St. Petersburg University
Graduate School of Management
Master in Management
RELATIONSHIP BETWEEN SOCIAL CAPITAL OF BOARD OF DIRECTORS AND
FINANCIAL RESULTS OF RUSSIAN MULTINATIONAL COMPANIES
Master’s Thesis by the 2nd year student
Concentration — Master in Management
Associate Prof., Tatiana A. Garanina
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПУСКНОЙ
Я, Островская Анна Ефимовна, студентка второго курса магистратуры направления
080500 - «Менеджмент», заявляю, что в моем отчете по работе над магистерской
диссертацией на тему «Влияние социального капитала совета директоров на финансовые
показатели российских мультинациональных корпораций», представленной комиссии для
публичной защиты, не содержится элементов плагиата.
Все прямые заимствования из печатных и электронных источников, а также из
защищенных ранее выпускных квалификационных работ, кандидатских и докторских
диссертаций имеют соответствующие ссылки.
Я ознакомлен с действующим в Высшей школе менеджмента СПбГУ регламентом
учебного процесса, согласно которому обнаружение плагиата (прямых заимствований из
других источников без соответствующих ссылок) является основанием для выставления за
выпускную квалификационную работу оценки «неудовлетворительно».
STATEMENT ABOUT THE INDEPENDENT CHARACTER OF THE MASTER
I, Anna Ostrovskaya, second year master student, Master in Management program 080500
«Management», state that my master thesis on the topic « The relationship between social capital
of Board of Directors and financial results of Russian multinational companies», which was
presented for the public defense, does not contain any elements of plagiarism.
All direct borrowings from printed and electronic sources, as well as from master theses, PhD
and doctorate theses which were defended earlier, have appropriate references.
I am familiar with the study process regulations at Graduate School of Management of Saint
Petersburg State University, according to which finding of plagiarism (direct borrowings from
other sources without appropriate references) can be the reason for research proposal to be
evaluated as «unsatisfactory».
Тема магистерской диссертации
ФИО научного руководителя
Описание целей, задач и основных
Островская Анна Ефимовна
Взаимосвязь социального капитала совета
директоров и финансовых показателей
Высшая школа менеджмента
Гаранина Татьяна Александровна
Социальный капитал совета директоров
считается значимым для финансовых
показателей фирмы, особенно, когда
фирмы выходят на международный рынок,
где связи могут являться конкурентным
преимуществом. Социальный капитал
совета директоров особенно значим для
мультинациональных компаний в связи с
их деятельностью на нескольких рынках.
Целью диссертации является исследовать
взаимосвязь социального капитала совета
директоров и финансовых показателей
компаний. Эмпирическое исследование
проведено в форме регрессионного
анализа на примере данных по 61
доказывают, что существует взаимосвязь
между внешним социальным капиталом
совета директоров и финансовыми
показателями компаний. Исследование
имеет как теоретический вклад в
исследования социального капитала совета
значимость для менеджеров, которым
следует учитывать фактор социального
капитала для создания эффективного
Социальный капитал, совет директоров,
Master Student’s Name
Master Thesis Title
Anna E. Ostrovskaya
The relationship between social capital of
Board of Directors and financial results of
Russian multinational companies
Graduate School of Management
Academic Advisor’s Name
Tatiana A. Garanina
Description of the goal, tasks and main results Social capital of board of directors is
considered to be significant for the firm
financial results, especially for firms that
compete in a global market, where strong
external network can be a competitive
advantage. Social capital of board of directors
is particularly significant for multinational
enterprises (MNEs) due to their competition
in foreign markets. Goal of this thesis is to
evaluate the relationship between social
capital of board of directors and financial
results of Russian MNEs. The empirical
research is conducted in a form of a
regression model for data collected from 61
Russian MNE. The results of the research
show that there is a relationship between
external social capital, which is embedded in
networks with other boards and governmental
organisations, and financial results of MNEs.
The empirical research possesses theoretical
contribution to the emerging interest in social
capital of board of directors research, as well
as a practical implication for managers who
can benefit from taking into consideration
social capital for creation of an efficient
Social capital, board of directors, MNEs
TABLE OF CONTENTS
1.1.! Research background!...............................................................................................................................!7!
1.2.! Research question!......................................................................................................................................!8!
1.3.! Research goal and objectives!.................................................................................................................!8!
1.4.! Expected findings!......................................................................................................................................!8!
1.5.! Organization of the research!..................................................................................................................!9!
2.! THEORETICAL BACKGROUND OF BOARD OF DIRECTORS’ SOCIAL CAPITAL!..!10!
2.1.! Social capital definition and theory!..................................................................................................!10!
2.1.1.! Concept of social capital!..............................................................................................................!10!
