Boards of a Feather: Homophily in Foreign Director Appointments Around the World

• Published date: 01 September 2022
• Author: JOHN M. BARRIOS,PIETRO A. BIANCHI,HELENA ISIDRO,DHANANJAY NANDA
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/1475-679X.12416

DOI: 10.1111/1475-679X.12416

Journal of Accounting Research

Vol. 60 No. 4 September 2022

Printed in U.S.A.

Boards of a Feather: Homophily in

Foreign Director Appointments

Around the World

JOHN M. BARRIOS,∗PIETRO A. BIANCHI,†

HELENA ISIDRO,‡AND DHANANJAY NANDA§

Received 20 March 2019; accepted 12 November 2021

ABSTRACT

We examine how similarity in institutional, legal, and social characteristics

between a firm’s and its directors’ home countries, that is, country-pair ho-

mophily, affects foreign director appointments. We estimate a gravity model

that includes economic and geographic proximity and find that country-pair

homophily is a significant determinant of foreign director appointments to

corporate boards. We also find that country-pair homophily limits the ap-

pointments of foreign directors from high-quality governance countries to

firms located in low-quality governance countries, which may reduce the

role of board internationalization in promoting the global convergence of

∗Washington University in St. Louis and NBER; †Florida International University; ‡Instituto

Universitário de Lisboa (ISCTE-IUL), BRU-IUL; §University of Miami

Accepted by Rodrigo Verdi. The authors thank Bernie Black, Philip Bond, Mara Faccio,

Fabrizio Ferri, John Matsusaka, Darius Miller, Margarita Tsoutsoura, Luigi Zingales, and par-

ticipants at University of Miami Finance Brownbag, the 2016 AAA IAS Midyear Meeting, 2016

EAA Annual meeting, Alliance Manchester Business School, IE Business School, Universidad

Carlos III, Bocconi University,INSEAD, ASU, UBC, University of Michigan, NTU, 2017 Global

Issue in Accounting Conference at the University of Chicago, London School of Economics,

USF, FIU, University of Tel Aviv 13th International Conference in Accounting. Helena ac-

knowledges the financial support of FCT,grant UIDB/00315/2020. Online appendices to this

paper can be downloaded at http://research.chicagobooth.edu/arc/journal-of-accounting-

research/online-supplements.

Email: john.barrios@wustl.edu

1293

© 2021 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1294 j. m. barrios, p. a. bianchi, h. isidro, and d. nanda

governance practices. We analyze changes in foreign director appointments

around the international adoption of IFRS and Norway’s gender-quota rule

and find a higher appointment likelihood for directors originating from

countries that are institutionally and culturally similar to that of the firm.

Our findings point to the critical role that country-pair homophily plays in

matching director to boards with implications for the diffusion of governance

practices globally.

JEL codes: F16, F66, G30, G34, J60

Keywords: corporate governance; foreign directors; gravity model; ho-

mophily; culture; International Financial Reporting Standards; gender

quota

1. Introduction

We examine how similarity in institutional, legal, and social characteristics

between a firm’s and its directors’ home countries, that is, country-pair ho-

mophily,affects foreign director appointments. The composition of the cor-

porate board has long been viewed as a critical governance characteristic

(Adams, Hermalin, and Weisbach [2010]), and board diversity has become

one of the most significant governance issues faced by executives and share-

holders. For example, gender and ethnic diversity in boards have been

mandated by governments and institutions around the world (e.g., Orga-

nization for Economic Co-operation and Development (OECD) [2015]).1

Although the ethnic and gender composition of the board attracts con-

siderable media and political attention, firms consider other dimensions

of diversity when selecting the composition of their boards (e.g., Bernile,

Bhagwat, and Yonker [2018]). The demand for diversity and the need to

keep up with business globalization has led firms to increasingly appoint

foreign directors, that is, individuals domiciled in other countries.

