Firm Complexity and Board of Director Composition

Garen Markarian and Antonio Parbonetti

Corporate Governance: An International Review, 2007, vol. 15, issue 6, 1224-1243

Abstract: This paper examines the relationship between firm complexity and board of director composition. Utilising the board typology of Baysinger and Zardkoohi (1986), we classify board members either as insiders, business experts, support specialists, or community influentials, and examine board composition in relation to firm internal and external complexity. Internal complexity refers to the sophistication of 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 and geographic segments, and industrial leadership). Utilising a random sample of 150 firms drawn from six industries over the 2003–2005 time period, and after classifying 4,408 directors to one of our board categories, multivariate 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 insiders. Additionally, 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., 2007; 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.

Date: 2007
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