2.1.2.! Definition of social capital!..........................................................................................................!12!
2.1.3.! Importance of social capital for MNEs development!........................................................!15!
2.2.! Social capital of board of directors!...................................................................................................!16!
2.2.1.! Strategic role of board of directors in the company’s performance!..............................!16!
2.2.2.! Social capital of board of directors: definition and components!....................................!19!
2.2.3.! Measurement approaches to social capital of the board of directors!............................!23!
2.3.! Research gap!............................................................................................................................................!29!
2.4. Chapter 2 summary!....................................................................................................................................!30!
3.! EMPIRICAL RESEARCH!..........................................................................................................................!31!
3.1.! Hypotheses formulation!.......................................................................................................................!31!
3.3.! Data collection and sample selection!...............................................................................................!35!
3.3.1.! Russian MNEs’ specifics for data collection!........................................................................!35!
3.3.2.! Sample selection!.............................................................................................................................!37!
3.4.! Measurement of variables!....................................................................................................................!39!
3.5.! Descriptive statistics!..............................................................................................................................!43!
3.6.! Data analysis and results!......................................................................................................................!50!
3.7.! Chapter 3 summary!................................................................................................................................!52!
4.! DISCUSSION AND CONCLUSIONS!...................................................................................................!54!
4.2.! Theoretical contribution!.......................................................................................................................!57!
4.3.! Managerial implication!.........................................................................................................................!57!
4.4.! Limitations and direction for further research!..............................................................................!58!
APPENDIX 1. Empirical articles on social capital of board of directors!.............................................!67!
Creation of knowledge based management and investment into intellectual capital has recently
become one of the main objectives of companies around the world; especially multinational
corporations that require global management of its international affiliates profit from strong
intellectual capital as it leads to a competitive advantage.
In the company it is board members, owners and executive directors who are responsible for
making key decisions in the companies. Thus, board members are responsible for achievement
of firm’s financial, strategic and other goals. Hence, intellectual capital of board of directors is
crucial for the company, as it is largely interconnected with the decisions the board makes. The
influence of the intellectual capital of the board of directors is a topic of research in terms of the
financial performance of the firm.
The topic relevance is explained by the recently increased interest in the corporate governance in
general, and board of directors in particular. Companies seek improvement in the board, as it
defines the strategy of the company. Increased competition within the country leads Russian
companies to expansion, hence, they decide to develop as multinational enterprises. The board
makes a decision to do that, hence, some particular traits of the board members might influence
the performance of a multinational company.
Finally, many studies currently focus on the social capital of the board of directors and some
researchers claimed that the amount of studies with social capital in it has increased in the last
decade (Martín-de-Castro et al., 2011). Although these studies focused on samples of companies
from both developed countries (Hillman, A., 2005) and developing countries (Kim Y., 2005), as
well as both external and internal social capital of the board of directors, there is no prior
research on the social capital of board of directors conducted on the sample of Russian capitals.
Moreover, several studies (Goerzen and Beamish, 2005) claimed that social capital is highly
important for multinational companies, as it increases their chances of success.
The effect of alliance networks on individual firm performance has become a critical question to
both managers and scholars (Goerzen, 2005). Therefore, this research contributes to the broad
research of social capital of board of directors, supporting it with the evidence from Russian
The research question that is raised according to the goal of the research is: is there a relationship
between social capital of board of directors and financial results of Russian MNEs?
Research goal and objectives
The goal of the research is to examine the relationship between the social capital of the Board of
Directors and the financial performance of Russian multinational corporations.
The following objectives are set in order to achieve the goal:
To study existing literature on the relationship of social capital of the board of directors
and the firm’s financial performance;
To create an empirical model for the research;
To collect and describe data for analysis;
To apply the regression model to the sample;
To make managerial implications of the obtained results.
Methodology of the study consists of application of regression models to the sample of Russian
multinational companies. The set of independent variables remains the same, while two
dependent variables are used (market capitalization and ROA), which act as metrics for firm
accounting- and market-based financial performance.
This paper is expected to make both theoretical and practical contribution. Its main scientific
value is an attempt to fill the gap in existing theory of social capital of board of directors with
evidence from the Russian market. Practical implications of the research are expected to provide
managers with information and evidence on the statistically significant relationship between the
board social capital and financial performance of the firm. The information is useful to managers
for choosing the board members in multinational enterprises, bearing in mind that they want to
improve the financial performance of the company.
Expected result of this study is to find a positive relationship between the external and internal
social capital of the board of directors and financial performance of Russian multinational
companies. All regression coefficients are expected to stay statistically significant and of the
same sign regardless of the dependent variable used (market capitalization and ROA). However,
if the opposite is found, it will be seen as valuable evidence of social capital of board of directors
having less impact than the boards’ human capital in terms of firm’s performance.