Foreign directors can bring diversity of thought and country-specific ex-

pertise (Masulis, Wang, and Xie [2012]; Miletkov, Poulsen, and Wintoki

[2016]). Moreover, board internationalization has been singled out as a

mechanism for propagating corporate governance practices across coun-

tries (Hansmann and Kraakmann [2001]; Khanna, Kogan, and Palepu

[2006]; Bouwman [2011]; Davies and Hopt [2013]; Giannetti, Liao, and

Yu [2015]; OECD [2017]; Iliev and Roth [2018]).2Despite the percep-

tion that foreign directors enhance board diversity and promote the prop-

agation of governance, evidence on the drivers of cross-country director

1Governments in Norway, France, Germany, Italy, and Iceland have passed laws imposing

quotas for women on boards of publicly listed companies. In the United States, California

laws requires public companies to have at least one female director and one director from an

underrepresented community by the end of 2021. Examples of nongovernmental initiatives

promoting board diversity include The Alliance for Board Diversity and the Catalyst Institute.

2For example, the German Corporate Governance Code encourages the appointment of

foreign members to supervisory boards.

boards of a feather 1295

appointments remains sparse. We provide evidence on the determinants of

cross-border director appointments highlighting the role of shared institu-

tional and social conditions between the firm’s country and the directors’

home country, that is, country-pair homophily.

Prior governance work shows that firms’ selection of governance poli-

cies, including board structure, are influenced by institutional, economic,

and sociocultural conditions of their domicile country (e.g., Black [2001];

Durnev and Kim [2005]; Doidge, Karolyi, and Stulz [2007]; Levit and

Malenko [2016]; Lel and Miller [2019]). Prior studies also conclude that

similarities between countries are significant determinants of cross-country

transfer of knowledge, labor, and finance (Khanna, Kogan, and Palepu

[2006]; Guiso, Sapienza, and Zingales [2009]; Aggarwal et al. [2011];

Bloomfield et al. [2017]). Consequently, we posit that both the supply of

and the demand for foreign directors are not only affected by firms’ coun-

try characteristics, but also by the similarities in institutional, economic, le-

gal, and sociocultural characteristics between the firm’s and its directors’

home countries. Existing studies on cross-country director appointments

are informative about firm-level governance choices (Bouwman [2011];

Masulis, Wang, and Xie [2012]; Giannetti, Liao, and Yu [2015]; Iliev and

Roth [2018]), but largely ignore the role of shared country-level character-

istics.3We supplement this inquiry by examining whether shared character-

istics, country-pair homophily, affect foreign director appointments.

Homophily is the tendency of individuals to associate, interact, and bond

with others with similar characteristics and backgrounds and is construed

as inhibiting diversity. Homophily has been identified as affecting social

networks based on interpersonal relationships (McPherson, Smith-Lovin,

and Cook [2001]), group formation, and social connections in a wide array

of settings, such as school, work, and marriage (e.g., DiMaggio and Pow-

ell [1983], McPherson, Smith-Lovin, and Cook [2001], Rivera [2012]).4

As interpersonal relationships and networking are key elements of direc-

tor selection and retention, we expect that homophily at the country-pair

level affects the supply of and demand for foreign directors. When selecting

foreign directors, firms likely consider their background and experiences

that are shaped by the conditions in their home countries. Homophily

would lead firms to prefer directors who share institutional and sociocul-

tural values with the firm’s domicile country to increase board diversity but

reduce the risk of frictions and lack of cooperation with the other board

3Further, firm-level studies capture the marginal effect on firms’ governance rather than

the aggregate effect on country-level governance. Micro-estimates equal aggregate estimates

only if the micro-estimates are proportional to the aggregate estimate. In the case of firm-level

governance within a country, the proportionate assumption rarely holds (i.e., the marginal

firm does not always equal the average firm).

4In the case of the marriage market, positive assortative mating along observable inherita-

ble traits (e.g., intelligence, race, and height) as discussed by Becker [1973] can be viewed as

the micro-foundation of homophily in which choosing a partner with similar characteristics

increases the certainty about the quality of one’s offspring.