employment stability 0.786 98.10
Employee training 0.384 100.00
loaded positively on a single factor. As can be seen in
Table 2, the factor loadings for these items ranged
from a low of 0.38 to a high of 0.84. Consequently, we
computed relatively robust factor scores representing
firm performance for each of the organizations in our
study. The Cronbach alpha for this factor was 0.83,
which indicates more than acceptable reliability.
3.2.2. Independent variables
In 1996, Russian Federal law required all Russian
firms to separate the roles of CEO and board chair.
Thus, the ‘‘formal’’ CEO duality measure for each and
every Russian firm since that time is that the Chair-
person’s position is occupied by a separate person in
all cases, and that this person is supposed to function
independent of the CEO. However, many Russian
firms have responded formally to this legal require-
ment, but not all firms operate with an independent
board chair. Hence, the ‘‘informal’’ CEO duality
varies from firm to firm.
As a result, we asked respondents to indicate if the
board chair functioned independently of the CEO or
not in our survey in recent board deliberations. When
they did function independently, the duality measure
was recorded as a ‘‘0.’’ When the two individuals did
not function independent of each other and the CEO
effectively controlled the board, then the duality mea-
sure was coded as a ‘‘1.’’ With this approach, we
captured the essence of the agency argument even
though it may not reflect the formal legal situation.
The ‘‘insider proportion’’ measure was also col-
lected from our Russian respondents in the survey who
were familiar with their board structure and function-
ing. We asked them to provide the size of the board of
directors, and to inform us as to the number of insider
or executive directors also serving on the board. This
391
measure was computed by dividing the number of
inside directors by the total number of board members,
similar to the majority of previous studies on board
structure (Dalton & associates, 2000).
The ‘‘grand strategy’’ variable asks respondents to
characterize the strategic emphasis within the firm in
our 2002 survey. Following Judge and Krishnan (1994),
we described each grand strategy type and asked the res-
pondents to place 100 points amongst the four strategic
types to best capture the convergence or divergence of
strategic emphasis within the firm. For exact wording of
the four strategy types, please refer to the Appendix.
With this approach, we were able to not only
identify the primary strategic thrust, but also get a
feel for the overall strategic focus, or lack thereof, by
the firm. In this way, each grand strategy type ranged
in value from 0 to 100, and all four strategy types
added to 100. For this study, the retrenchment strategy
represents the relative emphasis of retrenchment activ-
ities with respect to the other three grand strategies.
3.2.3. Control variables
Previous research has repeatedly shown that organi-
zation size has an impact on firm performance. To
control for size, we collected data from the respondents
on the number of employees currently working for the
firm. To address non-normality concerns with residuals,
we transformed this variable using the logarithmic
transformation, similar to most of the board struc-
ture–firm performance literature (e.g., Dalton and
associates, 1998; Rhoades and associates, 2001).
In addition to organizational size, we also collected
data on whether the Russian government had an own-
ership stake in the firm. Previous research on transition
economies, particularly in Russia, indicate that govern-
ment ownership changes the governance situation dra-
matically (Che & Qian, 1998). As a result, if the firm
had any governmental ownership, we provided a con-
trol variable that was dummy coded as a ‘‘0’’ for no
governmental ownership or ‘‘1’’ for some governmental
ownership.
4. Results
The descriptive statistics for this study are shown in
Table 3. Notably, we had complete records of data for
only 45 organizations so our sample size shrunk near
392 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396

Table 3
Descriptive statistics (N ¼ 45)

No. Variable Mean Standard deviation 1 2 3 4 5 6

1 Firm performance 0.00 1.00 1.00

2 Organizational size 8.32 1.69 0.28 1.00
3 Government ownership 0.22 0.42 0.16 0.18 1.00
4 Informal CEO duality 0.16 0.37 0.23 0.40 0.08 1.00
5 Insider proportion 0.51 0.28 0.26 0.81 0.03 0.20 1.00
6 Retrenchment strategy (%) 17.8 10.0 0.13 0.11 0.12 0.06 0.28 1.00

Note. ‘‘Organizational size’’ in this exhibit represents the logarithmic transformation of the number of employees in 2002.

p < 0:05;  p < 0:01.

