Who's the Boss at the Top? A Micro‐Level Analysis of Director Expertise, Status and Conformity Within Boards

• DOI: http://doi.org/10.1111/joms.12276
• Author: Eric Molleman,Reggy B. H. Hooghiemstra,Dennis B. Veltrop,Hans van Ees
• Published date: 01 November 2017
• Date: 01 November 2017

Who’s the Boss at the Top? A Micro-Level Analysis of

Director Expertise, Status and Conformity Within

Boards

Dennis B. Veltrop, Eric Molleman,

Reggy B. H. Hooghiemstra and Hans van Ees

University of Groningen and De Nederlandsche Bank; University of Groningen

ABSTRACT In this paper we address how director expertise impacts a director’s social status

and conformity within the board. Our results, derived from two unique multi-source datasets

of peer ratings on director status and conformity of non-executive directors from Dutch

organizations, indicate that industry-specific expertise and financial expertise differently impact

directors’ social status and influence within the board. We find that directors’ individual

performance orientation – the motivation to demonstrate expertise – acts as an important

contingency for expertise to increase directors’ status within the board. Additional analyses

using archival data and interviews with non-executive directors substantiate our findings and

provide additional insight into the dynamics operating within boards. This study extends

existing research on boards of directors and provides unique micro-level insights into the

boardroom dynamics that connect director expertise to director status and conformity within

boards.

Keywords: conformity, expertise, individual performance orientation, non-executive

directors, social status

INTRODUCTION

Residing at the apex of the organization, boards of directors are high profile decision-

making groups that determine strategic objectives for the organization, hire, fire and

monitor senior management, determine executive remuneration, and provide senior

management with strategic advice (Hillman and Dalziel, 2003; Pearce and Zahra, 1992;

Westphal, 1999).

[1]

In order to successfully carry out these complex tasks, boards require

a high degree of knowledge and expertise (Forbes and Milliken, 1999; Hillman and Dal-

ziel, 2003). Indeed, the growing literature on board capital acknowledges that human

Address for reprints: Dennis B. Veltrop, Faculty of Economics and Business, Department of Accounting,

University of Groningen, Nettelbosje 2, Groningen 9747AE, The Netherlands (d.veltrop@rug.nl).

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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.12276

capital – which includes expertise – is a crucial ingredient for understanding board effec-

tiveness (Carpenter and Westphal, 2001; Hillman and Dalziel, 2003; Khanna et al.,

2014; McDonald et al., 2008). Nevertheless, while governance researchers have shown

that boards vary greatly in their board capital (Takacs Haynes and Hillman, 2010) and

despite the obvious advantage of having expert directors on the board, the empirical evi-

dence on the relationship between board expertise and effectiveness has been far from

conclusive (Johnson et al., 1996, 2013). Governance scholars have argued that to better

understand board effectiveness, researchers must pay attention to the nature of interac-

tions and decision-making within the boardroom (Carter and Lorsch, 2004; Finkelstein

and Mooney, 2003; McNulty and Pettigrew, 1999; Pettigrew, 1992). To unpack the

determinants of board effectiveness, a relevant finding is that board interactions and

decisions will be influenced mostly by directors with the highest social status within the

board (Finkelstein, 1992; He and Huang, 2011; Mace, 1986). Furthermore, while

research on utilizing expertise in groups suggests that groups make higher quality (i.e.,

more effective) decisions when expert members are accorded higher levels of status (Bar-

ton and Bunderson, 2014; Bunderson, 2003; Littlepage and Mueller, 1997) and while

board scholars argue that boards will be more effective when having directors with the

‘right’ kinds of knowledge and expertise in the board (Carpenter and Westphal, 2001;

Forbes and Milliken, 1999; Hillman and Dalziel, 2003; McDonald et al., 2008), to date,

little is known about how and under what conditions director expertise impacts direc-

tors’ social status and influence within boards (see Johnson et al., 2013).

Combining research on board effectiveness with the extant literature on board inter-

actions, we argue that to truly understand how director expertise impacts the effective-

ness of board decision making, it is first necessary to focus on the more proximal, but

crucial, question of who has the most and who has the least say within the board. To

date, this has remained an open question (Hambrick et al., 2008). In a similar vein,

Lorsch and MacIver (1989, p. 88) already posed the seminal question ‘(w)hat happens in

these boardrooms that make a society’s corporate leaders be as unwilling as an unpre-

pared child in a classroom quiz to raise their hands during board meetings?’ Therefore,

the central research question of this paper is how and when director expertise leads to

higher status and ultimately conformity from other directors; an important form of

social influence within groups that occurs when individuals publicly conform with a

viewpoint, but do not necessarily agree (Cialdini and Goldstein, 2004; Yukl et al., 2005).

