Academic journal article Journal of the Australian and New Zealand Academy of Management

Defining the Social Capital of the Board of Directors: An Exploratory Study

Academic journal article Journal of the Australian and New Zealand Academy of Management

Defining the Social Capital of the Board of Directors: An Exploratory Study

Article excerpt

ABSTRACT

This paper advances the resource dependence and social networks literature by investigating a board's structural social capital created as a consequence of interlocking directorates. Using approaches and measures developed by social network analysis we compare the interpersonal directorship networks of the top 250 companies in the United States and Australia. We find that the smaller, sparser Australian network is only marginally less compact and connected than the larger US network at the firm level of analysis. However, at the director level of analysis the US network is much larger and more connected than its Australian counterpart. As a result, we argue that scholars studying the resource dependence role of boards should consider using measures of interpersonal links as well as traditional measures of inter-firm links.

Understanding how boards impact on corporate performance is a question central to the corporate governance research agenda. Agency theory, for example, argues that the key way a board adds value is by ensuring the interests of the managers of the firm are aligned with the interests of the owners (Eisenhardt 1989; Jensen & Meckling 1976). A quite distinct area of inquiry, however, relates to the role that the board plays in providing access to important resources such as customers (Pennings 1980), capital (Mizruchi & Stearns 1988), the business elite (Useem 1984) and power in general (Pfeffer & Salancik 1978).

We aim to broaden understanding of the resource dependence theory of corporate governance by examining the links provided to a board by interlocking directorships. We commence by reviewing existing research on the resource dependence role of the board before outlining how the emerging construct of social capital can be adapted and applied to investigate this role. In particular, we highlight how it is the personal director network that is critical to the development of social capital rather than the corporate network (i.e. network of corporations).

While this study is primarily exploratory and descriptive, we contribute to the literature by employing a new methodology to measure the Opportunity network' that interlocking directorates provide a board within a national corporate governance system (Adams 2002a; 2002b; 2002c). We show how the formal models, procedures and techniques developed in social network analysis can be applied to individual-level networks among directors. We stress that we are not considering the formation of social capital at the individual level; rather we are examining the systemic connections of individual directors in order to illustrate the opportunity network available to a board within the national corporate governance system. A comparison of the Australian and US systems highlights the divergence in network attributes between corporate networks and the networks of interlocking directors. We conclude with implications and areas for further research.

Boards and Resource Dependence Theory

Resource dependence theory posits a firm's success will be contingent on its ability to gain access and control over external resources (Aldrich 1979; Aldrich & Pfeffer 1976). Proponents argue that control of the external environment is a key determinant of firm performance (Katz & Kahn 1978; Hillman, Cannella & Paetzold 2000) and so firms seek to control market conditions (such as competition, social forces and regulation) or access critical resources (Boyd 1990; Pfeffer & Salancik 1978). This idea has been extensively investigated in a variety of contexts including differing organisation types, (Zald 1967; Provan 1980; Pfeffer & Nowak 1976; Boyd 1990) and difficult methods of cooptation, (Pfeffer 1972a; Burt 1980a; Pfeffer & Nowak 1976; Pfeffer & Leblebici 1973; Galaskiewicz 1979).

Director Interlocks: Definitions and Correlates

Interlocking directors have been long-acknowledged as one method of controlling the external environment and accessing resources (Means 1939). …

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