Board of Director Contacts and Implications for Firm Performance

DOI: 10.5176/2251-2039_IE15.24

Authors: Kevin J. Smith

Abstract: Boards of directors are considered the pinnacle of corporate governance and directors can provide a wealth of knowledge and resources to the companies they serve. Personal connections among company directors are regarded as an important phenomenon which can be used to access and mobilise resources for their firms, including new practices and innovation. This study extends the knowledge of interlocking directorships by examining the links between directors’ opportunity networks and firm performance. We develop new measures of a board’s opportunity network manifested through its directors’ connections. We find that better-connected boards are associated with higher market-based (Tobin’s Q) performance. Weaker and mostly unreliable associations were found for the accounting-based performance measure ROA. Furthermore, formal (or corporate) network ties are a stronger predictor of market performance than total network ties (comprising social and corporate ties). Similarly, strong ties (connections at degree-1) are found to be better predictors of performance than weak ties (connections at degree-2).

Keywords: corporate governance, boards of directors, directors, networks, social capital, interlocks, resource dependence component