Over the last years, public policy makers, media and the public have become concerned about the presence and influence of corporate board networks. In the wake
of corporate governance scandals, worldwide corporate governance reform initiatives have introduced provisions aimed at limiting connections between boards of listed companies. Drawing upon institutional theory, we developed a framework to examine the responses of listed firms on changing societal expectations and beliefs about the appropriate design of board networks. We hypothesized that institutional responses of corporations would depend on company characteristics and entrepreneurial attitude, i.e. societal visibility, international financial market exposure and participation in regulatory bodies. Archival data on 75 top-100 listed corporations in the Netherlands from 2001 to 2005 reveal that the structure of the Dutch corporate network has been altered as a result of board reform initiatives and the changing institutional context.
Our main observations are the following:
x The number of board ties with top-100 listed corporations (-21%) and the number of board ties with top-3 banks (-38%) have significantly decreased during the period surrounding the implementation and introduction of the Tabaksblat Code (2003).
x Corporations withlarger board networkshave beenaffectedmore heavily by natio-nal pressure to reform their board network.
x Larger and morevisible companies have been relatively successful in maintaining their central board network position by reducing their interconnectivity with lower tier companies. As a result the Dutch board network has become more structurally stratified.
x Corporations with international market exposure and ties with regulatory bodies have been able to partially counteract national pressure to reform board networks.
5.6.1 Implications
The changing structure of the Dutch board network has three important implications for companies and public policy makers. First, while board network provisions in the Tabaksblat Code (2003) appear to be successful in terms of disintegrating the overall corporate board network, negative side effects exits for medium-sized and smaller firms. Our results indicate that the top-3 banks in particular have broken board ties with medium-sized and smaller companies. Moreover, the largest and most prestigious
companies have become disconnected through diminishing board ties with medium-sized and smaller listed companies. Policy makers should take these unanticipated effects for smaller firms into account prior to the introduction and midterm adjustment of corporate governance reform initiatives.
Second, our study reveals that firms are not necessarily guided by corporate governance reform initiatives, but, instead, are able to influence institutional templates or to nullify their impact. Thus, it may be beneficial to conceptualize changing societal expectations as a strategic question and opportunity that may give a firm a competitive advantage. In our research setting, several (larger) corporations in the Netherlands have proven to be good at this game, as their foreign listings and their participation in key regulatory bodies buffered them against certain institutional pressure within the Netherlands. Thereby, our results support the recent literature on institutional entre-preneurship. Further examination of opportunities, consequences and limitations of specific corporate tools with regard to institutional entrepreneurship in the context of corporate governance may shed light on successful strategies and actions that firms could deploy to maintain their status quo in a changing institutional environment or, even, benefit from future board reform initiatives.
Third, the changing structure of the corporate board network in the Nether-lands may adverselyaffect the strategic and financial performance of listed companies.
Prior studies have revealed that board ties are useful communication mechanisms that spread information about innovation, mergers and acquisitions, and board connections constitute mechanisms to manage resource dependencies (i.e., legal expertise, political lobbying power and financial resources) in the light of environmental turbulence (cf.
Mizruchi, 1996). To get a first insight in the relationship between broken ties and financial performance, we calculated the correlations of our dependent variables with the ROA, ROE and EPS of firms in 2005. The number of lost board ties (all) proved to be negatively correlated with ROA (r=-.269; p<.05) and the number of lost board ties with the top-3 banks proved to be negatively correlated with ROE (r=-.268; p<.05).
This tentatively suggests that firms should carefully manage their board connections and have to search for new mechanisms to secure their overall position. Furthermore, this finding fuels ongoing debate whetherit is stillbeneficial tohave a listing at a stock exchange, as non-listed companies face far less stringent corporate governance
regu-lations. Future longitudinal research is necessary to entangle the exact chain of cau-sality and strategic and financial consequences.
5.6.2 Limitations and Avenues for Future Research
The study has several limitations, but provides avenues for future research also. First, in the study we have solely focused on formal board connections between top-100 listed in the Netherlands. This raises the question how informal connections between members of the corporate elite relate to formal board connections, i.e., we have to examine the impact of informal meetings between board members during football matches, at golf courts and during diners in exclusive elite clubs. Scholars have sug-gested that informal networks actually may be more influential and insular than formal networks (Ghoshal et al., 1994; Tsai, 2002). Future studies could investigate whether the development of these informal networks follows the same pattern as the develop-ment of formal board networks (see for example Heemskerk, 2007) and whether the initiatives of the Tabaksblat Code (2003) have been successful in this respect.
Second, the network measures we used provide no direct evidence of the quality and importance of board connections. While corporations may have responded to societal expectations to limit their board network, they might have eliminated non-vital board ties only, i.e., they might be symbolically complying with the provisions in the Tabaksblat Code without actually altering their board network practices. The per-sistence of board ties between the 25 largest corporations (AEX corporations) tenta-tively supports this view. Furthermore, corporations might have swapped board ties with top-100 corporations for board connections with large non-listed companies and banks, such as Rabobank, Maxeda and VolkerWessels, i.e., thereby retaining their board network position withoutviolating theprovisions in the Tabaksblat Code. Future research could assess to which extent corporations have really adopted new societal expectations and what the consequences are of real versus symbolic adoption. Because listed firms in the Netherlands are obligated to “comply or explain” their compliance with provisions of the Tabaksblat Code, analyzing their self-reported statements in annual reports might be a useful starting point.
Third, the described network developments might be contingent on the speci-fics of the Dutch corporate governance context. Future cross-country research studies
could investigate to which extent the same patterns are observable in other countries with two-tier board systems (e.g., Germany and Austria), in countries with one-tier board systems (e.g., Great Britain and the United States) and in countries with mixed board systems (e.g., France).
5.6.3 Concluding Remarks
While scholars emphasize the benefits of board ties, societal attention has shifted to their disadvantages more recently. Although corporate governance reform initiatives have been successful to open corporate board networks, our findings reveal complex sociopolitical and institutional processes that guide companies and their board mem-bers in maintaining and breaking corporate connections. For instance, international financial market exposure and participation in reform bodies support corporations in counterbalancing the negative of corporate governance reform initiatives, while they become liabilities in other areas at the same time. Furthermore, existing corporate elite networks associated with larger listed corporations have been relatively successful in maintaining their network position, while medium-sized and small listed companies have become more disconnected from the elite and financial institutions. Policy makers should take these unintended consequences into account prior to the intro-duction of new corporate governance reform initiatives or mid-term adjustments of the Tabaksblat Code.
Chapter 6: Change from Without: The Dutch