Organization of the research
The research consists of introduction, two main chapters: theoretical framework and empirical
study, and a chapter with conclusion, discussion, theoretical and managerial implications and
limitations of the research.
First part is theoretical framework of social capital of board of directors, which consists of two
sections. The first section of the theoretical framework is devoted to the background analysis of
the key concept of social capital: its definition, theories, components and significance for
multinational enterprises. The second section of the theoretical framework is focused on the
profound review of social capital in application towards board of directors’: definition,
components and importance of social capital of the board of directors. It is followed by a
detailed analysis of existing theoretical frameworks and empirical research on the social capital
of the board of directors and its effects on the firm’s financial results. Theoretical part is
summarized by a formulation of a research gap from the conducted literature review.
Second part is devoted to the empirical study of the social capital of board of directors based on
the research gap identified in the first part. Chapter starts with the hypotheses formulation,
explanation of methodology, variables and data collection process. The collected sample is then
analysed in detail, descriptive statistics are presented and the regression analysis is conducted.
Empirical part is summarized by the analysis of the results of regression.
The paper closes with the discussion of the findings, comparison of the findings with the relevant
research, theoretical contribution of the research, managerial implications of the findings,
limitations of the work and suggestions for further research.
THEORETICAL BACKGROUND OF BOARD OF DIRECTORS’ SOCIAL
Social capital definition and theory
2.1.1. Concept of social capital
Social capital is a part of a larger construct, namely, intellectual capital. One of the first
researchers to track the components of intellectual capital were Edvinsson and Malone (1997).
They divided intellectual capital into the following sub-categories: 1) human capital, which
included employees’ knowledge, skills and network, and 2) organizational (alternatively referred
to as structural capital) capital, which consisted of software systems, trademarks and supply
chains. Sveiby (1997), Stewart (1998) and Bontis (1998) separated networks from human capital
and proposed a third component into the intellectual capital construct, which they referred to as
relational (or “customer”) capital. Relational capital included relationships with all shareholders
and, thus, the networks created by these relationships. Hence, intellectual capital was commonly
Figure 1. Intellectual capital components
Human capital was defined by Bontis (1998) as tacit knowledge of the employees, based on
their age, education and prior work experience in related industries (Hudson, 1993). Thus,
human capital includes individual knowledge and motivation of a human that can be used for
practical output in form of goods, services or information. Some researchers argued that human
capital is the major part of the intellectual capital, since the company is a collection of individual
employees, who all possess tacit knowledge (Nahapiet and Ghosal, 1998).
Structural capital was defined as relations and tools existing within the organization and
supporting employees’ performance (and thus, the human capital). Stewart (1998) defined
structural capital as a stock that supports knowledge transfer in the organization. Bontis (1998)
includes into structural capital such intellectual property components as databases, patents and
trademarks. Organizational capital plays an important role in the knowledge transfer within the
company as it includes systems and databases, which accumulate knowledge and improve the
knowledge between the employees.
Relational (or “customer”) capital reflects the relationships outside the organization, such as
relationships with existing and potential clients, suppliers, business partners and other agencies.
Putnam (2001) also included social norms and trust under the customer capital. This component
of the intellectual capital is connected with the organization’s stakeholders and it reflects the
benefits acquired by the organization through the networking with these stakeholders.
Following the authors who discussed the intellectual capital components in their research, we
can notice that most differentiate human, structural and relational capital (see Table 1 below).
Table 1. Distinguished components of intellectual capital
Edvinsson and Malone
Nahapiet and Gholsal
Lovingsson et al.
Galunic and Anderson
Petty and Guthrie
As seen in the Table 1, human capital and structural capital were prevailing in research until
recently. Martín-de-Castro et al. (2011) noticed that relational capital received less attention
from the researchers in comparison to the other two types of intellectual capital.
Burt (1992) and Coleman (1990) were pioneers in the development of social capital: in theor
research they referred to social capital instead of relational capital. Since late 90s, following Burt
and Coleman, researchers began to discover the social capital – all potential resources available
via the relationships within and outside the organization (Nahapiet and Ghosal, 1998). Castro et
al. (2011) noticed that since the 2000s relational capital was split into business and social capital.
Business capital referred to the relationship with customers, suppliers and partners, whereas
social capital was described as the general value of firm’s networks. Such researchers as
McElroy (2002) and Chen et al. (2005) revised the intellectual capital typology, including
human, structural and social capital into it.
Thus, this discussion on social capital is relevantly new, and more research is required in the
field of social capital. The next part of this chapter will focus on social capital definitions,
theories and components, which researchers include into social capital.
