What do they know? The effects of outside director acquisition experience on firm acquisition performance

Abstract

This article contributes to the literature on board effectiveness by being perhaps the first to systematically examine how the nature of outside directors' prior experience, and resulting expertise, will influence the performance of a focal firm's strategic initiatives. Our theoretical model is grounded in the psychological literature on expertise and its role in group decision making effectiveness. We focus on outside director expertise in acquisition decision making, and its implications for the performance of the acquisitions of a focal firm. Our conceptual framework indicates that directors will develop expertise in making particular kinds of acquisition decisions (e.g., related or unrelated acquisitions or acquisitions in specific industries or product markets) through their past experiences at other firms with decisions about those specific types of acquisitions, and we predict that this experience and expertise will have positive effects on the performance of a focal firm's acquisitions. We extend our theoretical model to consider the conditions under which relevant director experience will prove most beneficial. Our model predicts that outside director acquisition expertise will deliver the greatest benefits when the focal firm's board is independent from management. We find empirical support for all of our hypotheses. In considering how and when director experience and resulting expertise may influence the performance of corporate acquisitions, our theory and results help to highlight a potential second main focus for research on the long-standing question of what factors render boards of directors effective.

Does Board Experience Matter? Evidence from Foreign Direct Investment

“…For each sample firm, we then sum the cases for all outside directors on the board to obtain a final number representing its board's international investment experience. We exclude inside directors in the calculation to focus on a board's unique contribution outside of what the firm's executives can provide [3,8,15]. The following is the formula of director FDI experience:…”

“…According to expertise literature, individuals develop expertise on complex decision makings as they accumulate substantial amounts of relevant experience in that particular field [8,26]. In contrast to general decision makings of which information can be clearly processed and critical message can be articulately identified, complex decisions are usually subject to information overload, vague cause-and-effect relation, and ambiguity of unforeseen contingencies.…”

“…We further test whether the presence of executives' associated experience moderates the significance of director experience to provide further support for a board's advisory role. We particularly focus on the value of outside directors' experience [3,8,15], as we intend to differentiate the contribution of board members from firm executives who serve mostly as inside directors. The event study approach is applied to assess FDI outcomes, following numerous studies on corporate governance and cross border investment strategies [7,16,17].…”

The king reports, independent non-executive directors and firm valuation on the Johannesburg stock exchange

“…By contrast, high levels of executive directorships are associated with high access to information that leads to high quality decision-making (Zahra and Stanton, 1988;Weir et al, 2002;Nicholson and Kiel, 2003), with positive consequences firm valuation. Further, it has been argued that corporate boards dominated by INEDs tend to stifle managerial initiative and strategic actions (Pfeffer, 1973;Baysinger and Butler, 1985;McDonald et al, 2008), which arise from excessive managerial supervision (Baysinger and Hoskisson, 1990;Haniffa and Hudaib, 2006), and thereby leading to lower market valuation.…”

“…However, and whereas there is a theoretical agreement that INEDs perform crucial roles in improving corporate monitoring and valuation (Fama, 1980;Jensen, 1993;McDonald et al, 2008), the empirical evidence on the effect of the presence of INEDs on firm valuation is mixed. A number of reasons, however, have been suggested that may account for the conflicting results of prior studies.…”