Karen Schnatterly

Board Composition Beyond Independence Social Capital, Human Capital, and Demographics

Board composition is a critical element in the ability of the board to impact firm outcomes. While much of this research has focused on size and independence, there is growing literature that investigates the composition of directors’ demography, human capital, and social capital. The purpose of this article is to synthesize this diverse literature. The authors first review the literature on board demographics, human capital, and social capital composition research. In doing so, they highlight the theoretical and methodological approaches utilized. Finally, they suggest avenues for future research that can advance our understanding of the effects of board composition.

Institutional Investors and Institutional Environment: A Comparative Analysis and Review

We provide a review of the literature surrounding institutional investor classifications, and we extend this research by examining the aforementioned classification systems and relate this to the three predominant financial systems (market-based, family-centred, and bank-centred systems). After integrating this literature we propose that future research can contribute to the corporate governance field in three main ways: through improved measurement of the central constructs, through more complex research designs (through moderated and/or longitudinal relationships), and through asking new types of questions. We suggest several questions and approaches for future research on institutional investors and their interrelationship with country financial systems.

Antecedents of New Director Social Capital

Prior research shows that firms benefit from the social capital of their boards of directors but has not explored the antecedents of new director social capital. We argue that firms can attract directors with social capital by offering more compensation. We also argue that more complex firms (firms with a greater scale and scope of operations) are more attractive to such directors because of the greater experience and exposure that such directorships provide. Similarly, we argue that firms with high-status directors on their current boards will be more attractive to directors with social capital. We analyse the social capital of new outside directors added to boards of semiconductor firms between 1993 and 2007. Surprisingly, we find no support for the hypothesis that higher compensation is associated with adding directors with high status or board ties. However, firm complexity is associated with the ability to add new directors who have social capital, and the status of current board members is associated with the ability to add new directors who also have high status.

Are More Innovative Firms More Likely to Have Fraud? Evidence from U.S. Public Companies

Innovation in organizations requires certain cultural and organizational characteristics. These characteristics include a fast-paced environment, comfort with risk-taking, and not too many rules. These organizational characteristics are also associated with the occurrence of wrongdoing. We argue that firms that are innovative, therefore, have an increased propensity for wrongdoing. Leadership in the organization can influence this relationship, with more women in the top ranks mitigating this effect, and where greater CEO power (weaker board power) can amplify it. We tested our hypotheses using 1,154 cases, including 298 fraud cases among S&P 1500 firms between 1996 and 2012 and 856 matching cases without fraud. We find general support for these ideas. We find strong support for the positive relationship between a firm’s innovativeness (in terms of innovation scale and pace) and fraud. We also find that female leadership (in terms of female board directors) mitigates the positive effect of innovation on f...

Gender Board Diversity as Reputation Insurance Against Discrimination Litigation

A discrimination lawsuit levied against a firm can cause irreparable damage to its reputation. Therefore, some firms try to find strategies that will help reduce the incidence of discrimination and mitigate the risk of litigation. The reputation insurance literature argues that if firms develop goodwill with stakeholders before a negative event occurs, firms can prevent severe consequences when a negative event, in this case, a discrimination lawsuit, does happen. In this paper, we consider how appointing a female member to the board of directors acts as reputation insurance for firms that face discrimination lawsuits. We find that female directors reduce the likelihood of future discrimination litigation for firms, but that this effect is contextual. Specifically, this effect is weaker for firms in socially contested industries; however, we find no support that this effect is stronger for small firms compared to large firms.

Angel Investors: Early Firm Owners

Angel investors are often the first outside investors in a firm (Wetzel, 1983). Given the history of the firm prior to their financing—that is, virtually new and unknown—their decision to provide funding for the entrepreneurial venture poses quite an investment risk (Mason & Harrison, 2002). Ventures perceived to be less risky while still offering an acceptable return on investment are more likely to receive financing (Ganzach, 2000; Lange, Leleux, & Surlemont, 2003; Tyebjee & Bruno, 1984). Certain firm and angel characteristics influence the angel’s perception of the investment and decision to participate (Galbraith, De Noble, & Ehrlich, 2009). Once involved as part-owners, the angels themselves can have a strong influence on the firm and its functioning (Prowse, 1998). Provided that the firm survives and moves more closely to an investor exit (e.g., initial public offering [IPO] or buyout), the angels also play a role with regard to the next-stage owners.

Operational Governance and Firm Value

Most governance research has focused on high-level mechanisms operating at the interface of owners and top managers. Yet there is evidence that operational governance mechanisms function within the firm and can be used to prevent value loss. In this study, we supplement the existing evidence of the importance of operational governance mechanisms and examine these mechanisms to assess their association with value creation. We find those operational governance mechanisms such as clarity of policies and procedures, opportunities for communication, a compensation system that rewards more employees for performance and strong accounting systems discriminate among high-, median- and low-value firms, while high-level mechanisms do not.