Network connections within committees and board governance effectiveness

Abstract

Abstract Research Question/Issue: The paper studies how network connections within board committees affect corporate governance effectiveness. Research Findings/Insights: Using detailed director biographical data of a large U.S. sample, we find that firms with more connections among compensation committee members exhibit less CEO excess compensation, and firms with more connections among audit committee members exhibit less earnings management. These positive effects of connections on corporate governance are more pronounced when a committee has shorter joint tenure, when the firm's information is more opaque, when the firm's CEO is more powerful, or when external governance is weaker. To address endogeneity concerns, we further exploit exogenous departures of directors and continue to find that connections among committee members lead to more effective governance. Theoretical/Academic Implications: Our paper's findings suggest that network connections among directors improve governance effectiveness. This relation is consistent with sociology views that social connections foster information sharing, opinion exchange, and coordination. Our paper complements previous studies on board connections that mainly focus on whether connections between boards and CEOs impair board monitoring. Our paper also shows that director network connection is an important board characteristic. Practitioner/Policy Implications: Our paper's results lend support to the perspective that director network connections can be valuable to firms. Network connection with other board members is an important part of a director's human capital. Therefore, hiring new directors that are connected to the incumbent members can be beneficial to firms at least in certain settings.

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