Essays on board structure, interlocking and director networks

Guide(s)

Pallathitta, Rejie George

Department

Strategy

Area

Strategy

University

Indian Institute of Management Bangalore

Place

Bangalore

Publication Date

3-31-2023

Year Awarded

March 2023

Year Completed

March 2023

Year Registered

June 2015

Abstract

Boards of organizations have a significant impact on the quality of their governance and the performance of organizations (Kogut, 2012; Hillman and Dalziel, 2003). The internal dynamics of the board and the external position of the board impact the level of monitoring and resources that the board provides. The internal structure of the boards affects firm performance through the level of monitoring and external position of board enables access to resources primarily through interlocking directorates (Desai, 2016, Barroso-Castro et al., 2016). Agency theory hypothesizes that busy directors cannot pay attention to the multiple firms they sit on the boards of, and hence have a detrimental effect on firm performance. From another theoretical perspective the board of directors links the organization through various types of relationships and puts it in a strategically important position in the network. Network centrality of a firm as reflected in interlock ties with other firms, is a form of social capital as it provides access to information flows through the network (Davis, 1991). Heavily interlocked directors constitute corporate elite which is often at the forefront of innovations and firms centrally located in the interlock network would be among the first to make use of these innovations to generate value for the firm (Mizruchi,1996). Network theory allows us to move beyond these shortcomings. I seek to understand the role of boards in India, an emerging market, in a dynamic institutional context, a period that covers the pre and post enactment phases of government regulation (i.e., Companies Act, 2013) from 2010 to 2019. The first essay of my thesis attempts to comprehensively document governance literature landscape that focuses on characteristics of CEO’s and directors, boards/teams as well as networks from the perspective of their effect on firm performance. This decade (2009-19) has seen a significant rise in publications in the field of corporate governance (Zheng and Kouwenberg, 2019). Using a novel methodology of qualitative systematic review for narrative synthesis for summarization of prior knowledge in the field of corporate governance required an iterative and purposive search strategy. The main objective was to develop an overarching visualization through concept maps detailing its landscape through the prism of publications from six high ranking journals from FT50 list published over the decade 2009-19. Concept maps are graphical tools for organizing and representing knowledge parsimoniously. The PRISMA (Preferred Reporting Item for Systematic Review & Meta-analysis) framework was used for sample derivation. The defining element of qualitative systematic reviews is the adoption of a narrative approach in the process of analysis and synthesis which required us to go through the research articles intensely and categorize these hundred and eighteen papers into seven categories on the basis of their units of analyses. The thematic categorization across three-levels viz. individuals (e.g., directors), teams (e.g., board of directors) and networks (e.g., director network) reveals prospective research gaps. I discover that while there have been publications that have focused on a single level viz. individual, team or network level, fewer publications focus on inter-level analysis. Intra-level papers form the bulk of the publications (a total of 92 out of 118) with 27 papers focused on the individual, 49 on the team and 16 on the network level. Inter level papers, which together constitute (a total of 17 out of 118) less than 15% of the papers published. My second essay attempts to fill that gap by empirically linking network characteristics of individual directors on a board of directors to firm performance. It takes individual (director attributes) and team (board of directors’ attributes) and links it to firm outcomes. Another major gap was identified in papers bridging the individual to network level analysis. It is evident that the connection between traditional corporate governance issues and network theory properties is still under-investigated. The third essay aims to bridge this gap by linking the individual level (directors) to network level (board of directors). In second essay I investigate the relationship between board attributes and firm performance in detail by analysing data from a large set of companies in India from 2010 to 2019, a period that covers the pre and post enactment phases of government regulation (i.e., Companies Act, 2013) that limits the number of directorships that can be held by a single director. I utilize this exogenous shock to examine the changes that have occurred in Indian boards as companies hit the stipulation for compliance. I find evidence that agency theory is limited in its prediction of busy directors negatively affecting firm performance. Despite this, interestingly, its predictions with regard to the positive effect of attendance of board meetings by directors on firm performance hold. In addition, the network theory prediction that the focal director’s centrality in the director network has a positive impact on firm performance holds, but only when the relationship is moderated by director attendance. While agency theory is the dominant paradigm in literature, it has its limitations. Network theory allows us to move beyond these shortcomings. It allows me to visualize directors and their linkages beyond mere count measures that are agnostic to board complexity and functioning. It allows me to incorporate “how” and “who” a director is connected to in a network, as opposed to just “how many” other directors he/she is associated with. Therefore, I used centrality measures, particularly betweenness and eigenvector centrality, to examine the impact of director networks on firms. They allow me to go beyond a simple count measure of the number of directorships and examine how many directors are linked to a focal director and who a focal director is linked to and how important they are in the network of directors. While Based on a fixed effects estimation, I do find a statistically significant relationship between betweenness or eigenvector centrality and firm performance, I also find a significant positive relationship of their interaction effect with board meetings attended and firm performance. This indicates that it is not only the incidence of multiple directorships that is beneficial for the firm, or the extent to which they are boundary spanners or connected to influential others in the director network, but also their attendance of board meetings of a focal firm that allows them to act as boundary spanners in favour of the firm and bring in information and resources to benefit the firm. Implications of the interactions with the Companies Act (2013) are also interesting. I find significant and interesting interaction effects of board meetings attended, multiple directorships, betweenness and eigenvector centralities with Companies Act that shed light on how the corporate landscape in India has adapted to this institutional change. The third essay aims to bridge the gap identified in the first essay by linking the individual level (directors) to network level (network of firms). Board interlocks are known to allow promoters to extort disproportionate gains from the company in the context of a developing country. In India Companies Act (2013) aims at restricting this influence by limiting the number of directorships that can be held by a director, and hence, limit firm interlocks. I utilize this exogenous shock to study its impact on the structure of the firm networks in the superset of NSE 100 firms from 2010-2019 which covers pre- and post-institutional disruption period. Four panels, constructed for the years 2010, 2013, 2016 and, 2019, allow us to examine the shift in various network characteristics as Indian companies adapt to the stipulations proposed in the Companies Act (2013). Overall, I find that the network of firms continues to be susceptible towards the formation of clusters even as the number of clusters has sharply fallen over the last decade, leading a focal firm to be better connected to more firms that are a part of its new, bigger cluster. In conclusion, while the Companies Act (2013) does lead to a major upheaval in the corporate directors’ network, I find that the disruptions do not affect companies that are linked to each other more strongly (multiple ties) to a huge extent and instead are localized to companies that were linked through a single multiple director. This might be an indication that firms search for new linkages to companies that might help them tide over institutional dynamism in the short term but do not do it at the cost of companies they are closely linked to, instead choosing to sacrifice peripheral connections. In conclusion, this thesis structured around three essays provides both theoretical and empirical contributions. In the first essay I provides a systematic qualitative review along with concept maps to document the current state of corporate governance literature and develop broad research gaps around inter-level categories. Essay two and essay three aim attempt to bridge these gaps by providing a reasonably accurate picture of the impact of stipulations of the Companies Act (2013) on the Indian corporate governance network by moving beyond agency theory framework to network theory and analysis.

Pagination

xix, 253p.

Copyright

Indian Institute of Management Bangalore

Document Type

Dissertation

DAC Chairperson

Pallathitta, Rejie George

DAC Members

Raghunath, S; Prabhu, Ganesh N; Bhagavatula, Suresh

Type of Degree

Ph.D.

Relation

DIS-IIMB-FPM-P23-03

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