60% from our original sample. There was a rather
large and significant inter-correlation between orga-
nizational size and proportion of insiders suggesting
that the larger the organization, the less likely that
insiders dominate the board’s composition. While this
relationship was interesting, it could pose a potential
problem of multicollinearity.
We investigated potential multicollinearity pro-
blems by examining variance inflation factors (VIFs).
The maximum VIFs obtained from the three models
(presented in Table 4) were 4.2 for organization size
and 3.9 for insider proportion, well below the rule-of-
thumb cutoff of 10.0 for multiple regression models
(Neter, Wasserman, & Kutner, 1985: 392). Thus, we
can conclude that the regression estimates for our
theoretical variables were not adversely affected by
the presence of multicollinearity.
Table 4 contains the results of our analysis. Recall
that Hypothesis 1 predicted a negative relationship
between informal CEO duality and firm performance.
As can be seen in Model 2 of Table 4, this relationship
was empirically supported by our data (t ¼ 2:58,
p < 0:01). For Hypothesis 2, we predicted a negative
relationship between insider proportion and firm per-
formance. Model 2 reveals that our data did not
support this second hypothesis.
As can been seen from Model 3 of Table 4, the
retrenchment strategy was positively related to firm
performance (t ¼ 2:24, p < 0:01) suggesting that
retrenchment has a distinct impact on firm perfor-
mance within Russian firms, separate and distinct
from the board context. This result, while not hypothe-
sized, is an interesting one and will be discussed
further in the next section.

Table 4
Regression analyses on firm performance (N ¼ 45)

Variable Model 1 Model 2 Model 3

Beta t-value Beta t-value Beta t-value

Constant 1.05 1.24 2.15 1.21 1.26 0.68

Organizational sizea 0.15 1.71þ 0.24 1.44þ 0.23 1.38þ
Government ownershipb 0.27 0.76 0.29 0.83 0.11 0.30
Informal CEO dualityc 1.10 2.58 1.61 2.05
Insider proportion 0.09 0.10 1.27 1.00
Retrenchment strategy 0.10 2.24
Retrenchment  CEO duality 0.05 1.14
Retrenchment  insider proportion 0.09 1.92
Unadjusted R2 0.09 0.23 0.33
Adjusted R2 0.05 0.15 0.21
F-value 2.05 2.96 2.64
a
This variable represents the logarithmic transformation of the number of employees in 2002.
b
This variable is ‘‘0’’ if no government ownership, and ‘‘1’’ if some or all of the organization is owned by the government.
c
This variable is ‘‘0’’ for non-duality situations, and ‘‘1’’ when informal duality is present (e.g., CEO functions as chairman).
þ
p < 0:10;  p < 0:05;  p < 0:01.
 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
Hypothesis 3 predicted that the retrenchment strat-
egy would moderate the relationship between informal
CEO duality and firm performance due to increased
centralization pressures. Our data did not support this
relationship as the interaction term was in the pre-
dicted direction, but not significant. However, Hypoth-
esis 4 predicated that the relationship between
proportion of insiders on the board and firm perfor-
mance would be more negative within a retrenchment
context. Clearly, our data supported this fourth
hypothesis (t ¼ 1:92, p < 0:05).
5. Discussion and conclusions
Two of our four hypotheses were supported by the
data. First, we found consistent evidence suggesting
that informal CEO duality was negatively related to
firm performance. This is especially noteworthy given
the fact that Russian law formally prohibits the CEO
from also occupying the chairman’s role. While this
finding is tentative and needs further examination, our
data suggest that allowing CEOs to informally manip-
ulate their board chair represents a conflict of interest
and hinders firm performance. Thus, agency predic-
tions (e.g., Jensen & Meckling, 1976) that a moral
hazard exists when the CEO effectively leads the
entity responsible for evaluating his or her perfor-
mance has been strongly supported in our Russian
data set.
While this relationship has been found to be unclear
in the developed economies, there is a strong and
pronounced negative relationship between informal
CEO duality and firm performance in this Russian
sample. Perhaps this lends further support to those
who argue that we need to employ more field research
on persons directly involved with actual boardroom
dynamics than relying primarily on archival proxies to
really understand corporate governance (Judge &
Zeithaml, 1992; Schmidt, 1975).
Second, we found evidence suggesting that the
more that Russian firms engage in retrenchment activ-
ities, the more negative the relationship between
proportion of inside directors and firm performance.
This implies that inside directors’ interests generally
align with the owners’ interests, except when con-
fronted with personal loss through such things as
a retrenchment situation. Thus, outside checks and
393
balances in the form of an independent board appear to
be even more critical when the Russian firm is
engaged with downsizing and restructuring.
Third, we found that the retrenchment strategy was
positively related to overall firm performance. This
suggested that those Russian firms that cut unproduc-
tive costs and assets from the firm experienced quick
and robust performance results. This is an encouraging
finding that implies that when a Russian firm is led
capably with proper oversight from outsiders, the firm
can restructure itself to become more competitive.
Interestingly, our data did not support the notion
that the proportion of inside directors, in and of itself,
is negatively related to firm performance. There are
two possible explanations for this result. First, our data
showed that the proportion of inside directors is
associated firm performance only when the firm is
pursuing a retrenchment strategy. It may be that the
board composition has little influence on firm perfor-
mance when the enterprise is stable or growing in
typical Russian firms. A second possible explanation
is that another variable that somewhat approximates
the insider/outsider distinction has yet to be identified
in the governance literature. One possibility might be
organizational commitment; another might be leader-
ship expertise. Clearly, field research would be helpful
in uncovering what that missing variable might be.
Also, we did not find that the retrenchment strategy
moderated the informal CEO duality and firm perfor-
mance relationship. This suggests that the CEO’s
power inside of the board is not influenced by the
firm’s strategic context. This may be relatively unique
to Russian culture with its historical tendency to
conflate the leader with the overall country (Service,
1997). Alternatively, this finding may be an artifact of
our relatively small sample size as the beta coefficient
for our data was nearly significant and in the hypothe-
sized direction. Clearly, it would be valuable to test
this finding on a larger sample of Russian firms.
Furthermore, it would be fascinating to explore this
relationship in China which is also a transition econ-
omy, but the role of the leader is viewed differently.
Despite these provocative findings, our results must
be taken with some caution. First, the generalizability
of our sample may or may not apply to transition
economies outside of Russia, as the previous discus-
sion and institutional theory suggests. Clearly, addi-
tional research is needed to test these findings in firms
394 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396

