A framework for board capital

• Pages: 452-475
• DOI: https://doi.org/10.1108/CG-10-2015-0146
• Date: 06 June 2016
• Published date: 06 June 2016
• Author: Leticia Pérez-Calero,Ma del Mar Villegas,Carmen Barroso
• Subject Matter: Strategy,Corporate governance

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

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