Structure behind principles: social selection mechanisms in corporate governance networks

• DOI: https://doi.org/10.1108/CG-02-2019-0063
• Pages: 87-105
• Published date: 04 October 2019
• Date: 04 October 2019
• Author: Slobodan Kacanski
• Subject Matter: Strategy

Structure behind principles: social

selection mechanisms in corporate

governance networks

Slobodan Kacanski

Abstract

Purpose –The purpose of this study is to showthat social relations in a corporate governance platform

between members of supervisory boards and between members of supervisory and executive board

tiers can serve asan alternative viewpoint for understanding mechanismsof social selection in corporate

governancenetworks. The study shows that throughthe lenses of social network analysis,it is possible to

identify and understand how the process of corporate governance member selection unfolds within

companies and how that selection process may have been potentially influenced by the cross-board

relations,such as interlocking directorships.

Design/methodology/approach –To estimate network parameters and attribute effects of networktie

emergence, this study hasused exponential random graph models (ERGMs) on corporate governance

data of Danish publicly listed companies. Econometric models are applied to estimate parameter

statisticswhich serve further to explain tendencies of tie emergence.

Findings –The results of this study revealthat the process of selection of both supervisory boardsand

executive directors is interdependent. Also, the study showed that board members are more likely to

select popular supervisoryboard members and top managers who have their expertisegained through

multiple companiesaffiliated with multiple industries.However, these conditions for CEO selectionapply

only to the extent to which they have theirexperience gained from multiple companies but not multiple

industries.

Originality/value –On one hand, this study demonstrates that being a dynamic practitioner who is

exposed to diverse corporate environments by being affiliated with different companies belonging to

different industries generally increases practitionersvisibility in the corporate governance network, and

therefore theirattractiveness to boards of directors.On the other hand, the results show that the research

on board assemblage,nowadays, should be rather observed throughthe methodology of social network

analysis as the method gives an opportunity to understand structuresthrough relations, from which the

executivetier should not be exempted as well.

Keywords Boards of directors, CEO, Management, Corporate governance, Social network analysis,

ERGMs

Paper type Research paper

1. Introduction

Corporate boardroom processes have long been of interest to organizational researchers

and practitioners, and to understand boards, we need to understand the people who sit on

them (Adams, 2017). The importance of corporate governance structure has motivated

numerous studies to discuss board compositions and board and executive member

selection processes (Kesneret al.,1986). Both researchers and practitioners, such as those

from the national institutes of company directors, emphasized that outcomes of governing

corporations (e.g. company performance) depend on a combination of competences that

board members possess (Australian Institute of Company Directors, 2016;Darko et al.,

Slobodan Kacanski is

based at the Department

for Social Sciences and

Business, Roskilde

University, Denmark.

Received 13 February 2019

Revised 27 May 2019

30 July 2019

5 August 2019

Accepted 20 August 2019

DOI 10.1108/CG-02-2019-0063 VOL. 20 NO. 1 2020, pp. 87-105, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 87

2016;Nordberg and Booth, 2019). To determine the combination of competences required

by board representatives, companies are recommended to develop “skill matrices” which

will enable them to select those candidates that fit company demands (Australian Institute

of Company Directors, 2016). The skillmatrices represent the outline of mandatory skills that

further set out the conditions under which the assessment processes, and ultimately the

selection of candidates for the supervisory boards, are administered. Matrices imply that

the selection criteria are indicative of the diversification of expertise among existing and

new board representatives, through which the synergetic effect is generated, and which

further condition successfulgovernance.

ACadbury (1992) report defines corporate governance as a system that enables directing

and controlling business entities. The Organisation for Economic Co-operation and

Development emphasizes that assimilation of the concept of “relationship” is nowadays

fundamental for understanding corporate governance, as it has the potential to supplement

and extend knowledge of corporate business strategies and board structures. This

assertion indicates that relational ties existing between representatives of corporate boards

have the capacity to reveal more information about how corporate boards are assembled,

than does inspecting further the selection mechanisms and methodologies that companies

apply to assemble boards (Mizruchi and Stearns, 1988;Pfeffer, 1972;Allen,1978, 1974;

Stokman et al., 1985;Zeitlin,1974;Pfeffer and Salancik, 1978).

Following the argument by McPherson et al. (2001) and Freeman (2007) regarding the

development of board selection processes, the requirement for diversification of skills at

supervisory boards seems to not be sustainable under the following assertion. They argue

that the homophily effect is the grounding principle under which corporate boards are

established. Homophily indicatesthat social actors associate themselves with others similar

to them (McPherson et al.,2001;Freeman, 2007), implying that it is not skill diversification

that drives the selection process of corporate board composition, but rather the similarities

among team members.

Taking into account that organizational research argues that similarities among the

representatives of two-tier boards drive the selection process, this study aims to identify

how social selection processes develop in the corporate governance context, and whether

homophily represents one of the main effects that drives the selection processes.

Additionally, this study extends further the discussion about selection processes beyond

the boundaries of supervisory boards,as it incorporates the selection of executive directors

within the model to identify the logic that supervisory board members follow to select

appropriate executive directors. Thus, both corporate governance tiers are simultaneously

investigated through the methodology of social network analysis (SNA) while taking into

account the condition of interdependence (Lusher et al.,2013). This conditionassumes that

both selection processes are mutually susceptible, and arguably, do not develop in

isolation from each other. Thus, this studyleads to further discussion on whether –and if so,

how –tendencies towards homophily and preferences for particular corporate board

representatives create an interplay of social selection mechanisms in the two tiers of

corporate governance. Following this, the study argues that corporate board social

selection processes do not develop in isolation and at random, but that the selection

depends both on the selection conducted by the other boards and on the personal

characteristics of the actors.

2. Theoretical background and hypotheses

Corporate governance theorysuggests that shareholders, as asset owners, represent those

who are responsible for corporate decisions. In practice, companies employ agents

(supervisory and executive directors) who will be responsible for both determining and

executing companies’ strategic decisions (Shleifer and Vishny, 1997). It is essential that

supervisory boards’ decisions are in compliance with shareholders’ incentives to prevent

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