Who needs experts most? Board industry expertise and strategic change—a contingency perspective

• Author: Sebastian Schrapp,Jana Oehmichen,Michael Wolff
• Date: 01 March 2017
• DOI: http://doi.org/10.1002/smj.2513
• Published date: 01 March 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 645–656 (2017)

Published online EarlyView 22 April 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2513

Received 1 March 2013;Final revisionreceived 27 December 2015

WHO NEEDS EXPERTS MOST? BOARD INDUSTRY

EXPERTISE AND STRATEGIC CHANGE— A

CONTINGENCY PERSPECTIVE

JANA OEHMICHEN,*SEBASTIAN SCHRAPP, and MICHAEL WOLFF

Chair of Management and Control, Georg-August-University Göttingen, Göttingen,

Germany

Research summary: We analyze the effects of board industry expertise on corporate strategic

change and the moderating roleof institutional quality. We suggest that country-level contingency

factors mitigate the effect of experienced boards on strategy formation by providing alternative

sources of information and control in strategic matters. We develop institutional quality as

institutional information provision and institutional control provision to test our hypotheses on a

sample of rms fromMSCI Europe and the S&P 500. Our ndings conrm that industry expertise is

a salient driver of strategicchange across countries. The strength of the effect, however,depends on

the institutional quality. We submit that weak institutions require greater boardindustry expertise

as an alternative channel of information and control.

Managerial summary: This study provides new empirical evidence that experience in the rms’

industries enables directors to increasestrategic change. Our ndings show that this effect is even

stronger in countries with weak regulatoryenvironments. Wehereby provide guidance for multiple

stakeholders. First, shareholders seeking a more active adjustment of their rms’ strategies may

want to compose boards that leverage such experienced directors. Second, directors can use

their industry experience to control and to challenge managers better to move beyond the status

quo. Third, managers lacking access to information on potential strategic change can use such

experienced directors for strategic advice and as a source of information. Overall, we add to

the understanding of the corporate board’s role in shaping strategy and the inuence of weak

regulations. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

Recent research stresses the benecial effects

of board members’ individual expertise on the

strategy formation process (Golden and Zajac,

2001; Westphal and Fredrickson, 2001). Their

deeper understanding of strategic processes enables

experienced directors to monitor and advise

managers better on strategic issues (Haynes and

Hillman, 2010). We strive to add to this research

Keywords: board expertise; corporate governance; institu-

tional differences; resource-based view; strategic change

*Correspondence to: Jana Oehmichen, Chair of Management

and Control, Georg-August-University Göttingen, Göttingen,

Germany. E-mail: jana.oehmichen@wiwi.uni-goettingen.de

Copyright © 2016 John Wiley & Sons, Ltd.

by challenging the effectiveness of these two board

functions in different institutional environments.

Drawing on a conjoint view of the agency and

resource dependence (RD) perspectives set forth

by Hillman and Dalziel (2003), we contend that

industry expertise drives strategic change across

countries. However, we nd that institutional

differences as moderating effects modify the board

expertise– strategy relation. Specically, we pro-

pose that a high-quality institutional environment

that facilitates strategic deciders’ access to required

information and provides stakeholders legal means

for exerting a controlling inuence on managers

reduces the need for experienced directors to

provide counsel and monitoring.