Independent directors’ human and social capital, firm internationalization and performance implications: An integrated agency-resource dependence view
Introduction
Expansion into international markets has become an economic necessity for today's firms (Rivas, 2012a, Rivas, 2012b). Internationalization provides firms with the opportunity for growth, the ability to acquire knowledge and access to new resources in foreign locations and the potential for long-term profitability. At the same time, however, it produces high costs, complexities and uncertainties (George, Wiklund, & Zahra, 2005). Given the importance and the nature of internationalization, a large body of research has examined numerous factors affecting corporate decisions regarding internationalization, including compensation (Carpenter & Sanders, 2004), firm size and ownership (Fernandez and Nieto, 2005, Fernandez and Nieto, 2006, George et al., 2005) and the characteristics of chief executive officers (CEOs) (Jaw & Lin, 2009) and top management teams (TMTs) (Herrmann & Datta, 2005) and board structure (e.g., board size and the percentage of outsiders on the board) (Sanders & Carpenter, 1998) to name a few. Despite this extensive line of research, relatively little is known about the effect of board capital on internationalization.
Internationalization can be highly risky as it is subject to great uncertainty and complexity derived from heterogeneous cultural, institutional and competitive environments that increase the information-processing demand placed upon firms and their top executives (Sanders & Carpenter, 1998). A classic agency situation thus emerges that highlights the importance of boards of directors who serve as guardians to protect shareholder interests (Lai, Chen, & Chang, 2012). Additionally, the success of internationalization requires abundant and various resources, such as knowledge, information, technology and managerial capability (Fernandez & Nieto, 2005). Board directors may provide top executives with on-going advice and facilitate access to these essential resources. Though the roles directors play as monitors and resource providers is critically important, little effort has been made to investigate how they contribute to a firm's internationalization decisions from the aspects of both monitoring and resource-provision functions.
In practice, directors both monitor and provide resources (Hillman & Dalziel, 2003). The theoretical underpinning of the board's monitoring function is derived from agency theory, which describes the potential for the conflicts of interest arising from the separation of ownership and control in organizations (Berle and Means, 1932, Jensen and Meckling, 1976). Agency theorists assume that independent directors have greater motivation to be effective than inside directors with respect to monitoring managers and protecting shareholder interests (Fama & Jensen, 1983). The theoretical underpinning of the board's resource provision function is based on resource dependence theory (Pfeffer & Salancik, 1978), which emphasizes the directors’ resource dependence role in providing advice and access to important resources. Resource dependence theorists focus on board capital to examine how directors provide resources to the firm (Dalziel et al., 2011, Haynes and Hillman, 2010). Despite the fact that directors serve these two important functions for organizations, agency theorists and resource dependence theorists have examined one board function at the expense of the other, thereby contributing to an incomplete understanding of what boards do and how they affect organizational outcomes (Hillman & Dalziel, 2003). Hillman and Dalziel (2003) suggest that integrating agency and resource dependence perspectives is important when investigating board influence on firm outcome. Kroll, Walters, and Wright (2008) argue that in addition to agency concerns for director vigilance (e.g., independent outside directors), the simultaneous consideration of director experience may extend the understanding of the board influence on firm outcomes. Grounded on agency and resource dependence theories, this study assumes that independent directors with human and social capital enhance board monitoring and expand the resource base on which TMTs can draw, thereby contributing to firm internationalization.
Board human capital refers to the knowledge and skills that directors bring to a firm and that can be developed through experience (Hillman & Dalziel, 2003). Lai et al. (2012) suggest that an independent board that holds experienced directors with relevant expertise reduces executives’ risk-averse inclination and eases the liability of foreignness faced by firms. Accordingly, experienced independent directors may be more willing and better able to monitor executives’ internationalization decisions and better able to provide insightful counsel and essential resources for internationalization. Board social capital refers to directors’ ability to access resources through relationships, which can be built by interlocking directorate ties (Hillman & Dalziel, 2003). Independent directors with strong ties within the firm and with other firms have better access to more and higher quality information (Tian, Haleblian, & Rajagopalan, 2011) and valued resources, thus enabling them to serve as monitors and resource providers for internationalization. Following previous studies, this study uses independent directors’ industry-specific experience (Kroll et al., 2008) and international experience as indicators of board human capital (Barroso, Villegas, & Pérez-Calero, 2011) and uses independent directors’ tenure overlap and interlocking directorate ties as indicators of board social capital (Tian et al., 2011) to examine their influence on internationalization.
A few papers have investigated the effect of board capital on internationalization, but their findings are inconsistent. Rivas, 2012a, Rivas, 2012b finds that directors’ international experience is positively and significantly related to internationalization, while Barroso et al. (2011) do not confirm that firm internationalization is positively related to board international background. Additionally, Peng, Au, and Wang (2001) find that interlocks are positively and significantly associated with firm internationalization, but Chen, Dyball, and Wright (2009) document a positive, though not significant, relationship between the proportion of interlocking directors with extra-industry ties on the board and geographic diversification.
