By Klavdia Evans, Ashley Salaiz, Seemantini Pathak, & Dusya Vera
Evidence show that companies draw upon directors’ specific knowledge, skills, abilities, and connections stemming from their professional background, experience, and expertise (e.g., Hillman et al., 2000, 2009; Kor & Misangyi, 2008; McDonald et al., 2008). However, given that each director has different expertise, it was important to understand when a specific area of expertise becomes more salient in a company’s corporate social performance (CSP).
Therefore, we focused on board members whose expertise lay in a non-business environment, provided thorough understanding of social issues, and enabled influencing with powerful community groups. Directors with such expertise are often referred to as community influentials (CIs) and traditionally include political, social, religious, and community leaders, as well as university or other institutional representatives. We were curious to examine how the presence of CIs on the board, as well as their ties to either nonprofit organizations or companies with strong CSP, could steer the board’s, and hence the company’s, attention toward stronger CSP.
Our investigation, based on a panel of Fortune 500 companies in the 2004-2008 period, painted a nuanced picture of when and how CIs affect CSP. Firstly, the number of CIs on the board positively influenced CSP, but this applied only for companies with recent weak CSP. Secondly, the number of CIs’ current board ties to nonprofit organizations (e.g., The Boy Scouts of America) had a strong positive effect on the focal company’s CSP. This effect was stronger when non-CI directors (e.g., retired CEOs, lawyers, other directors with business backgrounds) had fewer ties with nonprofit organizations. However, the highest level of CSP arose when both CIs and non-CIs had many ties with nonprofit boards. Further, CIs’ board ties to companies with strong CSP positively impacted the focal company’s CSP, but only on the boards where non-CI directors did not have such ties. Our results show that it is important to not only consider the utility of directors’ background in the company’s current context, but also with respect to the availability of that expertise among other directors.
Our results are relevant to managers because they provide details about the conditions under which CI directors can help improve CSP. Specifically, companies that suffer from CSP weaknesses are more likely to leverage the expertise of their CI directors and improve their CSP accordingly. Such companies need to also consider CI directors’ links with nonprofit organizations and for-profit companies with strong social performance, together with the portfolio of socially oriented board ties by the other categories of board members.
Our findings become even more practitioner-relevant with the current changing dynamics in US corporate governance. As laid out by the 2022 US Spencer Stuart Board Index, given the low prevalence of board CSR (corporate social responsibility) committees in the past five years (10% for 2016 and 7% for 2021), directors’ and executives’ pro-social values and ties are important mechanisms that can strengthen company’s social postures. Since CEOs have been progressively staying away from serving on outside boards (54% of CEOs in 2011 vs. 60% of CEOs in 2021 did not serve on outside boards), outside directors become key information channels between boards. Considering that boards (57% in 2011 vs. 67% in 2021) are restricting their directors’ ability to accept additional directorships, the nature and the quality of the existing board ties of each director (including CIs) becomes a rare commodity for companies to manage. Finally, in 2021, the Securities and Exchange Commission implemented changes requiring companies to increase their board diversity by appointing at least one person who identifies as a female and one person who identifies as an underrepresented minority. Since the representation of women and minorities is greater among community influential, our findings have become even more relevant, and support the idea that companies are likely to see their boards being more pro-social than before.
References:
Evans, K., Salaiz, A., Pathak, S., & Vera, D. 2022. Community influential directors and corporate social performance. Business & Society, 61: 225-263.
Hillman, A. J., Cannella, A. A., Jr., & Paetzold, R. L. 2000. The resource dependence role of corporate directors: Strategic adaptation of board composition in response to environmental change. Journal of Management Studies, 37: 235–255.
Hillman, A. J., Withers, M. C., & Collins, B. J. 2009. Resource dependence theory: A review. Journal of Management, 35: 1404–1427.
Kor, Y. Y., & Misangyi, V. F. 2008. Outside directors’ industry–specific experience and firms’ liability ofnewness. Strategic Management Journal, 29: 1345–1355.
McDonald, M. L., Westphal, J. D., & Graebner, M. E. 2008. What do they know? The effects of outside director acquisition experience on firm acquisition performance. Strategic Management Journal, 29: 1155–1177.