2.1.2. Definition of social capital
The concept of social capital originated in sociological research and was discussed by
sociologists, such as Coleman (1990), Burt (1992) and Putnam (1995). Only in the 90s did the
concept appear in the managerial and organizational research. The following definitions of social
capital were shaped by the researchers (Table 2):
Table 2. Social capital definition
“Social capital is defined by its function. It is not a single entity,
but a variety of different entities having two characteristics in
common: They all consist of some aspect of social structures, and
they facilitate certain actions of individuals who are within that
“Relations within and beyond the firm. A network as your access
to people with specific resources, which creates a correlation
between theirs and yours”
“The sum of the resources, actual or virtual, that accrue to an
individual or a group by virtue of possessing a durable network of
more or less institutionalized relationships of mutual acquaintance
“Features of social organization such as networks, norms, and
social trust that facilitate coordination and cooperation for mutual
and “Sum of the actual and potential resources embedded within,
available through, and derived from the network of relationships
possessed by an individual or social unit”"
“‘Investment in social relations with expected returns”
Kwon and Adler
“The goodwill that is engendered by the fabric of social relations
and that can be mobilized to facilitate action”
and “Resources accessible through the network of relationships
possessed by an individual or a social unit”
Luo, Xueming, et “An intangible asset that is created through social relations that
can be leveraged to facilitate action and achieve and sustain a
“Advantage created by a person’s location in a structure of
Ji-Hwan, “A set of individuals or groups that are connected to one another
Chul Choi, and through socially meaningful relationships”
Jae Min Kim
A large contribution into the research of social capital was made by Nahapiet and Ghoshal
(1998). The authors noticed that there was no universal definition of social capital, since some
researchers believed that social capital only referred to the structure of relationships or networks
(Baker, 1990), whereas others included the potential value, which can be derived from such
networks (Putnam, 1995). For instance, Nahapiet and Ghosal (1998) defined social capital as
realized and potential resources the organization can exploit through the individual employees to
achieve the goal of the company and divided it into three separate dimensions:
Structural – the structure of the relationships and the map of connections within the
network with the possibility of stronger ties. Coleman (1988) also included the networks created
for different purpose, but which could be used for another;
Relational – personal relationships, developed through the repeated interactions between
the individuals of the network. This dimension also includes emotional attachment, expectations
and trust level of different actors of the network;
Cognitive – refers to the systems, interpretations and codes created and shared by the
agents of one network as resources of network building and development.
The researchers worked on the concept of social capital further and pointed out the networks as
the key resource for building social capital, and mentioned that it is dependent on social
relations. Thus, among the key characteristics of social capital defined by the researches, the
most commonly used are: networks, social relations, reciprocity and trust.
It is important to mention three theoretical dimensions of social capital derived by the
researchers. These dimensions were summarized by Putnam (2001) and distinguish forms of
social capital and focuses on the ways to measure these dimensions:
Bridging and bonding ties: bridging forms of social capital link external relations,
whereas bonding forms of social capital link to internal ties (Putnam, 2001). Bridging forms
create ties with external partners and, thus, connect heterogeneous social groups, which lead to
the competitive advantage of the firm (Burt, 1992). Bonding forms focus on networking and
resource sharing within the organization (Coleman, 1988), thus, creating ties in homogeneous
groups of actors and taking into account the connections formed between the individuals of one
firm, which lead to achievement of the firm’s goals (Adler and Kwon, 2002). This theory, if
applied to the board of directors, can bring a conclusion that the former perspective would
include networks of board members with other companies, e.g. seats on more than one board, or
ties with the government on the board. The latter perspective would focus on the networks
between the board members of one company and how they influence the decision-making
Vertical and horizontal ties: vertical forms of social capital include agents of different
hierarchical levels, whereas horizontal ties are being formed if the actors are of the same
hierarchical level (Putnam, 2001).
Strong and weak ties: strong ties have fewer actors in the network, however, these imply
greater trust and connectedness between the members. Weak ties are being formed in case of
larger amount of actors, which increases heterogeneity of connections and the size of the
Another way of distinguishing social capital was proposed by Payne G. T. et al. (2011), who
proposed a four-quadrant typology: one axis represented unit of analysis (individual or
collective), whereas the second axis included the distinction between internal and external ties,
proposed by Adler and Kwon (2002). Based on this distinction the general definition of each
quadrant was proposed and dominant perspectives of social capital research were discussed.
In this research bridging and bonding ties are the key dimensions for the analysis, as these
summarize two key elements of social capital of board of directors that are going to be discussed
later in this chapter.
