Antecedents of Board Composition: The Role of Nomination Committees

• Author: Szymon Kaczmarek,Satomi Kimino,Annie Pye
• Date: 01 September 2012
• Published date: 01 September 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2012.00913.x

Antecedents of Board Composition: The Role of

Nomination Committees

Szymon Kaczmarek, Satomi Kimino, and Annie Pye*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The global f‌inancialcrisis in 2008 has generated increasing recognition of the importance of board

diversity ref‌lected amidst the capabilities and skills of directors on a board. As the primary institutional mechanism

designed to strengthen the director selection process, nomination committees (NCs) occupy centre stage of this discussion.

However, there is a dearth of studies which focus either specif‌ically on NCs or on diversity as a boardcomposition outcome.

In this study, we examine the research question of the likely antecedents in terms of NC characteristics of two board

composition outcomes, i.e., diversity as variety in terms of gender and nationality, and diversity as separation in terms of

a board demographic faultline.

Research Findings/Insights: For a panel of FTSE350 companies from 1999 to 2008, we f‌ind that the increasing presence on

the NC of females or non-British nationals is likely to have a positive impact on the level of board gender and nationality

diversity, respectively. In addition, we report that the presence of the chief executive off‌icer (CEO) on the NC is found to

interact with the NC independence, as a result of which a board demographic faultline is likely to emerge.

Theoretical/Academic Implications: We bring together three concepts from social psychology research to create the

theoretical basis for our study of the inf‌luence of NCs on board diversity: these are similarity-attraction, homosocial

reproduction, and social identity. The strong empirical f‌indings suggest that these socio-psychological dimensions are

applicable to the operations of NCs, which has implications for the outcomes of the director nomination and selection

process, and consequently also for board composition.

Practitioner/Policy Implications: Our research indicates that NC characteristics are signif‌icant antecedents of board diver-

sity, hence composition of the NC is an important step and pre-requisite for assembling a diverse board. For example,

appointing females and/or non-nationals to the NC increases the likelihood of greater representation of females and/or

non-nationalson the entire board. At the same time, our evidence suggests thatthe presence of the CEO amidst the majority

of non-executive directors (NEDs) on the NC is detrimental for board cohesiveness.

Keywords: Corporate Governance, Boards of directors, Diversity/Faultline, Nomination Committee

INTRODUCTION

Corporate governance researchers are often encouraged

to explore how boards work and how their conduct

may be improved to contribute to value creation (Durisin &

Puzone, 2009; Filatotchev & Boyd, 2009; Huse, Hoskisson,

Zattoni, & Viganò, 2011). In addition, calls for greater theo-

retical pluralism (Hambrick, Werder, & Zajac, 2008) persist.

Despite this, board sub-committees of audit, remunera-

tion, and nomination remain relatively under-researched,

although they are considered to have heightened impor-

tance with regard to effective board functioning (Brown,

Steen, & Foreman, 2009). Of these three, nomination1com-

mittees (NCs) remain the least researched (Huse et al., 2011;

Ruigrok, Peck, Tacheva, Greve, & Hu, 2006). However, the

diversity of directors’ backgrounds is high on the corporate

governance agenda for both academics and practitioners

(e.g., Financial Reporting Council (FRC), 2010, 2011;2

Nielsen & Huse, 2010b; Van Veen & Elbertsen, 2008). This

focus on diversity is in line with the proposition of “value-

in-diversity,”which views diversity as a human capital asset

(e.g., Cox, Lobel, & McLeod, 1991; Hillman, Cannella, &

Harris, 2002; Watson, Kumar, & Michaelsen, 1993). In this

paper, we propose that the composition of NCs, which hold

responsibility for the director selection and appointment

*Address for correspondence: Annie Pye, Centre for Leadership Studies, University of

Exeter Business School, Streatham Court, Rennes Drive, EX4 4ST. Tel: 44-0-1392

722556; Fax: 44-0-1392 723242; E-mail: annie.pye@exeter.ac.uk

474

Corporate Governance: An International Review, 2012, 20(5): 474–489

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00913.x

process, represents the f‌irst and most important antecedent

of diversity in the boardroom.

Gender and nationalityare two dimensions of diversity to

have received particular attention from regulators world-

wide. For example, in their recognition of the importance of

gender equality, countries such as Norway have introduceda

quota-based system of female boardrepresentation, whereas

others adopt a recommendation-based solution, with

desired future targets for larger listed companies (e.g.,

Davies Review, 2011). Academic research demonstrates that

appointing female directors to boards may bring about

change in diversity not just in terms of numbers but also

because female directors are, for example, more likely to

have backgrounds outside the business area, to have higher-

level educational degrees, and to more quickly become a

member of other boards compared to male directors

(Hillman et al., 2002; Ruigrok, Peck, & Tacheva, 2007).

Female directors are also found to inf‌luence board strategic

involvement (Nielsen & Huse, 2010a), strategic and opera-

tional control (Nielsen & Huse, 2010b), as well as board

creative discussions (Huse, Nielsen, & Hagen, 2009).

