Community Social Capital and Board Advising: Evidence from the Structure of Board Committees
| Published date | 01 October 2023 |
| Author | Zhe Li,Bo Wang |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12662 |
British Journal of Management, Vol. 34, 1714–1749 (2023)
DOI: 10.1111/1467-8551.12662
Community Social Capital and Board
Advising: Evidence from the Structure of
Board Committees
Zhe Li 1andBoWang 2
1Department of Accounting and Financial Management, School of Business and Management, Queen Mary
University of London, Mile End Road, London, E1 4NS, UK 2Department of Banking and Finance,
Southampton Business School, University of Southampton, Southampton, SO17 1BJ, UK
Corresponding author email: b.wang@soton.ac.uk
We investigate how community social capital, captured by the strength of cooperative
norms and social networks within a geographical community, affects the internal struc-
ture of corporate boards. We nd that rms headquartered in high-social-capital US
counties have a more advising-intensiveboard structure, as they are more likely to set up
specialized advisory committees and appoint more advisory directors. These ndings are
robust to endogeneity concerns and a battery of sensitivity tests. Our mediation analysis
shows that the increased board advising intensity, induced by community social capital,
reduces investment inefciency. We further revealthat community social capital reduces
board monitoring intensity and directors’ monitoring efforts.Overall, our results are con-
sistent with the argument that community social capital serves as a societal monitoring
mechanism to reduce rms’ need for board monitoring, and, hence, rms’ boards located
in high-social-capital communities focus more on advising.
Introduction
Community social capital, captured by the con-
uence effects arising from the cooperative norms
and the density of associational networks in a
geographical community, is an important con-
struct across various disciplines, including sociol-
ogy, economics, and management.1As individu-
als are susceptible to social inuences in the geo-
graphical areas in which they reside, community
social capital helps to build trust, reciprocity, infor-
mation sharing, and cooperation, thus encourag-
ing honest dealings and discouraging individuals’
unethical behaviours (Coleman, 1988; La Porta
1Prior studies in these disciplines havefound that commu-
nity social capital reduces the crime rate(Buonanno et al.,
2009), enhances local and national governmental perfor-
mance (Knack, 2002), and facilitates economic growth
(Knack and Keefer,1997).
et al., 1997).2A burgeoning literature shows that
community social capital matters in the corpo-
rate setting, as corporate managers are individu-
als subject to the inuence of social capital in the
community where their rms are headquartered
(Jha and Chen, 2014). Managers’ self-interested
behaviours are contrary to the prescribed values
of cooperative norms, and dense social networks
2For instance, Hong et al. (2004) and Hong et al. (2005)
show that social interactions in local geographical ar-
eas affect stock-market participationand fund managers’
trading behaviours. Pirinsky and Wang (2006) observe
strong co-movement in the stock returns of companies
headquartered in the same geographic area due to the
trading patterns of local residents. A large numberof pre-
vious studies, including Coleman (1988), Elster (1989),
Guiso et al. (2004) and Spagnolo (1999), have found that
strong cooperative norms and dense social networks in
a community foster an environment that constrains nar-
row and self-interested behaviours and limits opportunis-
tic behaviours.
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of BritishAcademy
of Management.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distri-
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Community Social Capital and Board Advising 1715
compel individuals to comply with the codes of
conduct associated with cooperative norms (Cole-
man, 1988). Therefore, community social capital
disciplines managers and alleviates agency issues
(Gao, Li and Lu, 2021; Gupta, Raman and Shang,
2018; Hoi, Wu and Zhang, 2019), an important re-
sponsibility of the board of directors.However,we
still know little about how community social capi-
tal affects the functioning of corporate boards.
The board of directors, as an integral element,
performs both monitoring and advising duties
(Adams and Ferreira, 2007). The monitoring func-
tion of the board oversees the management and
guards against harmful conduct, while the advis-
ing function of the board guides the management
to apply appropriate strategies and approves ma-
jor expenditures (Adams,Her malin and Weisbach,
2010). Although monitoring the management is es-
sential for rm success, excessive board monitor-
ing can be counterproductive. Increased focus on
board monitoring not only comes at a substantial
cost to board advising but also weakensthe CEO’s
perception of board support (Adams and Ferreira,
2007; Hillman and Dalziel, 2003), which leads to
managerial myopiaand poor performance (Faleye,
Hoitash and Hoitash, 2011). While antecedents for
effective board monitoring have been well estab-
lished, the optimum way to structure the board
for effective advising remains an essential but un-
derstudied issue. Randøyand Jenssen (2004) claim
that board monitoring becomes less demanding,
and even redundant, when external governance
mechanisms discipline managers. Adams and Fer-
reira (2007) contend that, theoretically, a friendly
board that does not monitor too much but focuses
on advising is more optimal when other gover-
nance mechanisms exist. Therefore, we conjecture
that rms headquartered in areas with higher lev-
els of social capital can assemble a more advising-
intensive board to avoid the adverse consequences
of excessive monitoring and improve board ef-
ciency.
To test our conjecture, we empirically explore
the effect of social capital at the county level in
the United States on board advising intensity for
rms headquartered in the county.Using a sample
of 12,174 rm-year observations from S&P 1500
rms over the period 2000–2018, we nd that rms
headquartered in counties with higher levels of so-
cial capital are more likely to set up specialized
advisory committees and appoint more directors
devoted to advising, suggesting a positive relation-
ship between community social capital and board
advising intensity.
According to Adams, Hermalin and Weis-
bach (2010), advisory directors offer strategic ad-
vice about the rm’s investment opportunities.