2.1.3. Importance of social capital for MNEs development
Multinational enterprises are particularly interesting to address in the research of social capital of
board of directors for several reasons. Firstly, UNCTAD (2000) noted that multinational
enterprises have become the most significant emerging organizational form in the past years,
thus it is a relevant topic. Secondly, network management for multinational enterprises is crucial,
especially for those who form international joint-stock ventures. It is vitally important for the
company to nurture its alliance by improving ties with external stakeholders to achieve
competitive advantage in global markets. Last but not least, multinational enterprises offer an
important setting in the research of social capital due to the large variation across firms and
industries they operate in, which leads to a diversified board of directors with diverse skills,
experiences and strategic approaches in managing multinational enterprises (Goerzen, 2005).
To achieve sustainable competitive advantage in foreign markets multinational companies need
to gather a lot of information from external resources via formal and informal relationships, as
well as develop a network of affiliates to achieve competitive advantage. These tasks are
commonly done by the board of directors and connected to the development of its external social
capital. Firms who operate in global environment and have a large network also have more
resources they can access to increase their ability to compete in comparison with firms who
operate independently. Firms that possess high social capital have an advantage in the
competitive global environment. Therefore, it is crucial for multinational firms to learn how to
develop and manage social capital and to create a strong network ties in their domestic markets,
as well as globally. Therefore, issue of managing and developing social capital became
particularly important for a competitive advantage of multinationals that compete in global
markets. (Ireland et al., 2002)
Social capital is an important source of competitive advantage for multinational firms because of
the need for appropriate resources, such as information, technology, knowledge, etc. to compete
effectively in global markets. Social capital can give these firms a sustainable competitive
advantage. The focus of this work is on the importance and effects of social capital in Russian
multinational firms. In this research we focus on the social capital of Russian multinational
companies embedded in its board of directors. It is therefore crucial to understand the specifics
of Russian MNEs.
Social capital of board of directors
2.2.1. Strategic role of board of directors in the company’s performance
Board of directors plays several roles in the organization. The functions of the board include the
appointment of CEO, monitoring of management, search of financing options and many more
(Dalton et al. 1998). There is no doubt that these actions of the board affect the firm’s financial
performance. However, in order to understand how actions of the board affect the firm’s
performance and what position networks (social capital) have, we need to look at the theories
regarding the board’s role in the organization.
Researchers distinguish several perspectives on the role of board of directors in the organization.
First of all, board of directors is legally enforced to oversee management of the company and its
decisions. Board members are legally liable for the decisions made by the directors and their
consequences (Johnson et al., 1996). Two frameworks were developed to study the board of
directors: agency theory and a resource dependency theory, also referred to as resource-based
Agency theory assumes a corporation exists as a set of contract relationships between
management and shareholders (Jensen and Meckling, 1976; Fama and Jensen, 1983). Based on
this theory researchers concluded that there is a high chance of a conflict of interests between the
stockholders and the management of the company. From the point of view of the researchers this
issue should be mitigated by a third-party, the board. Thus, the key role of the board is to
monitor the management of the company and the company’s activities, to ensure that the interest
of stockholders is well represented. Additionally, the agency theorists agreed that the board
should provide strategic counselling to the management. These roles combined can be viewed as
the ‘internal’ role of the board, since it focuses on the internal relationships of the company.
This theory has been criticized, since often the board can influence the decision-making in a
negative way (Fama and Jensen, 1983). Another point of criticism came from the researchers
who claimed that from the managerial perspective board has to agree with the CEO decision
(Stiles, 2001). A solution to the agency theory was proposed by Fama and Jensen (1983) who
claimed that having outside directors on the board of directors ensures independence of the
decisions. The fewer benefits firm performance has for the director and the fewer risks directors
have from the negative financial performance, the more objective and rational their decisions
will be. Agency theory claims that independent directors are more efficient in terms of
management control function and are better at representing shareholders’ interests. Hillman and
Dalziel (2003) argued that although having independent directors on the board improves
objectivity, it does not fully eliminate the problem of organizational performance, since such
directors lack industry-specific knowledge to make crucial strategic decisions. Thus, it can be
concluded that it is crucial to have a balanced board.
The second perspective on the board was developed by the resource-based view theorists
(Pfeffer and Salancik, 1978; Dalton et al., 1998; Hillman and Dalziel, 2003). According to the
resource-based view researchers the key role of the board is to attract external resources into the
organization (Pfeffer and Salancik, 1978). Based on the resource-based view theory the board
members with stronger links to external environment (external networks) influence the
company’s performance positively (Jackling and Johl, 2009).
Robert I Tricker (1994) worked out a further classification, distinguishing between the external
focus and the internal focus of the board, as well as pointing out two new roles: the conformance
role and the performance role (see Table 3 below).
The conformance role focused on
monitoring the management to ensure it acts in the interest of the stockholders. The performance
role is the setting of strategy and objectives. The internal focus of the board is seen as the
contribution of ensuring the good strategic management and decision-making within the firm,
while the external focus includes the communication with external stakeholders and the
representation of the company in the external environment.
