How do board ties affect the adoption of new practices? The effects of managerial interest and hierarchical power

• Author: Anja Tuschke,Chang Hyun Kim,Jung Wook Shim,Toru Yoshikawa
• DOI: http://doi.org/10.1111/corg.12300
• Date: 01 January 2020
• Published date: 01 January 2020

ORIGINAL ARTICLE

How do board ties affect the adoption of new practices? The

effects of managerial interest and hierarchical power

Toru Yoshikawa

1

|Jung Wook Shim

2

|Chang Hyun Kim

3

|Anja Tuschke

4

1

Lee Kong Chian School of Business,

Singapore Management University, Singapore

2

Faculty of Economics, Kyoto Sangyo

University, Kyoto, Japan

3

Department of Strategy and

Entrepreneurship, China Europe International

Business School (CEIBS), Shanghai, China

4

Munich School of Management, University of

Munich, Munich, Germany

Correspondence

Toru Yoshikawa, Lee Kong Chian School of

Business, Singapore Management University,

50 Stamford Road, Singapore 178899.

Email: toru@smu.edu.sg

Abstract

Research Question/Issues: Most extant literature implicitly equates obtaining

information through board interlocks to acting on the information. We investigate

triggers that help to translate the information into action. In addition to exposure

to the information by board interlocks, we suggest that the self‐interest of the indi-

viduals who create these ties and hierarchical power of interlinked firms determines

the likelihood of taking actions of adopting new practices.

Research Findings/Insights: Using the action of adopting two distinctive gover-

nance practices, stock option pays or board reform, we find that sent ties and

received ties affect the adoption decisions differently. Whereas sent ties reflect man-

agerial interests, received ties derive power from a hierarchical relationship between

the focal firm and the interlinked firm. Such differential nature of sent and received

ties drives a differential result in terms of adopting two distinctive governance prac-

tices. We also find support for different moderating effects of firm performance on

the impact of sent and received ties.

Theoretical/Academic Implications: In this study, we incorporated the self‐interest

of executives with sent ties to prior adopters and the power of directors who estab-

lish ties with prior adopters that are hierarchically positioned. By doing so, this study

paints a more fine‐grained picture regarding underlying mechanisms by which infor-

mation gained through ties is translated into action. This provides important insights

for both agency theory and resource‐dependency theory.

Practitioner/Policy Implications: Hierarchical board ties are not a unique phenom-

enon in Japan. We often find such ties in business groups in China, India, Korea, and

some European countries. Establishing board interlocks among subsidiaries in a busi-

ness group is an important governance resolution for controlling the whole business

group. Hence, our findings that the ties carry not only information but also agent's

interest and hierarchical power should be taken into account when a business group

designs board interlocks.

KEYWORDS

Corporate governance, board policy issues, blockholder ownership, Japan, resource dependence

theory

Received: 3 September 2018 Revised: 23 July 2019 Accepted: 24 July 2019

DOI: 10.1111/corg.12300

2© 2019 John Wiley & Sons Ltd Corp Govern Int Rev. 2020;28:2–22.

wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Extant research regards board interlocks as conduits of information

that influence a firm's strategic direction and adoption of new prac-

tices (e.g., Geletkanycz & Hambrick, 1997; Johnson, Schnatterly, &

Hill, 2013; Kim & Miner, 2007; Palmer, Jennings, & Zhou, 1993).

Beckman and Haunschild (2002) show, for instance, how firms benefit

from information on acquisition premiums gained through board inter-

locks with experienced firms. Similarly, various types of network ties

with prior adopters have been found to accelerate the adoption of

investor relation departments (Rao & Sivakurmar, 1999), the introduc-

tion of quality standards in hospitals (Young, Charns, & Shortell, 2001),

and the diffusion of shareholder‐oriented practices in a stakeholder‐

oriented environment (Sanders & Tuschke, 2007). Although most

extant literature implicitly equates obtaining information through

board interlocks to acting on the information (Shropshire, 2010), we

suggest that the adoption of new practices depends on the self‐

interest of the individuals who create these ties.