Firms that receive better advice are expected to in-
vest wisely and efciently (Kim, Mauldin and Pa-
tro, 2014). Our mediation analysis conrms that
board advising intensity mediates the relationship
between community social capital and rm in-
vestment efciency. In other words, the increased
board advising intensity, induced by higher lev-
els of community social capital, results in more
efcient rm investments, suggesting that com-
munity social capital improves board advising
efciency.
We then conduct several tests to underpin the
argument that community social capital reduces
board monitoring need and allows for more ad-
vising. First, we corroborate previous studies by
showing that communitysocial capital reduces dis-
cretionary accruals, CEO compensation,and costs
of equity. Second, we nd that rms in high-social-
capital counties appoint fewer monitoring direc-
tors and are less likely to form a monitoring-
intensive board. Third, we use board meeting at-
tendance as a proxy for directors’efforts (Masulis
and Mobbs, 2014) and show that community so-
cial capital signicantly increases meeting absence
among directors holding monitoring duties, but
not among those specializing in advising. Collec-
tively, these results provide strong evidence that
board monitoring is less demanding for rms in
high-social-capital counties, and suggest that the
board may shift its focus from monitoring to ad-
vising.
To further strengthen our premise, we conduct
two cross-sectional analyses to examine whether a
rm’s need for board monitoring plays a role in
the positive relationship between community so-
cial capital and board advising intensity. As the
rm’s need for board monitoring is further re-
duced by the external market monitoring (Guo,
Lach and Mobbs, 2015; Randøy and Jenssen,
2004), we nd that the observed relationship is
more prominent for rms covered by more ana-
lysts and for rms operating in highly competi-
tive industries. The cross-sectional variation evi-
dence further conrms the importance of reduced
board monitoring needs in the interplay between
community social capital and board advising
intensity.
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
1716 Z. Li and B. Wang
We also investigate an alternative interpretation
of our results. Specically, higher levels of com-
munity social capital develop trust and dense net-
works,which are considered valuable resources for
strategic advising. As a result, the board can take
advantage of these resources and strengthens its
advising intensity. This alternative interpretation
suggests a direct effect of community social capital
on board advising, while our premise and previous
results suggest an indirect effect of community so-
cial capital on board advising through a reduction
in board monitoring. While our premise is consis-
tent with the agency theory perspective of commu-
nity social capital and board advising (Adams and
Ferreira, 2007; Hoi, Wuand Zhang, 2019; Masulis
and Mobbs, 2014), the alternative explanation is
consistent with resource dependence theory,which
argues that the board responds to the external en-
vironment and changes its composition directly
(Hillman, Withers and Collins, 2009; Loasby, Pf-
effer and Salancik, 1979). We do not consider the
two interpretations to be mutually exclusive, as
Hillman and Dalziel (2003) contend that board
function can be explained by integrating the two
perspectives. We perform a path analysis that sup-
ports our view.We nd that community social cap-
ital is positively related to board advising inten-
sity when board monitoring is held constant, con-
rming the direct effect. However, community so-
cial capital also indirectly improves board advis-
ing intensity through its effect on reducing board
monitoring after taking into account its direct ef-
fect. Thus, both pathscontribute to the positive re-
lationship between community social capital and
board advising intensity. However, because exces-
sive board monitoring leads to inferior perfor-
mance (Faleye,Hoitash and Hoitash, 2011), the in-
direct path is important for rm success.
Our main results hold when addressing the en-
dogeneity concerns with the instrumental vari-
able (IV) approach,the propensity score-matching
(PSM) technique, and difference-in-differences
(DiD) analysis, suggesting that our results are
causal instead of correlational. The results also
survive a battery of robustness tests relating to
omitted variables and alternative measures of
community social capital and advisory directors.
We rst contribute to the limited research ex-
ploring the dynamics of the optimal internal struc-
ture of board committees (Chen and Wu, 2016;
Faleye, Hoitash and Hoitash, 2013). As we show
that community social capital is a key factor inu-
encing internal board structure regarding commit-
tee setup and director assignments, we conform to
the notion that optimal board structure depends
on a rm’s operating environment (Boone et al.,
2007; Coles, Daniel and Naveen, 2008). Second,
we elaborateon the emerging literature on the dual
role of board functions. We conrm that commu-
nity social capital improves monitoring outcomes
(e.g. mitigates earnings management and rent ex-
traction) and show that the increased board ad-
vising intensity induced by community social cap-
ital enhances board advising effectiveness (e.g. re-
duces investment inefciency). Third, we highlight
the importance of recognizing the heterogeneity
of independent directors sitting on different board
committees (Faleye, Hoitash and Hoitash, 2011;
Zalata et al., 2019). By examining independent di-
rectors sitting on monitoring and advisory com-
mittees, rather than treating all independent direc-
tors homogenously, we add to the research that ex-
plores the different rolesplayed by independent di-
rectors (Faleye, Hoitash and Hoitash, 2011, 2013).
Fourth, we extend the theoretical development of
Adams and Ferreira(2007) by answering the call to
investigatecircumstances in which a friendly board
that does not monitor excessively but that focuses
on advising is optimal. To the best of our knowl-
edge, this study is the rst to investigate the inter-
actions between external monitoring mechanisms
(e.g. community social capital) and the subordi-
nate board structure regarding advising. Our nd-
ings suggest that rms can alleviate the compet-
ing tensions between board monitoring and advis-
ing when considering the community social capital
surrounding their headquarters.
Theoretical background
Community social capital and opportunistic
behaviours
The theoretical foundation of social capital was
rst systematically developed by Coleman (1988),
who denes social capital as a variety of entities
generated by trust, information, norms, obliga-
tions, and effectivesanctions that facilitate individ-
ual or group actions. Coleman (1988) further per-
ceives the use of social capital as a theoretical strat-
egy that involves taking rational action but rejects
extreme individualistic premises.
Since then, social theorists have developed var-
ious operating denitions of social capital and
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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