Table 3. Role of board of directors
Past and present oriented
Source: Robert I. Tricker, 1994
The agency theory and the resource-based view theory together with the Tricker’s classification
were studied further and led to a common way of distinguishing between the external role and
the internal role of the board of directors.
The internal role consisted of the actions directly connected to the internal processes within the
company and includes such actions as:
Link between shareholders and management;
Setting organizational strategy, including: investment decisions (Fama and Jensen, 1983),
strategic goals (Hendry and Kiel, 2004), strategic guidance;
Oversee decisions of the top management, such as decisions regarding M&A, distribution
of financial and humans resources (Hillman and Daziel, 2003).
The external role is connected to the external environment of the company and includes the
following responsibilities of the board:
Linkages to the external environment of the organization;
Obtaining of necessary resources for the organization;
Forming board interlocks;
Contact with the government (which is especially relevant for the countries such as China
or Russia, where political connections include significant benefits for the organizations)
Maintaining stakeholders relations (connected to networking).
Pfeffer (1972) states that the firm benefits from the external resources that the board member
bring with them, therefore, the key role of the board is to create access to these resources.
Hillman et al. (2000) noted in their research that it is of crucial importance to choose the board
members based on the resources they can bring in the organization from the external
Based on the two roles of the board, the hypotheses were formed about different aspects of the
board that affect the firm’s performance. Such characteristics of the board as board composition,
size, age, gender diversity, proportion of non-executive directors and position on multiple boards
were studied thoroughly. The detailed overview of the studies and outcomes in these categories
can be found in the Appendix. We focus further on the board composition, as the social capital
component was not usually studied in the researches on board composition, however, it is a
crucial part of it. Board composition includes studies on human capital of the board members,
e.g. research on board interlocks in relation to the independent directors (Carpenter and
Westphal, 2001). Little studies examine the board influence with the focus on social capital
(Stevenson and Radin, 2009).
In this research author would like to focus on the social capital of the board of directors and its
influence on the company’s financial results. Thus, the next part of this master thesis will be
devoted to the analyses of the prior theoretical and empirical research on the social capital of the
board and the relationships between the networks of the board of directors and the firm’s
2.2.2. Social capital of board of directors: definition and components
A vast research is focused on the intellectual capital of the board of directors in terms of its
influence on the financial performance of the company. It is board of directors who possess
certain knowledge, experience and network create the crucial intellectual capital, which can be
employed by the firm. However it was only in the early 2000s that research of social capital of
board of directors became popular in academic research (Adler and Kwon, 2002). The focus of
this research is on board of directors for several reasons:
Board of directors is a representative sample for the analysis of the social capital, since it
is the board that makes key decisions in the firm, hence, influence the firm’s financial
Data collection on personal social capital is only possible for the board member,
otherwise, a much larger sample of executives would be required and there would be troubles in
acquisition of such sample.
Traditionally intellectual capital of board of directors divided into human and social capital.
Social capital is often formulated as board of directors’ ties with external stakeholders of the
company and the resources available to the board members, and the company, based on these
ties. Under social capital researchers include the following elements: ties with governmental
organizations, which tend to have positive influence on the financial performance indicators,
such as ROA, ROS and Tobin’s Q (Hillman and Dalziel, 2003), ties with other board of directors
often referred to as multiple directorship or board interlocks, family relations and other ties to
CEO and internal networks with the board members of firm’s board of directors.
One of the first researchers to apply the concept of social capital to the board of directors were
Adler and Kwon (2002) and Kim and Canella (2008). Kim and Cannella (2008) defined board
social capital as an intangible asset that consists of relationships and potential resources gained
from these relations. A range of definitions of social capital in relation to the board of directors is
presented in the Table 4.
Table 4. Definitions of social capital of board of directors
“Degree to which outside board members have outside
contacts within an institutional environment”
Kor, Y. Y., Chamu
“Collective ability to access information and resource
networks through external and internal connections”
Kim, Y., Cannella, A.
“Interpersonal linkages between individuals, both inside
and outside the firm, that are important to board”
Lester, R. H.
“Expertise, knowledge, skills, and social networks [of each
Stevenson, William B.,
“Benefits of social relations on the board”
and Robert F. Radin.
Haynes, K.T., Hillman,
“Ability of the board to provide resources to the firm”
Tian, Jie Jenny, Jerayr
“Co-working experience on the board and external
John Haleblian, and
directorship ties to other corporate boards”
Johnson S., et al.
