Influence of Board of Directors on Corporate Diversification: Evidence from India

• Author: Neeraj Dwivedi,Dhirendra Mani Shukla
• Published date: 01 September 2016
• Date: 01 September 2016
• DOI: http://doi.org/10.1002/jsc.2074

RESEARCH ARTICLE

Strat. Change 25: 471–484 (2016)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2074

Copyright © 2016 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2074

Inuence of Board of Directors on Corporate

Diversication: Evidence from India1

Dhirendra Mani Shukla

Indian Institute of Management, Lucknow, India

Neeraj Dwivedi

Indian Institute of Management, Lucknow, India

Board diversity in terms of a board’s combined human and social capital has a

positive inuence on the level of corporate diversication.

Questions related to the role of board of directors (henceforth ‘board’) have been

addressed by scholars from the areas of nance and strategy for quite a long time

(Jensen and Meckling, 1979; Pfeer and Salancik, 1978). e two dominant

streams of research examining the role of board are primarily guided by two theo-

retical perspectives: agency theory and resource dependence theory (Chung and

Luo, 2008; Hillman and Dalziel, 2003; Hillman et al., 2000). Agency theorists

emphasize the monitoring role of the board (Eisenhardt, 1989; Jensen and Meck-

ling, 1979), while resource dependence theorists emphasize the resource provision

role of the board (Pfeer, 1972; Pfeer and Salancik, 1978). A few researchers

have attempted to integrate these perspectives, highlighting that directors are

involved in both these functions (Hillman and Dalziel, 2003; Kor and Sundara-

murthy, 2008). ese researchers argue that the monitoring role of directors does

not depend only on the right incentives, but also on the abilities of the directors;

similarly, the resource provision role of directors is dependent on directors’ abilities

and competencies (Hillman and Dalziel, 2003; Kor and Sundaramurthy, 2008).

Consequently, this stream of research, which considers a board’s human and social

capital as proxy for their monitoring and resource provision abilities, has become

important in the corporate governance literature (Haynes and Hillman, 2010;

Johnson et al., 2012; Westphal and Milton, 2000).

As far as the eect of the board on a rm’s strategic behavior is concerned,

researchers have examined the inuence of the board’s human and social capital

on rm performance (Hillman and Dalziel, 2003; Khanna et al., 2013), inter-

nationalization (Rivas, 2012), innovation (Chen et al., 2013), and resource alloca-

tion patterns (Haynes and Hillman, 2010). However, there have not been many

1 JEL classication codes: G34, L21, L25.

Drawing on resource dependence

and agency perspectives, this

study examines the inuence of

board of directors’ human and

social capital on rm

diversication.

An empirical investigation on a

sample of 99 publicly listed Indian

rms suggests that a board’s

experience, competence, and

social capital help rms enter into

and operate in diverse product

markets.

The ndings of the study

contribute to the corporate

governance literature by

emphasizing the importance of

the board’s resource‐provisioning

role in rms’ corporate strategy

decisions.