It is useful to consider the interlocks according to the type of board member (executive or non-executive) who posseses them? Their effect on firm performance

  1. Leticia Pérez-Calero Sánchez
  2. Carmen Barroso-Castro
Journal:
Revista europea de dirección y economía de la empresa

ISSN: 1019-6838

Year of publication: 2015

Volume: 24

Issue: 3

Pages: 130-137

Type: Article

DOI: 10.1016/J.REDEE.2015.04.001 DIALNET GOOGLE SCHOLAR lock_openDialnet editor

More publications in: Revista europea de dirección y economía de la empresa

Abstract

Taking the assumptions of the resource dependency theory as our starting point, the main objective of this investigation is to gain an understanding of how and in what way board members who serve on multiple boards (interlocks) can affect a firm's profitability, and whether it is useful to consider the derivation of these interlocks according to the type of board member (executive or non-executive) who possesses them. Using dynamic panel data analysis (GMM) and a sample of 88 firms quoted on the Spanish Continuous Market for the period 2005–2008, our results confirm the existence of a curvilinear (inverted-U) relation between interlocks and firm performance. The results demonstrate that this relation is only significant if we include the total number of external ties rather than just the number of links generated by non-executive directors. We can also confirm that the degree of familiarity and shared knowledge between board members (measured by average board tenure) affects this relationship.