Building on two unique multi-source datasets in which directors provide ratings on their

expertise, but also provide ratings on each other’s social status and their level of confor-

mity within the board, we provide a micro-level analysis on the relationships between

director expertise, status and conformity within boards.

By disentangling the micro-level relationships that connect expertise, status and con-

formity within boards, our study contributes in several ways to the nascent literature on

director human capital, on the one hand, and to the board and corporate governance

literature that seeks to understand how director expertise impacts boardroom dynamics

on the other. First, in addition to previous research that has linked director human

capital with board level outcomes (e.g., Khanna et al., 2014; McDonald et al., 2008;

Oehmichen et al., 2016), our study extends this body of research by arguing that exper-

tise utilization and influence within boards is inherently a status organizing process. Our

1080 D. B. Veltrop et al.

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

study thereby contributes to the literature that goes beyond the logic of board incentives

and ability and seeks to identify important barriers for effective board functioning

(Boivie et al., 2016) and acknowledges that director behaviours take place within a con-

text of social structural relationships operating within boards (see Westphal and Zajac,

2013). Drawing from the rich literature on status characteristics theory we posit that it is

not necessarily directors’ expertise that drives influence within the board, but rather

how competent directors appear in the eyes of other directors within the board (see

Berger et al., 1972, 1980). Because expertise itself is intra-personal and cannot be

directly observed by fellow group members (Bunderson, 2003; Bunderson and Barton,

2011), directors must rely on indirect cues to draw inferences about one another’s ability

to contribute to the board (see Berger et al., 1972, 1980; Bunderson and Barton, 2011).

Then, ultimately, patterns of within-board influence and deference are a function of

directors’ social status within the board. An expert director that is not attributed social

status within the board is unlikely to be influential. Directly linking director human capi-

tal to board level outcomes may therefore potentially result in erroneous conclusions.

Second, because director expertise is intra-personal and not directly observable by fel-

low directors, we argue that the more intensely directors demonstrate their expertise,

the more apparent their expertise becomes to their fellow directors. Drawing from goal

orientation research and in line with the truism that performance is a function of moti-

vation and ability (Bell and Kozlowski, 2002; Campbell et al., 1993), we therefore argue

that directors’ individual performance orientation acts as a crucial individual level mod-

erator for the relationship between director expertise and social status within the

board.

[2]

Specifically, performance orientation reflects an individual’s disposition to

demonstrate one’s competence to others and the desire to be positively evaluated by

others (Elliot and Dweck, 1988; Payne et al., 2007; VandeWalle, 1997). Since directors

with a strong performance orientation have the desire to demonstrate their competence

and are more likely to signal their expertise towards fellow directors, we expect that

these directors have more social status within the board because their expertise is more

apparent to their fellow directors. Accordingly, we believe that a social psychological

perspective on director expertise within boards that integrates insights from goal orien-

tation research with status characteristics theory may provide a unique insight into the

relationship between expertise, status and ultimately conformity within boards.

Third, while board scholars suggest that directors will benefit from having the ‘right’

kinds of knowledge and expertise, it is not exactly clear what these ‘right’ expertise

domains are (Carpenter and Westphal, 2001; Hillman and Dalziel, 2003; McDonald

et al., 2008). Acknowledged, it is difficult to specify relevant director expertise domains

in any general way. However, domains such as financial expertise may be thought of as

universally important for directors, while other expertise domains such as industry-

specific expertise may be thought of as depending more on the specific context

(Hambrick et al., 2015). Nevertheless, both financial expertise and industry-specific

expertise are generally considered as important elements of human capital that directors

can bring to the board (Forbes and Milliken, 1999; Kor, 2003; Kor and Sundaramur-

thy, 2009; McDonald et al., 2008; Pozen, 2010; Stiles and Taylor, 2001; Takacs Haynes

and Hillman, 2010). Indeed, a recent survey among directors shows that in addition to

financial expertise, industry-specific expertise is considered highly relevant for director

1081Expertise, Status and Conformity Within Boards

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