operating in other economies emerging from the
constraints of a centrally-controlled economy.
Also, our sample size is relatively small. As such,
larger sample sizes may reveal that some relationships
are supported that are not statistically supported in this
study. For example, the retrenchment-informal CEO
duality interaction was not significant with a t-value of
1.14, but the direction of the relationship was con-
sistent with our hypothesis and it was nearly signifi-
cant. Thus, a larger sample size would contain more
‘‘power’’ and may have revealed this hypothesis to be
significant. Finally, this study is cross-sectional in
nature. While we hypothesize that firm performance
is the dependent variable, it may be the other way
around. Additional research is needed where these
relationships are regressed against a lagged perfor-
mance factor to more firmly assert causality.
Despite these limitations, we believe that our find-
ings refine and extend the corporate governance lit-
erature into transition economies. Most notably, this
study reveals that even with a law formally separating
the roles of CEO and board chair, informal activities
can undermine the law and firm performance. For this
study of Russian firms, it appears that properly func-
tioning corporate boards are important for navigating
the ‘‘deinstitutionalization’’ of the Russian economy.
In general, it appears that checks and balances on the
CEO’s power by separating the roles of CEO and
Chairman is a productive step toward making the firm
more competitive when the chairman operates inde-
pendently from the CEO. And given a retrenchment
situation, proper governance in the form of a majority
of outside directors also appears to add value.
Clearly, surveys administered by trusted third parties
and filled out by managers with first-hand knowledge of
boardroom dynamics yielded important and interesting
insights. However, our data only explained 21% of the
adjusted variance in firm performance and the data was
retrospective. Nonetheless, the movement toward more
independent and active boards appears to a trend that
needs to be encouraged within the Russian economy,
and perhaps in all transition economies.
Appendix A
I. Descriptions of the four grand strategy types used
in the survey
Please read the following four strategies and indi-
cate what percentage of effort your firm places on each
strategy. The four entries should add up to 100%:
Firm continues to serve customers in the same
or similar product/market domain, has its main deci-
sion focus on incremental improvement of functional
performance, and continues to pursue the same or
similar objectives year by year.
Firm emphasizes growth predominantly through
internal development from within the company.
Firm emphasizes growth predominantly from
acquisition or merger, or joint ventures with other firms.
Firm tries to improve performance by scaling
down the level and/or scope of its product/market
objectives by cutting back in costs and by reduction
in the scale of operations through divestment of some
units or divisions.
II. Descriptions of eight firm performance items
used in survey
Please rate the following performance attributes of
your organization relative to your industry average
(please circle one of the numbers for each attribute):

Performance Well below Somewhat below About the Somewhat Well above
dimension the industry the industry same as the above industry industry
average average industry average average average
Financial profitability 1 2 3 4 5
Growth in size or assets 1 2 3 4 5
Customer satisfaction 1 2 3 4 5
Product or service quality 1 2 3 4 5
Capacity utilization 1 2 3 4 5
Process improvements 1 2 3 4 5
Employment stability 1 2 3 4 5
Employee training 1 2 3 4 5
 W.Q. Judge et al. / Journal of World Business 38 (2003) 385–396
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