Bibliographic References

  • Adler, P. S., & Kwon, S. W. (2002). Social capital: Prospects for a new concept. Academy of Management Review, 27, 17-40.
  • Aguilera, R., & Cuervo-Cazurra, A. (2009). Codes of good governance. Corporate Governance: An International Review, 17, 376-387.
  • Aiken, L. S., & West, S. G. (1991). Multiple regression: Testing and interpreting interactions. Newbury Park, CA: Sage Publications.
  • Andrés de, P., Valentín, A., & Félix, L. (2005). Corporate boards in OECD countries:Size, composition, functioning and effectiveness. Corporate Board, 13, 197-210.
  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: MonteCarlo evidence and an application to employment equations. Review of EconomicStudies, 58, 277-297.
  • Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68, 29-51.
  • Barroso, C., Villegas, M. M., & Pérez-Calero, L. (2011). Board influence on afirm internationalization. Corporate Governance: An International Review, 19, 351-367.
  • Beckman, C. M., & Haunschild, P. R. (2002). Networks learning: The effects ofpartner's heterogeneity of experience on corporate acquisitions. AdministrativeScience Quarterly, 47, 92-124.
  • Bjornali, E. S., & Gulbrandsen, M. (2010). Exploring board formation and evolution of board composition in academic spin-offs. Journal of Technology Transfer, 35, 92-112.
  • Burt, R. D., & Carlton, D. S. (1989). Another look at the network boundaries of Amer-ican markets. The American Journal of Sociology, 93, 723-753.
  • Calof, J. L. (1993). The mode choice and change decision process and its impact oninternational performance. International Business Review, 2, 97-120.
  • Certo, S. T. (2003). Influencing initial public offering investors with prestige:Signaling with board structures. Academy of Management Review, 28, 432-446.
  • Dalziel, T., Gentry, R. J., & Bowerman, M. (2011). An integrated agency - resourcedependence view of the influence of directors' human and relational capital onfirms' R&D spending. Journal of Management Studies, 48, 1217-1242.
  • Datta, D. K., Musteen, M., & Herrmann, P. (2009). Board characteristics, managerialincentives, and the choice between foreign acquisitions and international jointventures. Journal of Management, 35, 928-953.
  • Davis, G. F. (1991). Agents without principles? The spread of the poison pillthrough the intercorporate network. Administrative Science Quarterly, 36, 583-613.
  • Diestre, L., Rajagopalan, N., & Dutta, S. (2014). Constraints in acquiring and utilizingdirectors' experience: An empirical study of new-market entry in the pharma-ceutical industry. Strategic Management Journal, http://dx.doi.org/10.1002/smj
  • Elitzur, R., & Yaari, V. (1995). Executive incentive compensation and earnings manip-ulation in a multi-period setting. Journal of Economic Behavior and Organization, 26, 201-219.
  • Ellstrand, A. E., Tihanyi, L., & Johnson, J. L. (2002). Board structure and internationalpolitical risk. Academy of Management Journal, 45, 769-777.
  • Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal ofLaw & Economics, 26, 301-326.
  • Ferris, S., Jagannathan, M., & Pritchard, A. C. (2003). Too busy to mind the busi-ness? Monitoring by directors with multiple board appointments. The Journal ofFinance, 58, 1087-1112.
  • Filatotchev, I. (2006). The effects of executive characteristics and venture capitalinvolvement on board composition and share ownership in IPO firms. BritishJournal of Management, 17, 75-92.
  • Filatotchev, I., Dynomina, N., Wright, M., & Buck, T. (2001). Effects of postprivatization governance and strategies on export intensity in the former Soviet Union. Journal International Business Studies, 32, 853-871.
  • Finegold, D., Benson, G., & Hecht, D. (2007). Corporate boards and company perfor-mance: Review of research in light of recent reforms. Corporate Governance: AnInternational Review, 15, 865-878.
  • Fligstein, N. (1995). Networks of power or the finance conception of control? Com-ment on Palmer, Barber, Zhou and Soysal, American Sociological Review, 60, 500-503.
  • Forbes, D. P., & Milliken, F. J. (1999). Cognition and corporate governance: Under-standing boards of directors as strategic decision making groups. Academy ofManagement Review, 24, 489-505.
  • Gabrielsson, J., & Huse, M. (2004). Context, behavior and evolution: Challenges inresearch on boards and governance. International Studies of Management andOrganization, 34, 11-36.
  • Goerzen, A., & Beamish, P. W. (2005). The effect of alliance network diversityon multinational enterprise performance. Strategic Management Journal, 26, 333-354.
  • Golden, B. R., & Zajac, E. J. (2001). When will boards influence strategy? InclinationX power = strategic change. Strategic Management Journal, 22, 1087-1111.
  • Greene, W. (2003). Econometric analysis (5th ed.). Prentice Hall: Upper Saddle River.
  • Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic ManagementJournal, 21, 203-215.
  • Haynes, K. T., & Hillman, A. (2010). The effect of board capital and CEO power onstrategic change. Strategic Management Journal, 31, 1145-1163.
  • He, J., & Huang, Z. (2011). Board informal hierarchy and firm financial performance:Exploring a tacit structure guiding boardroom interactions. Academy of Manage-ment Journal, 54, 1119-1139.
  • Hermalin, B. E., & Weisbach, M. S. (2000). Board of directors as an endogenously deter-mined institution: A survey of the literature. Working paper. University of Californiaat Berkeley and University of Illinois.
  • Hermalin, B. E., & Weisbach, M. S. (2003). Boards of directors as an endogenouslydetermined institution: A survey of the economic literature. Economic PolicyReview, 9, 7-26.
  • Hillman, A. J., Cannella, A. A., & Paetzold, R. (2000). The resource dependence role of corporate directors strategic adaptation of board composition in response toenvironmental change. Journal of Management Studies, 37, 235-255.
  • Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Inte-grating agency and resource dependence perspectives. Academy of ManagementReview, 28, 383-396.
  • Holm, C., & Schuler, F. (2010). Reduction of asymmetric information through corpo-rate governance mechanisms - The importance of ownership dispersion andexposure toward the international capital market. Corporate Governance: AnInternational Review, 18, 32-47.
  • Jackling, B., & Johl, S. (2009). Board structure and firm performance: Evidencefrom India's top companies. Corporate Governance: An International Review, 17, 492-509.