Internationalization of board composition (i.e., diversity of

director nationalities) parallels the globalization of business

and f‌inancial markets. For instance, Oxelheim and Randøy

(2003) demonstrated that appointing an Anglo-American

director on the board of a Scandinavian company exerted

positive impact on f‌irm value. In addition, a high level of

overseas commitment requires greater monitoring of

increased internationalization and, in effect, an adaptation

by the board (Judge & Zeithaml, 1992). International expan-

sion creates dependence on foreign markets for customers

and factors of production such that the board’s role of

directly monitoring executive action becomes more diff‌icult.

Non-national directors with knowledge of overseas markets

can therefore strengthen the fulf‌illment of the monitoring

function of the board (Luo, 2005). In their multi-country

study, Van Veen and Elbertsen (2008) found that nationality

diversity on corporate boards is largely explained by the

country’s governance regime, such as board structure (two-

tier versus unitary), ownership structure, and business elite

traditions (Maclean, Harvey, & Press, 2006). As a part of the

Anglo-American economy, the UK has been reported to

be relatively open to “foreign” (i.e., non-British national)

candidates (La Porta, Lopez-de-Silanes, & Shleifer, 1999).

Accordingly, the f‌irst research question in our study is what

antecedents, in terms of the composition of NCs, explain

the level of board gender and nationality diversity in this

context.

Harrison and Klein (2007) demonstrated that the vast

majority of academic work considered the phenomenon of

diversity as variety and did not take into account the differ-

ent textures of diversity, such as diversity as separation,

which can be captured by the notion of a faultline (Lau &

Murnighan, 1998, 2005). A faultline is arguably in-built in

teams where representatives of different groupings meet to

work together: for example, in unitary boards which com-

prise non-executive directors (NEDs) and executive direc-

tors (EDs) who share responsibility for shaping the strategic

direction and control of the company. This inherent faultline

is comparable to those found in teams managing interna-

tional joint ventures (Hambrick, Li, Xin, & Tsui, 2001; Li &

Hambrick, 2005) or top management teams of family-owned

f‌irms (Minichilli, Corbetta, & MacMillan, 2010). As an

embodiment of diversity as separation, this board demo-

graphic faultline characterizes a potential schism, which

may undermine recommendations for effective corporate

boards (FRC Guidance on Board Effectiveness, 2011). There-

fore, we consider the board demographic faultline as a

second composition outcome for which we examine ante-

cedents in terms of the NC characteristics.

As the theoretical basis for the derivation of our hypoth-

eses, we build on three concepts from social psychology

which have particular relevance to understanding diversity

amongst such groupings: similarity-attraction (Berscheid

& Walster, 1978; Byrne, 1971), homosocial reproduction

(Kanter, 1993; Powell, 1988), and social identity (Ashforth &

Mael, 1989; Hogg & Terry, 2000; Tajfel & Turner, 1986). We

propose that several NC characteristics, such as the presence

of female and non-British national directors on the NC and

the presence of the chief executive off‌icer (CEO) on the NC,

have an impact on the main board composition in the form of

diversity and faultlines. In order to address the well-known

problem of endogeneity in the corporate governance litera-

ture, we provide a comprehensive and econometrically

sound analysis by applying the system generalized method

of moments (GMM) estimation (Brown, Beekes, & Verho-

even, 2011).

Our f‌indings for FTSE350 companies between 1999 and

2008 suggest that NC characteristics have an inf‌luential

effect on board composition outcomes. The presence of one

female and a non-British national on the NC is likely to

impact positively on the levels of gender and nationality

diversity on the board, respectively. This effect is even more

pronounced when there are two or more females and non-

British nationals on the NC. Finally, the presence of the CEO

on the NC is found to interact with the NED coalition on the

NC, which leads to a stronger faultline on the board.

The next two sections provide theoretical understanding

of NCs and board composition. Then, we derive our hypoth-

eses. The methods section contains information on the

sample, variables, and method of analysis. Next, the results

are presented and then discussed. The f‌inal section draws

out our conclusions.

NOMINATION COMMITTEES

Board audit, remuneration, and nomination sub-committees

have been recommended consistently in corporate gover-

nance codes across many countries for at least the last two

decades (Pierce & Waring, 2004). Although audit and remu-

neration committees have both had widespread and prompt

uptake, NCs have generally been the last to be established.

While diff‌icult to compare research results based on postal

surveys of the Times 1000 companies (Conyon, 1994), the

FTSE350 (Gay, 2001), and the Global Vantagedatabase (Vafeas

& Theodorou, 1998), Dedman (2002) concludes that by 1999,

the majority of such large f‌irms (at least 85 percent) were

likely to have audit and remuneration committees, although

many were yet to establish a nomination committee.

As with corporate practice, research into the role and out-

comes of specif‌ic committees began with focus on audit

ANTECEDENTS OF BOARD COMPOSITION 475

Volume 20 Number 5 September 2012© 2012 Blackwell Publishing Ltd