Academic journal article Social Behavior and Personality: an international journal

Social Capital of Corporate Boards: Effects on Firm Growth

Academic journal article Social Behavior and Personality: an international journal

Social Capital of Corporate Boards: Effects on Firm Growth

Article excerpt

(ProQuest: ... denotes formulae omitted.)

The role of the board in large, publicly owned firms has traditionally been emphasized for its monitoring and controlling function of corporate governance, which allows for the efficient allocation of resources in business decisions (Jensen & Meckling, 1976). Others view the board as a function of service and resource provider to the firm, where the board as an expert group provides the firm with advisory support regarding management, legal, and accounting practices (Johnson, Daily, & Ellstrand, 1996). However, previous studies in which the relationship between the board's role and firm behavior and outcomes was examined with legally structured and traditionally used variables, such as the ratio of "outside" or nonexecutive directors (independent of management) to all board members, and chief executive officer (CEO) ownership, have often shown inconsistent results (Finegold, Benson, & Hecht, 2007).

We analyzed how-in addition to the traditional, legal criteria of board characteristics-information and resources obtained through the board members' network influence the growth of Korean firms. To do this, we measured the service and resource providing function of the board across different levels of social capital, which allowed us to capture the capabilities of the board as a group. As a board of directors can be viewed as a small subset of a networked society, it is worthwhile to examine how this group can influence the firm's outcomes.

Social capital is a set of goodwill or valuable assets that are obtained from other entities in a network (Adler & Kwon, 2002; Chang, Tu, Li, & Tsai, 2010). In a business context, the internal social capital of the board comprises the internal relationships of the board members, characterizing organizational bonding in the network, whereas external social capital characterizes the external bridging of the board members with board members in other firms. We also examined how ownership structure influences the relationship between board social capital and firm growth.

Literature Review and Hypotheses Development

Board Social Capital and Firm Growth

Social capital comprises three categories. First, it improves the quantity and quality of information that can be accessed. For example, people with broader personal networks that provide more information tend to have higher chances of being successful in job searches than do those with narrow personal networks (Fernandez & Weinberg, 1997), and firms refine information from networks to understand consumer preference and project future demands (Uzzi, 1997). Second, social capital provides influence and power. People or organizations that are in the position of exclusively bridging multiple entities hold the upper hand in negotiations by controlling the sources of information, and have a greater likelihood of achieving their goals (Burt, 1992). Third, it creates solidarities that are based on social trust and norms, which reduce monitoring costs, encourage commitment, and facilitate conflict solving (Nelson, 1989).

However, the costs of social capital sometimes outweigh the economic benefits (Gargiulo & Bernassi, 1999). First, considering that the cost of forming and maintaining social networks is high, the information obtained from social capital is not always cost effective. Second, expanding networks to obtain more information often reduces the exclusivity of the network, thus lowering the power and influence. Third, solidarities sometimes prevent members from accepting new information, whereby "not invented here" syndrome is persistent, group thinking makes it hard to promote new ideas, and members' free riding (benefiting from something without paying for it; Baumol, 1952) reduces economic efficiency.

Internal and External Social Capital

Internal and external aspects of social capital are associated with different functions in characterizing the role of the board. …

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