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Directors’ human capital, firm strategy, and firm performance

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Abstract

Ideally, corporations are directed by boards whose directors provide valuable human capital that match the firms’ strategy. We investigate how directors’ human capital (international experience, industrial know-how, CEO experience, and financial know-how) affects firm performance including the firm’s strategy (diversification and internationalization) and how human capital is related to acquisition strategies (non-diversifying and international acquisitions). Our sample consists of 560 firm-year observations in Switzerland. We find empirical evidence that directors’ human capital affects firm performance and that this relationship depends on the firm’s strategy. Furthermore, human capital is also correlated with acquisition strategy. The study shows that focusing on board independence and compliance issues may be unrewarding in board research and practice.

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Notes

  1. The question of personal profile needs also to be addressed, because the performance benefits from career specifics are not directly correlated with director independence or their demographics. As an illustration, the management researchers Hillman et al. (2002) show that "community influentials" are more likely to be females or African-American. Similarly, sociologists Zeng and Xie (2004) find evidence that US employees educated abroad earn less than Americans or foreigners educated in the United States. These two examples demonstrate that the omission of certain attributes, such as skill and experience, may cause problems when assessing the aptitude of various profiles for specific posts.

  2. Similarly, Hillman et al. (2000) classify board members skill-wise into three categories with specific board roles. The first group, "business experts" have executive experience as CEOs or as officers of large corporations. The second group, "support specialists" provides particular services to the boards; e.g., legal advise or financial expertise. And the final category includes politicians and university professors. This group has no specialized business background, but influences society and opinion-making. Such directors are denominated "community influentials" (Baysinger and Butler 1985 apply similar classifications).

  3. Krause et al. (2013) demarcate the service role of boards which is characterized by providing advice and expertise from the resource dependence role where solely external links to the firm’s environment are crucial. We follow, e.g., Hillman and Dalziel (2003) who see both roles as being part of the resource dependence theory.

  4. The market value of equity is calculated as the average share price 5 days before and 5 days after the last trading day of the year multiplied by the number of outstanding shares. Notably, the study uses all classes of equity, including non-listed equity. The market value of non-listed equity is estimated according to the firm’s listed stock price adjusted for different face values as stipulated by the Swiss tax authorities.

  5. The complete sample is corrected for outliers in Tobin’s Q (and Sales growth) with winsorization at the 5 % level in each tail (95 and 5 ‰) on the year level (and industry level).

  6. We collected data for Tobin’s Q in 2004, 2006, 2008, and 2010. 23 values of lagged (19) and leaded (4) Tobin’s Q are not available which reduces our sample to 537 firm-year observations.

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Acknowledgments

The authors acknowledge the research grant by the Förderverein WWZ (B-119). We thank three anonymous referees for their helpful comments and Hermione Miller-Moser for her editorial assistance. This paper is based on Chapter 6 of the Ph.D thesis by Christophe Volonté: “Corporate Governance in Switzerland”, University of Basel, 2011. Christophe Volonté thanks the University of Manchester for providing him with access to BoardEx during his research stay at the Manchester Business School.

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  1. Department of Financial Management, Faculty of Business and Economics, University of Basel, Peter Merian-Weg 6, 4002, Basel, Switzerland

    Christophe Volonté & Pascal Gantenbein

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  1. Christophe Volonté
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  2. Pascal Gantenbein
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Correspondence to Christophe Volonté.

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Volonté, C., Gantenbein, P. Directors’ human capital, firm strategy, and firm performance. J Manag Gov 20, 115–145 (2016). https://doi.org/10.1007/s10997-014-9304-y

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  • DOI: https://doi.org/10.1007/s10997-014-9304-y

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