Firm Complexity and Board of Director Composition

Abstract:     
This paper examines the relationship between firm complexity and board of director composition. Utilizing the board typology of Baysinger and Zardkoohi (1986), we classify board members either as insiders, business experts, support specialists, or community influentials, and examine it in relation to firm internal and external complexity. Internal complexity refers to the sophistication if internal work processes (proxied by firm R&D expenditures, and the amount of invested capital), while external complexity relates to the external competitive structure (proxied by the number of business segments, growth opportunities, and industrial leadership). Utilizing a random sample of 150 firms drawn from six industries over the 2003-2005 time period, results confirm conjectures that complexity is related to the specific capabilities that each board member brings to the firm. We find that externally complex firms substitute community influentials for business experts, and sometimes have lower levels of support specialists and insiders. On the other hand, internally complex firms have lower levels of community influentials, which are substituted by insiders and support specialists. This study adds to a small but growing literature that examines the economic determinants of board structure (Boone et al., 2004; Coles et al., 2005; Gillan et al., 2003; Linck et al, 2005), by providing a unique lens in examining board characteristics that goes beyond the traditional insider/independent classification.

Number of Pages in PDF File: 44

Keywords: firm complexity, board composition, corporate governance, determinants of boards, strategic governance

JEL Classification: G34, M41

working papers series