Chair-CEO Trust and Firm Performance

This study assesses whether individual-level trust between the board chair and the CEO affects firm performance. We find that chair-CEO trust is positively associated with firm performance. Additional tests suggest the relationship between trust and firm performance is causal, with more pronounced effects observed for firms with greater advisory needs (more diversified firms) and boards that are able to deliver high-quality advice (firms with higher ratios of busy directors). This trust promotes a strong board process that consequently leads to value-adding innovation and merger and acquisition decisions. Further, this trust relationship can moderate the negative effect on firm performance during CEO turnovers.