When Elites Forget Their Duties: The Double‐Edged Sword of Prestigious Directors on Boards

• Date: 01 November 2017
• DOI: http://doi.org/10.1111/joms.12275
• Published date: 01 November 2017

When Elites Forget Their Duties: The Double-Edged

Sword of Prestigious Directors on Boards

Jana Oehmichen, Daniel Braun, Michael Wolff and

Toru Yoshikawa

University of Goettingen; University of Goettingen; University of Goettingen; Singapore Management

University

ABSTRACT Previous research indicates that the performance effect of prestigious directors is

ambiguous. Our study addresses this issue by integrating the theoretical lens of board capital

and the institutional perspective. We argue that prestigious directors can bring benefits as well

as costs. We claim that the emergence of these costs depends on the institutional context,

specifically the institutional characteristics of the country’s corporate elite circle which is

characterized by the elite cohesion and the elite exclusiveness. Our empirical results with a

15-country sample covering the period of 2005 to 2014 provide evidence for the overall

existence of a positive performance effect of prestigious boards. However, our results also

indicate that these beneficial effects of prestigious boards are mitigated in countries with high

elite exclusiveness. Hence, under these certain institutional conditions, the elite-favouring

behaviour of prestigious directors also brings costs.

Keywords: corporate elite, corporate governance, director network, institutions, prestigious

directors

INTRODUCTION

The effect of board characteristics on firm performance has been a major focus of many

studies in recent decades (Combs et al., 2007; Kor and Mahoney, 2005; Peng et al.,

2003). The efficacy of directors’ impact on firm performance is generally based on how

the directors perform their board tasks, namely, providing advice and counsel (Forbes

and Milliken, 1999; Hillman and Dalziel, 2003; Lynall et al., 2003), monitoring manag-

ers (Jensen and Zajac, 2004; Kroll et al., 2008; Mizruchi, 1983; Pearce and Zahra,

1991), and providing legitimacy in the factor and product markets (Hillman et al., 2007;

Pfeffer and Salancik, 1978). The efficacy of directors usually depends on their human

Address for reprints: Jana Oehmichen, Chair of Management and Control, University of Goettingen, Platz

der G€ottinger Sieben 3, G€ottingen, 37073, Germany (jana.oehmichen@wiwi.uni-goettingen.de).

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C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:7 November 2017

doi: 10.1111/joms.12275

and social capital or director capital in general because it affects the directors’ capability

to fulfil their monitoring role and/or to play a resource provision role (Hillman and Dal-

ziel, 2003). Prestige of an individual director is one type of director capital that may

have an important effect on firm performance.

Prestigious directors can benefit companies immensely as they provide legitimacy

(Certo, 2003) and access to social capital (Boivie et al., 2012), and they can be a relevant

source of power for the board of directors over the management (D’Aveni and Kesner,

1993). However, researchers have started questioning whether prestige can also be detri-

mental (Pollock et al., 2010) and have addressed the potential cost of prestigious direc-

tors (Acharya and Pollock, 2013). Prestigious directors form a country’s economic or

business elite, which is defined as the best or choice part of a larger group (The Concise

Oxford Dictionary, 1990), or specifically, the choice part of the business community in

this study. Often, corporate executives and board directors of large firms belong to this

group, and we contend that the affiliation with these elites can influence the directors’

behaviour. For example, such affiliation may lead to elite-favouring behaviour such as

nepotism between directors and managers, which may mitigate directors’ vigilant moni-

toring, although such behaviour is rarely in a company’s best interest.

Researchers have shown that elite networks of directors shape countries’ business sys-

tems (Scott, 1991; Useem, 1982) and often set the rules and shape the norms of the busi-

ness world. The identification with the elite may cause them to behave in favour of the

elite even at the expense of other stakeholders due to their motivation to support other

elite members and/or to remain in this circle by conforming to the elite norms. At the

same time, prestigious directors are endowed with rich director capital such as extensive

social capital and access to valuable information and external resources, which can be

leveraged for the firm’s interests. Hence, the presence of prestigious directors on the

board can be either detrimental or beneficial for the firm. We thus explore competing

arguments to predict the performance implication of prestigious directors.

To disentangle the potential benefits and costs of prestigious directors and resolve the

competing arguments, we introduce an institutional view on elites and treat some insti-

tutional factors as important contingencies. We argue that elite structures are societal

phenomena that emerge at the institutional level and hence, our study also focuses on

institutional-level characteristics that likely affect the efficacy of a country’s elite. Our

view is that the performance effect of prestigious directors is contingent upon the char-

acteristics of elite structure, specifically the degree of elite cohesion and exclusiveness.

When the cohesion of the elite is strong, i.e., elite members are concentrated among a

small number of individuals, elite-specific norms and rules as well as proprietary infor-

mation spread more effectively, as cohesive networks improve the consensus about the

norms (Westphal and Khanna, 2003) and facilitate their diffusion (Davis et al., 2003).

Such structures likely motivate prestigious directors to choose behaviours that preserve

or enhance the benefits of the elite group sometimes at the expense of the focal firm’s

other stakeholders. Elite exclusiveness can lead to the formation of an elite group com-

prising of members from a similar social class background, which tends to lead to com-

mon understanding of appropriate behaviours and norms (Davis and Greve, 1997) that

are sometimes distinct from those of external members of the elite circle. This exclusivity

limits the diffusion of these norms beyond the elite’s borders and thus may facilitate

1051When Elites Forget Their Duties

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C2017 John Wiley & Sons Ltd and Society for the Advancement of Management Studies