Institutional Evolution and Corporate Boards

We argue that corporate boards are a dynamic repository of human- and social capital in response to external institutional evolution. Theoretically, integrating institutional economics, agency theory and resource dependence theory, we explain that evolution of market-, legal- and political institutions restructures the particular context in which board members play their two primary roles: monitoring the CEO on behalf of the shareholders, suggested by the agency theory, and supporting the CEO by providing resources, knowledge and information, suggested by the resource dependence theory. Such particular contexts entail the external competitive environment and the principal-agency relationship in corporate governance, amplify (or weaken) the need for certain type of board roles, and ultimately require corporations to reconfigure the human- and social capital embedded within the board. Additionally, since the board changes are typically proposed by the block shareholders, whose motivation for doing so is closely associated with a corporation’s financial performance, we further argue that financial performance is a key moderator of the relationships between institutional evolution and changes in board makeups. Using an unbalanced panel covering more than 3000 firms from 17 Western European countries (15 European Union countries plus Norway and Switzerland) and 28 emerging economies over the period 2000-2012, we have found supportive empirical evidence.