A framework for board capital

Author:Leticia Pérez-Calero, Ma del Mar Villegas, Carmen Barroso
DOI:https://doi.org/10.1108/CG-10-2015-0146
Pages:452-475
Publication Date:06 Jun 2016
A framework for board capital
Leticia Pérez-Calero, M
a
del Mar Villegas and Carmen Barroso
Leticia Pérez-Calero is
based at the Department
of Business
Administration and
Marketing, Pablo de
Olavide University,
Seville, Spain.
M
a
del Mar Villegas and
Carmen Barroso are both
based at the Department
of Business Management
and Marketing, University
of Seville, Seville, Spain.
Abstract
Purpose The purpose of this paper is to examine in greater depth the concept of “board capital”,
which the authors consider to be a bundle of three types of capital, and believe to be a clear antecedent
of the board’s ability to perform its roles, which have positive consequences for the firm’s performance.
Design/methodology/approach Through 83 firms listed on The Madrid Stock Exchange during the
period 2005-2010, the authors test empirically the relationships between different dimensions of board
capital and firm performance, and specially how internal social capital moderates the relationships
between board human capital and external social capital with firm performance.
Findings The results show that certain characteristics of human capital (average board tenure) and
external social capital (directors’ interlocks) are positively related to the firm performance. The empirical
findings also indicate that the internal social capital, measured by board density, is positively related to
the firm performance and moderates these above relationships, increasing the potential of the
resources contributed by the board members and influencing to a large extent on a firm’s performance.
Practical implications The results of the investigation will help both executives and scholar in two
ways. First, they will assist firms when they have to select board members, as they can now understand
how the resources that board members bring with them can affect the firm performance. To be more
effective, boards need to have members that have experience as firm’s directors, external connections
to other boards and many internal ties among them. Second, in this context, internal social capital is
especially relevant, so the firms should look for possible ways of encouraging internal ties between
directors. In this paper, the authors have opted for study the participation of directors in committees.
Originality/value The authors propose that these three types of capital (human, external and internal
social capital) need to be synergistically combined to create a group of directors with access to a
complete set of skills, knowledge and connections, but which can still work as a compact social group
when making decisions.
Keywords Boards of directors, Corporate governance, Boardroom dynamics
Paper type Research paper
1. Introduction
The literature in the field of corporate governance describes the importance of the link
between boards of directors and company results (Demb and Neubauer, 1992;Kiel and
Nicholson, 2006;Sonnenfeld, 2002;Westphal and Bednar, 2005). However, despite
extensive research, exactly how corporate boards influence their firms’ financial
performance remains a puzzle (He and Huang, 2010) or even what kinds of people make
the best board members (Johnson et al., 2013).
The corporate governance research agenda suggests that a firm’s results depend on
board effectiveness (Bird et al., 2004, p. 132). Board effectiveness here is understood to be
the board members’ ability to perform their roles in such a way as to positively affect firm
performance (Aguilera, 2005;Murphy and McIntyre, 2007). The literature has traditionally
assigned three roles to the board:
Received 26 January 2015
Revised 30 October 2015
Accepted 13 January 2016
PAGE 452 CORPORATE GOVERNANCE VOL. 16 NO. 3 2016, pp. 452-475, © Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-10-2015-0146
1. control or monitoring management as fiduciaries of the shareholders (Langevoort,
2001;Sundaramurthy and Lewis, 2003,Letza et al., 2004);
2. service or advice to management on strategic issues (Donaldson, 1990;Donaldson
and Davis, 1991,1994;Davis et al., 1997); and
3. provision of external resources that are critical for the firm’s success (Hendry and Kiel,
2004;Goodstein et al., 1994;Hillman et al., 2000;Kakabadse et al., 2001;Pearce and
Zahra, 1991;Pfeffer and Salancik, 1978).
Although the board carries out several roles at once (Hillman and Dalziel, 2003;Lynall et al.,
2003;Macus, 2008;Roberts et al., 2005), as a general rule, research has concentrated on
how the board’s execution of a single role affects firm performance. However, the ability of
the board to fulfill these three roles will determine how effectively the board governs the firm
with consequences on firm performance. Furthermore, a significant number of authors
believe that these roles are intertwined, and there is no clear distinction between them
(Hendry and Kiel, 2004;Hillman and Dalziel, 2003;Stiles and Taylor, 2001).
In our study, we use different aspects of board capital to describe the board’s ability to
have an influence on firm performance by carrying out their three roles: control, service and
provision of resources. In particular, we draw upon Hillman and Dalziel (2003) and Haynes
and Hillman’s (2010) conceptualizations of board capital for developing a framework
focusing on the human and social capital of the board. The literature on board capital
identifies two key elements of the board’s ability: human capital and external social capital.
We reconsider this concept to include the distinction between external and internal social
capital (Adler and Kwon, 2002;Kim and Cannella, 2008), and propose the
interdependence of the three types of capital (human capital, external social capital and
internal social capital) to understand the effectiveness of the board. Our paper makes an
important contribution to the field introducing internal social capital as a necessary variable
for a more complete understanding of the relationships of board human and external social
capital with firm performance, arguing that these relationships cannot be interpreted
accurately without considering the impact of internal social capital on them.
From our perspective, human capital, external social capital and internal social capital are
all vital in developing the board’s ability to perform its roles effectively, and together they
form “Board Capital” (Haynes and Hillman, 2010). To be exact, the human and social
external capital provide to the board a group of key resources (knowledge, experience and
information about the environment of the firm) that could be used by the board in a more
efficient way owing to the connection and collaboration between board members that
provide the internal social capital. Internal social capital involves a bonding form of social
capital that is focused on the characteristics that bring internal cohesiveness to the board
and facilitates the pursuit of collective goals (Adler and Kwon, 2002). Having key resources
does not guarantee their mobilization and application to the board’s decision making
process. It is when board members function as a cohesive group, with close ties, that they
are able to exchange, combine and make use of the knowledge, experience and external
resources that the board has access to through the human capital and external social
capital of each of its members to a greater degree. That is why we propose a multiplicative
effect of internal social capital by intensifying the positive effects of human capital and
external social capital on performance. Previous studies (Hillman and Dalziel, 2003;
Haynes and Hillman, 2010) have not taken into account this important distinction within the
concept of board capital, either because of a lack of distinction between different types of
social capital that may be present in a board (Hillman and Dalziel, 2003), or because they
focus primarily on the relationship between human capital and firm performance (Nicholson
and Kiel, 2004a). In our view, even if the board consists of highly qualified and experienced
directors with high levels of human capital and other productive forms of external social
capital, they still need the internal social capital to further drive the deployment and
VOL. 16 NO. 3 2016 CORPORATE GOVERNANCE PAGE 453

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