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How many board seats is too many for one director? That’s the question on many investors’ minds, as they confront the possibility of “overboarding” — directors being spread too thin to do their work effectively. BlackRock, for example, voted to oust one of Twitter’s board members in 2022 because he sat on the boards of six other companies.
However, new research from Sebahattin Demirkan, associate professor of accounting in the Costello College of Business at George Mason University, suggests there may be upsides to board directors holding multiple seats at the same time. His paper in Asian Review of Accounting finds that deeply networked boards are more flexible and creative when it comes to a key competitive area: open-ended strategic alliances.
The paper’s co-authors are Robert Felix of The Catholic University of America and Nan Zhou of University of Cincinnati.
The researchers used a metric called “board centrality” to quantify the total social capital held by a company’s board of directors.
“Centralized directors are leaders who have been in the industry a long time,” says Demirkan. “They sit on multiple boards. And they are deeply connected within an industry, such as if Nvidia and Intel have a relationship and that person is working as a board member for both.”
The researchers used the SDC strategic alliances database to capture new alliances formed during the period 1998-2011. Their data-set comprised 18,412 firm-year observations.
First, they divided the alliances into joint ventures and incomplete contracts. Joint ventures, which involve setting up an entirely separate business entity, entail much less complexity and uncertainty than do contractual alliances, which by definition cannot account for all the surprising challenges that may lie ahead. The paper finds that centralized boards were more likely to embark upon both types of strategic alliances, but the effect was strongest for contractual alliances.
Demirkan stresses that the two types aren’t mutually exclusive; a contractual alliance can be a precursor to a successful joint venture. “I always use marriage as a comparison…Some cultures do arranged marriage because families know each other very well, because they were neighbours and so on and so forth. It’s trial and error but you don’t want to make too many errors because these arrangements may hurt your parent company business. That’s where board capital comes in. Centralized board members know which strategic alliances will work for this particular company.”
Further, centralized boards took on more strategic alliances when their CEOs were relatively new, underscoring boards’ customary advisory role. Similarly, diversified firms, which normally require more guidance from the board, saw a stronger relationship between board capital and propensity for strategic alliances. The same was true of firms with more intangible assets — in other words, innovative companies engaging in heavy R&D.
The researchers also looked into whether the enhanced alliance activity paid off for these firms. Their analysis confirmed that the special ability of centralized boards to form successful strategic alliances was associated with higher market performance, steadier returns and lower audit fees.
This strikes an interesting contrast with some of Demirkan’s earlier publications on similar topics. For example, a 2014 paper in Journal of Business Research found that firms with contractual alliances suffered from lower earnings quality, making them a riskier bet for investors. A 2016 paper in Contemporary Accounting Research linked contractual alliances to higher audit fees.
“The market doesn’t like companies with contractual alliances,” Demirkan says. “It discounts their stock prices, because the information environment is not good; it’s quite complex and the boundaries are not well defined.”
However, the new paper indicates that centralized boards act as a reassuring signal to capital markets that offsets some of the inherent risk of contractual alliances. “Boards with high social capital may manage this better, because they are much more knowledgeable,” Demirkan says. “They know which contractual alliances are good, and the market also trusts them to pick these alliances wisely.”