“Ties to external organizations and high status, or
Johnson, Scott G.,
“Directors’ social relationships affect how both individual
Karen Schnatterly, and
directors and the board as a whole function. Broadly,
Aaron D. Hill
social capital can be divided into three types: directors’
ties to other firms, personal relationships with firm
managers, or social standing”
Lee, J., et al.
“Social networks on the basis of their [directors’] personal
affiliation in terms of educational and career background”
Barroso-Castro, C. et al. “An asset that represents both the relationships and the
potential resources arising from the relations”
“Level of their [directors’] external interconnectedness”
Based on the definitions provided in the Table 4, we can claim that the key parts of social capital
are: networks, relationships, access to resources, trust and reciprocity. Social capital of the board
of directors is seen as an important factor of firm performance due to its influence on chances to
gain better business partners, leverage firm’s activities, and improve the firm’s investor
perspective and, thus, market value. However, social capital is dynamic and embedded into the
relationships of the board members, which means that the corporation itself does not possess the
social capital of the board of directors and its resources.
Social capital of the board of directors is linked directly to the networks or relationships of the
board members. The theory of social capital of the board of directors is related to the resourcebased view theory of CG (Pfeffer and Salancik, 1978), which claims that the companies gain
competitive advantage from relationships with external organizations. Due to these relationships
the board members have access to the resources that can play a crucial role for the company’s
competitive advantage (Hillman and Daziel, 2003).
Prior research of the social capital of the board of directors is divided into the studies of
connections of the board members a) with other board of directors, b) with board members
within on board of directors and b) with the government. Adler and Kwon (2002) developed the
concept of the board social capital and divided it into external and internal social capital, or
“bridging” and “bonding” ties of board members. Internal ties are the ties between board
members within one board of directors, whereas external ties led to the relationships with
external parties. Networks between the board members are considered to be a mechanism for
negotiation during the board meetings. The presence or absence of external network ties of the
board members will improve the understanding of the influence of social capital on the financial
performance of the company. The interlocks with other boards are one type of board social
capital, which lead to knowledge exchange (Stevenson and Radin, 2009). As government is a
major external organization that has an ability to influence the firm’s activities, having a board
member who is linked to the government is crucial for the companies to build relationships with
this institution. Moreover, these ties can be seen as access to information unavailable for other
After having analysed definition of social capital of board of directors based on the theoretical
and empirical works, the components of the concept must be researched. Since researchers
distinguish between two types of social capital of board of directors – internal and external, – to
understand the difference both terms are reviewed below.
Internal social capital
Internal social capital or ‘bonding’ is formed by the interactions among board members and their
experience of working together. This type of social capital is established and owned by all board
members within one board (Adler and Kwon, 2002). Since the effectiveness of the board
performance is dependent on how well the members interact with each other in a limited timespan of board meetings, it is crucial that they have an established network. Lack of positive
dynamics among the board members lowers the effectiveness of the meetings. Moreover, outside
directors learn more about the firm performance from other board members than from any other
source of information. It affects strategic decisions, choice of CEO and other important
decisions. Longer co-working experience strengthens the understanding of strategic challenges
of the firm and efficiency of their resolution.
Co-working experience is a platform for directors to share individual knowledge and coordinate
their expertise to develop trust and realization of who is capable of what within the board. This
understanding of expertise location among group members is particularly important for groups in
which members’ special expertise or unique past experiences provide some members with access
to information that others do not have, and it has been found to have positive effects on group
task performance. Directors who have longer co-working history tend to develop a group-level
knowledge based on their co-working experience. Stevenson and Radin (2009) found that ties to
other board members who met outside the boardroom were important predictors of social
influence than human capital or ties across boards. However, other researchers found that an
internal network is positively related to the firm performance only up to a certain extent, after
which there is a negative relationship between the internal social capital and firm performance
(Kim, 2005). This curvilinear relationship between internal social capital and firm performance
is going to be further discussed in the research of Barroso-Castro (2015). The argument behind
this curvilinear trend is that if board members work together for too long, they might make
biased decisions, based on the other board members’ decision-making.
External social capital
External social capital is defined as the connections to external environment and potential
resources (Kim 2005). Barroso-Castro et al. (2015) defined the role of the external social capital
as “bridging, or linking the firm to the external environment”. The sources of external capital
vary and include outside directors’ connections to the firms where they are employed, seats on
the boards of other firms, personal relationships of directors. Researchers believe that the access
to external resources and larger networks of board members lead to higher financial performance
of the firm (Hillman and Daziel, 2003). However some researchers noticed that while board
members have seats on too many boards an effect of “overboarding” takes place, which leads to
lower attention of the board members to the management decisions (Kor and Sundaramurthy,
Researchers define several types of external social capital. Burt (1980) first started a research on
interlocking directorships, also referred to as multiple directorship. The researcher claim that
board interlocks increase access to strategic information for the firm. Pfeffer (1972) noticed that
directors who have seats on multiple boards possess more external resources that the firm can
deploy. Company benefits from directors’ multiple directorship while choosing corporate
strategy, selecting a CEO and other valuable information directors obtain from other boards.