Further, although previous research focuses on the impact of

interlinked firms' characteristics such as experience in a specific

domain and absorptive capacity (e.g., Diestre, Rajagopalan, & Dutta,

2015), they tend to ignore the hierarchal context of the interfirm rela-

tionships in which board interlocks are embedded (Boyd & Hoskisson,

2010). Although such hierarchical ties are often characterized by

power imbalance (Zona, Gomez‐Mejia, & Withers, 2018), they are

present in many institutional contexts. Hierarchical ties are pro-

nounced especially where business groups play a major economic role,

such as Korea and India (Yiu, Lu, Bruton, & Hoskisson, 2007) and even

some Western countries (Colpan & Hikino, 2018), as interfirm ties are

characterized by core–periphery relationships due to the ownership

structure and/or trading ties. Despite theoretical and empirical impor-

tance of hierarchal ties, we still have limited knowledge regarding dif-

ferential impact of heterogeneous ties on the strategic decision

making by interlinked firms (Boyd & Hoskisson, 2010). Using regula-

tory and institutional change in Japan from the late 1990s, this study

explores when information obtained through board interlocks, espe-

cially through hierarchical ties, leads to the action of adopting new

governance practices, namely, stock option pay and board reform

called executive officer system (EOS). To investigate the differential

influence of managerial self‐interest and power of those who create

ties to other firms on the adoption of new governance practices, we

distinguish between sent ties and received ties and examine when

these ties lead to the adoption of stock option pay and board reform.

Sent ties are created when an executive of the focal firm serves on

the board of another firm that has already adopted a new practice,

whereas received ties are established when an executive with experi-

ence with a new practice at another firm serves on the focal firm's

board (Beckman & Haunschild, 2002; Haunschild & Beckman, 1998).

We contend that received ties differ from sent ties in their potential

power implications. Unlike previous research that disregards power

implications between the focal firm and interlinked firm, a resource

dependence perspective suggests that a firm that sends its executive

to sit on another firm's board sometimes has power, based on the

firm's capability to provide critical resources such as financial or repu-

tational resource, over the other firm that accepts such a director

transfer (Lincoln, Gerlach, & Takahashi, 1992; Pfeffer & Salancik,

1978). Some firms, however, may accept executives of other firms,

without having a resource dependence consideration because those

executives have expertise that the focal firms can use. Hence, the

power‐related aspect has become more salient when the interlinked

firms have large equity stakes in the focal firms, as received directors

represent large shareholders (Kroll, Walters, & Wright, 2008).

In contrast, we expect that the impact of sent ties on the practice

adoption decision at the focal firms varies by the alignment between

the nature of a particular practice and self‐interest of executives

who create such ties. In this setup, power implication between the

two firms does not matter, because we are interested in the adoption

decision at the focal firms that have established sent ties, not the

adoption decision at the interlinked firms that have received such ties.

Hence, we suggest that the self‐interested executives selectively

deliver the information gained through sent ties to the focal firms.

Put together, the interests of the focal firm's executives creating sent

ties and the power of interlinked nonfocal firms generating received

ties determine the impact of ties in a separate manner on the adoption

of a specific practice. In an empirical sense, the differential nature of

sent and received ties would play their role in a distinctive manner

on the adoption of stock option pay and board reform due to different

economic and organizational implications of those practices.

In addition to the differential effects of these ties, we investigate

the moderating effects of firm performance and propose that perfor-

mance has a different impact on the effects of received and sent ties

regarding the governance practices under study. We argue that the

home institutions of executives who create received ties are inter-

ested in the adoption of governance practices like board reform for

monitoring effectiveness. Especially when the focal firms do not

deliver expected performance, they would be more likely to take such

actions. On the other hand, executives who create sent ties to prior

adopters may be indifferent with respect to board reform. They are

more likely to take actions in the adoption of stock option pay, how-

ever, when they observe higher chances of obtaining economic bene-

fits for themselves (Sanders, 2001). In other words, executives are

more likely to implement stock option pay when they observe the

focal firm's growth, which indicates greater chances of being able to

exercise the options in the future.

To study these questions, we focus on the adoption of stock

option pay and board reform among Japanese firms. Stock option

pay was only legalized in 1997 in Japan. Another practice we focus

on is a board reform called the executive officer system (EOS), which

Sony initially adopted in 1997 and subsequently the practice diffused

among Japanese firms. Those two regulatory and institutional changes

provide an ideal setting to test our research question, as they were

almost exogenous changes to firms in Japan. Furthermore, as our sam-

ple has no left censoring and covers all listed nonfinancial firms in

Japan, we constitute an ideal setting to test our research questions.

In our model, we find that sent ties established by executives

increase the probability of adopting stock option pay whereas received

YOSHIKAWA ET AL.3