One explanation for these mixed results is that studying the influence of board capital without considering their inside/outside status provides a muddled picture of director influence. From the agency perspective, owing to their affiliations with the CEO and other top managers, inside directors are less willing to monitor than independent directors (Dalziel et al., 2011). Additionally, inside directors are often senior managers of the firm and participate in the firm's strategic decision-making. Owing to their strategic commitment, inside directors tend to endorse the firm's past strategies rather than recognize the need for major changes in the firm's strategic direction. From the resource dependence perspective, inside directors are familiar with the firm's inside constituents, which may result in less communication and openness to external information, thereby restricting their view of the industry and environment. But independent directors who are from different institutions and are well-connected to external parties can extend external resources, infuse more diverse resources into the firm and initiate new business relationships vital for growth (Kor & Sundaramurthy, 2009). Therefore, the focus on independent directors can correspond to the concept of resource dependence theory that the provision of external resources to reduce environmental uncertainty. A few recent studies have drawn attention to the differing effects of insider directors versus independent directors on corporate investment decisions (e.g., Dalziel et al., 2011). However, studies on internationalization, such as Barroso, Villegas, and Pérez-Calero (2011), predict board influence by considering the whole board of directors and thus neglecting directors’ inside or outside status. The approach of this study is different because it considers directors’ monitoring and resource-provision functions and focuses on independent directors’ human and social capital; accordingly, it may glean a more accurate view of director influence on firm internationalization.
This study also examines the performance implications of the fit between independent directors’ human and social capital and firm internationalization. Based on the understanding that a fit among strategy, structure and environment provides a basis for competitive advantage, Kim, Burns, and Prescott (2009) suggest that superior firm performance is more likely when boards enhance TMTs’ capabilities in a way that fits the nature of the firm's competitive environment. Human and social capital of independent directors may render them best able to not only effectively monitor and advise managers with varied intellectual counsel on international issues but also qualified to help acquire essential resources for internationalization. All of these improve strategic effectiveness and quality and consequently enhance firm performance. Some studies find that independent directors’ human capital (Khanna, Jones, & Boivie, 2014) or social capital (Kim, 2007) is positively associated with firm performance. Accordingly, this study expects the relationships between independent directors’ human and social capital and internationalization to hold in better performing firms but not in firms exhibiting lower performance.
Taiwan is an interesting setting for this study for two reasons. First, Taiwanese firms are pressured to internationalize for expansion because Taiwan is a small open economy with limited domestic markets and scarce natural resources (Chiang & Chen, 2008). To secure low-cost labor and raw materials, Taiwanese firms have diversified their production bases to include, among others, China, Vietnam, India and Mexico. Second, the role of independent directors is particularly important in Taiwan due to the lack of external markets for corporate control (Tsai, Hung, Kuo, & Kuo, 2006). To enhance corporate governance, regulatory changes in Taiwan have emphasized the roles and qualifications of independent directors. For instance, the Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies stipulate that an independent director of a public company shall have professional knowledge and work experience in the area of commerce, law, finance, or accounting, or in another area necessary for the business of the company, together with at least five years of work experience. Accordingly, there is an implied need for independent directors who are capable of acting independently and professionally (Chen, 2011).
This study makes three major contributions to the literature. First, by extending Hillman and Dalziel (2003) and Haynes and Hillman's (2010) work, this study integrates agency and resource dependence theories and thus should help overcome a current myopia within the two streams of research based on a single theory perspective and provide a more complete understanding of how a firm's internationalization decisions are influenced by board directors. Specifically, unlike Barroso, Villegas, and Pérez-Calero (2011) who argue the board influence on firm internationalization from a resource-based lens, this study follows Hillman and Dalziel's (2003) emphasis on directors’ monitoring and resource-provision functions, and therefore is based on agency and resource dependence theories and focuses on independent directors’ human and social capital. Additionally, the findings and conclusions of Barroso, Villegas, and Pérez-Calero (2011) need to be confirmed because they use only 45 firms in one year for the analysis. This study uses a longitudinal sample and a large sample size and thus should capture a more accurate board influence on firm internationalization. Second, by simultaneously considering human and social capital of independent directors, this study shows that a firm's internationalization decisions are based on not only the human capital (knowledge and skills) independent directors provide to the firm but also on the social capital through which independent directors facilitate access to critically needed resources (information, knowledge and managerial capabilities). Third, this study extends our knowledge regarding how a fit between a board of directors and a firm's strategies can contribute to firm performance by examining the performance implications between independent directors’ human and social capital and firm internationalization.
Section snippets
Internationalization
Internationalization is associated with several benefits, including economies of scale and scope, access to new resources, extension of innovative capabilities, knowledge acquisition, location advantages and performance improvements (Hitt et al., 1997, Hitt et al., 2006b). On the other hand, internationalization is a complex, ambiguous and costly process that is accompanied by a great deal of uncertainty (George et al., 2005). Success of internationalization requires implementing more complex
Sample and analysis
This study focuses on electronics firms listed on the Taiwan Stock Exchange to examine the effects of independent directors’ human and social capital on internationalization between 2008 and 2011. The electronics industry is chosen because Taiwan's competitiveness is derived primarily from the electronics industry. According to the Institute for Information Industry in Taiwan, during 2008, many ICT (information and communication technology) products enjoyed the highest share of the global
Results and discussion
Table 2 presents the descriptive statistics for all the variables used in the regression model. The mean of internationalization after the principal components analysis is 0.00, with an S.D. of one. On average, 26.86% of all independent directors are highly experienced in the electronics industry, with an S.D. of 33.01. The mean percentage and S.D. of independent directors who have international experience are 47.12% and 34.39, respectively. On average, the overlap in independent directors’
Conclusions and managerial relevance
Much of the extant governance literature emphasizes board propensity to engage in decision control without adequately considering whether directors have the ability to enable them to exercise control effectively. To capture both board motivation and ability, this study assesses board capital for independent directors. Specifically, this study examines the effects of independent directors’ human and social capital on internationalization and the performance implications of the fit between
Acknowledgements
The authors would like to thank Editor Pervez Ghauri and two anonymous IBR reviewers for their helpful comments during the review process. This research was supported by Taiwan's Ministry of Science and Technology (MOST 102-2410-H-327-006).
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