A framework for board capital

TLDR: In this paper, the authors examined the relationship between different dimensions of board capital and firm performance, and specially how internal social capital moderates the relationships between board human capital and external social capital with firm performance.

Abstract: Purpose The purpose of this paper is to examine in greater depth the concept of “board capital”, which the authors consider to be a bundle of three types of capital, and believe to be a clear antecedent of the board’s ability to perform its roles, which have positive consequences for the firm’s performance. Design/methodology/approach Through 83 firms listed on The Madrid Stock Exchange during the period 2005-2010, the authors test empirically the relationships between different dimensions of board capital and firm performance, and specially how internal social capital moderates the relationships between board human capital and external social capital with firm performance. Findings The results show that certain characteristics of human capital (average board tenure) and external social capital (directors’ interlocks) are positively related to the firm performance. The empirical findings also indicate that the internal social capital, measured by board density, is positively related to the firm performance and moderates these above relationships, increasing the potential of the resources contributed by the board members and influencing to a large extent on a firm’s performance. Practical implications The results of the investigation will help both executives and scholar in two ways. First, they will assist firms when they have to select board members, as they can now understand how the resources that board members bring with them can affect the firm performance. To be more effective, boards need to have members that have experience as firm’s directors, external connections to other boards and many internal ties among them. Second, in this context, internal social capital is especially relevant, so the firms should look for possible ways of encouraging internal ties between directors. In this paper, the authors have opted for study the participation of directors in committees. Originality/value The authors propose that these three types of capital (human, external and internal social capital) need to be synergistically combined to create a group of directors with access to a complete set of skills, knowledge and connections, but which can still work as a compact social group when making decisions.