The effects of board expertise‐risk misalignment and subsequent strategic board reconfiguration on firm performance

Karen Schnatterly, Felipe Calvano, John P. Berns and Chaoqun Deng

Strategic Management Journal, 2021, vol. 42, issue 11, 2162-2191

Abstract: Research Summary Boards are unlikely to be effective if they do not have sufficient collective expertise to understand, monitor, and address future risks. This begs the question, does the board, in fact, have this expertise? If not, can they reconfigure their expertise to address those risks? Building on agency theory, we analyze the alignment between the board's expertise and the firm's future risks, with the expectation that board composition will change over time to reflect the firm's future risks—strategic reconfiguration. Our results show that misalignment has negative implications for firm performance, misalignment also motivates appropriate board reconfiguration, and that this reconfiguration positively effects firm performance. Managerial Summary Our study illustrates the need for board expertise to be aligned with firm risks. While there has been increasing pressure for firms to assess their directors' expertise (i.e., skill matrices), simply identifying expertise which is present or absent does not speak to whether that expertise is actually needed (or not) by the firm given the risks faced. We analyze boards' collective expertise, compare that with the risks that firms are facing, and identify the gaps which may detrimentally impact the monitoring ability of the board and cause firm performance to suffer. Consequently, understanding the degree of (mis)alignment is of paramount importance for boards to be effective monitors and positively influence firm performance.

Date: 2021
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