  • Johnson, R. A., Hoskisson, R. E., & Hitt, M. A. (1993). Board of director involvementin restructuring: The effects of board versus managerial controls and character-istics. Strategic Management Journal, 14, 33-50 (número especial).
  • Johnson, S., Schnatterly, K., Bolton, J. F., & Tuggle, C. (2011). Antecedents of newdirector social capital. Journal of Management Studies, 48, 1782-1803.
  • Johansen, R. T., & Pettersson, K. (2013). The impact of board interlocks on audi-tor choice and audit fees. Corporate Governance: An International Review, 21, 287-310.
  • Kaymak, T., & Bektas, E. (2008). East meets west? Board characteristics in an emerg-ing market: Evidence from Turkish banks. Corporate Governance: An InternationalReview, 16, 550-561.
  • Knockaert, M., & Ucbasaran, D. (2013). The service role of outside boards in high techstart-ups: A resource dependency perspective. British Journal of Management, 24, 69-84.
  • Knockaert, M., Bjornali, E. S., & Erikson, T. (2014). Joining forces: Top managementteam and board chair characteristics as antecedents of board service involve-ment. Journal of Business Venturing, 30, 420-435.
  • Kiel, G. C., & Nicholson, G. J. (2006). Multiple directorships and corpo-rate performance in Australian listed companies. Corporate Governance, 14, 530-546.
  • Kim, Y., & Cannella, A. A., Jr. (2008). Toward a social capital theory of director selection. Corporate Governance: An International Review, 16, 282-293.
  • Kim, Y. (2005). Board network characteristics and firm performance in Korea. Cor-porate Governance: An International Review, 13, 800-808.
  • Kim, Y. (2007). The proportion and social capital of outside directors and theirimpacts on firm value: Evidence from Korea. Corporate governance: An Inter-national Review, 15, 1168-1176.
  • Kor, Y., & Misanyi, V. (2008). Outside directors 'industry-specific experience andfirm's liability of newness. Strategic Management Journal, 29, 1345-1355.
  • Kor, Y., & Sundaramurthy, C. (2009). Experience-based human capital and socialcapital of outside directors. Journal of Management, 35, 981-1006.
  • Kroll, M., Walters, B., & Son, A. L. E. (2007). The impact of boards composition andtop management team ownership structure on post-IPO performance in youngentrepreneurial firms. Academy of Management Journal, 50, 1198-1216.
  • Kroll, M., Walters, B., & Wright, P. (2008). Board vigilance, director experience, andcorporate outcomes. Strategic Management Journal, 29, 363-382.
  • Le, S. A., Kroll, M. J., & Walters, B. A. (2013). Outside directors' experience, TMTfirm-specific human capital, and firm performance in entrepreneurial IPO firms. Journal of Business Research, 66, 533-539.
  • Letza, S., Sun, X. P., & Kirkbride, J. (2004). Shareholding versus stakeholding: A criticalreview of corporate governance. Corporate Governance: An International Review, 12, 242-262.
  • Lynall, M. D., Golden, B. R., & Hillman, A. J. (2003). Board composition from adoles-cence to maturity: A multitheoretic view. Academy of Management Review, 28, 416-431.
  • McIntyre, M., Murphy, S., & Mitchell, P. (2007). The top team: Examining board com-position and firm performance. Corporate Governance: An International Review, 7, 547-561.
  • Mizruchi, M. S., & Stearns, L. B. (1988). A longitudinal study of the formation ofinterlocking directorates. Administrative Science Quarterly, 33, 194-210.
  • Mizruchi, M. S., & Stearns, L. B. (1994). A longitudinal study of borrowing by largeAmerican corporations. Administrative Science Quarterly, 39, 118-140.
  • Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital and the organi-zation advance. Academy of Management Review, 23, 242-266.
  • Ocasio, W. (1994). Political dynamics and the circulation of power: CEO successionin U.S. industrial corporations. 1960-1990. Administrative Science Quarterly, 39, 285-314.
  • Ortiz, N., Aragón, J., Delgado, J., & Ferrón, V. (2012). The effect of director interlockson firms' adoption of proactive environmental strategies. Corporate Governance:An International Review, 164-178.
  • Palmer, D., Barber, B. M., & Xueguang, X. (1995). The finance concept of control "thetheory that ate New York?" Reply to Fligstein. American Sociological Review, 60, 504-508.
  • Pfeffer, J., & Salancik, G. (1978). The external control of organizations: A resourcedependence perspective. New York: Harper y Row.
  • Pombo, C., & Gutiérrez, L. H. (2011). Outside directors, board interlocks and firmperformance: Empirical evidence from Colombian business groups. Journal ofEconomics and Business, 63, 251-277.
  • Sanders, G., & Carpenter, M. A. (1998). Internationalization and firm governance: Theroles of CEO compensation, top team composition and board structure. Academy of Management Journal, 41, 158-178.
  • Shropshire, C. (2010). The role of the interlocking director and board receptivity inthe diffusion of practices. Academy of Management Review, 35, 246-264.
  • Shipilov, A., Greve, H., & Rowley, T. (2010). When do interlocks matter? Institutionallogics and the diffusion of multiple corporate governance practices. Academy ofManagement Journal, 53, 846-864.
  • Singla, C., George, R., & Eliyaht, R. (2010). Internationalization, family business andcorporate governance: An emerging market perspective. In Academy of manage-ment annual meeting proceedings , p1.
  • Stevenson, W., & Radin, R. F. (2009). Social capital and social influence on the board of directors. Journal of Management Studies, 46, 16-44.
  • Stiles, P., & Taylor, B. (2001). Boards at work: How directors view their roles andresponsibilities. Oxford: Oxford University Press.
  • Tian, J., Haleblian, & Rajagopalan, N. (2011). The effects of board human and socialcapital on investor reactions to new CEO selection. Strategic Management Journal, 32, 731-747.
  • Van Ees, H., Gabrielsson, J., & Huse, M. (2009). Toward a behavioral theory of boardsand corporate governance. Corporate Governance: An International Review, 17, 307-319.
  • Westphal, J. D., & Fredrickson, J. W. (2001). Who directs strategic change? Directorexperience, the selection of new CEOs, and change in corporate strategy. StrategicManagement Journal, 22, 1113-1137.
  • Westphal, J. D., Seidel, M-D. L., & Stewart, K. J. (2001). Second-order imitation: Uncov-ering latent effects of board network ties. Administrative Science Quarterly, 46, 717-743.
  • Wincent, J., Anokhin, S., & Boter, H. (2009). Network board continuity and effec-tiveness of open innovation in Swedish strategic small-firm networks. R&DManagement, 39, 55-67.
  • Zahra, S. A., Priem, R. L., & Rasheed, A. A. (2007). Understanding the causes and effects of top management fraud. Organizational Dynamics, 36, 122-139.