Carpenter and Westphal (2001) found in their research that board members with multiple
directorships in strategically related firms were more effective in strategic decision making for
similar firms than directors without such network ties.
Another benefit for the focal firm from multiple directorships was addressed by Hillman,
Cannella, and Paetzold (2000), who claimed that multiple directorships contributes to the
director’s reputation. Hence, it indicates higher market value of the director and, respectively,
higher market value of the company.
Ties with governmental organizations are seen as a second important source of external capital.
Hillman (2005) analytically used resource dependence theory to emphasize the importance of
ties with governmental organizations of board members with firm performance, especially in an
environment of economic uncertainty. Such ties include: government officials on the boards, past
experience in governmental organizations of board members and ex-politicians on the boards.
Firms with board members who have experience in governmental organizations tend to have
better market-based performance according to the research.
Some recent researches are focused on the interaction of internal and external social capital
(Barroso-Castro et al., 2015) and addressed the synergetic affects of internal and external social
capital on the firm performance.
2.2.3. Measurement approaches to social capital of the board of directors
Social capital of board of directors is a focus of the current study and in the empirical part the
relationship between social capital of board of directors and firm financial performance will be
measured. Before we proceed to the empirical part it is important to analyse existing empirical
research on social capital of board of directors and how the researchers have previously
measured internal and external social capital of board of directors, as well as the key results and
findings of these researches.
In order to research key characteristics of intellectual capital of board of directors with focus on
social capital and to explore its relationship with the firm performance, a literature review of
main empirical articles has been conducted. Articles from the following journals, published since
1990 have been chosen: Academy of Management Journal, Academy of Management Review,
Strategic Management Journal, Journal of Management Studies, Entrepreneurship Theory and
Practice, Organizational Science, Journal of Intellectual capital, Journal of Management.
Databases EBSCO, Science Direct and Emerald have been used for the literature review. The
articles mentioned above provided understanding of the relationship between various parts of
social capital of board of directors and firm financial performance assessed both on the
accounting and market measures.
After a thorough analysis of the empirical articles the 42 most fitting current research have been
selected. Table 5 represents the amount of articles found per journal. The Academy of
Management journal appeared to be the one providing key articles (see Table 5 below).
Table 5. Summary of retrieved articles.
Academy of Management Journal
Academy of Management Review
Strategic Management Journal
Journal of Management Studies
Entrepreneurship Theory and Practice
Journal of Intellectual Capital
Journal of Management
Based on the literature review we have analysed the following trends and topics in the research
of social capital of board of directors and its relationship to the financial performance of the
The research on social capital of board of directors has various angles in the existing research.
Some researchers analysed external network ties of board members and how these affect
strategic decision-making, which, in turn, leads to financial profitability of the company
(Carpenter and Westphal, 2001). In this research the data is collected from a survey, which is
followed by the OLS regression model to measure the relationship between the ties among
different boards and decision-making. The research revealed that firm performance was
enhanced by strategically related boards ties.
Ties of board members with multiple boards were further analysed by Ferris et al. (2003) in
terms of their relationship with firm performance. However, in this research the inverse
relationship is analysed: whether firm performance has an effect on the number of board seats
their directors simultaneously sit at. Researchers found that directors with seats in large firms are
more likely to have multiple directorships and that directors who have seats in financially
successful firms are more likely to be invited to other boards due to their increased reputation.
Kim analysed boards of directors in Korea for relationship between external social capital and
firm performance (2005). Kim used Tobin’s Q as a measure of market performance of the firm
and an independent variable of board members’ network density (2005), which can be seen as a
number of interlocks with other boards or past relationships to other external agencies. The
results of the research showed an inverted curvilinear relationship between network density and
firm value, due to the diminishing profit from an abundance of connections. Later Kim narrowed
her research down to the social capital of outside directors, which revealed a significant
relationship between outside director social capital and firm performance.
Kor and Sundaramurthy (2008) added industry related work experience and networks as another
element of external social capital, which together with multiple directorships revealed to have an
effect of company’s growth based on the evidence of 72 technological firms.
On the contrary Jackling and Shireenjit (2009) in their research of Indian companies found
negative relationship between number of multiple directorships and the firm performance
(measured as ROA and Tobin’s Q). They argue that the amount of board interlocks does not add
value to the firm, which is partially supported by Kim’s research of a curvilinear relationship
between a number of multiple directorships and firm performance.
Devos et al. (2009) researched board interlocks from a different perspective: their goal was to
measure whether interlocking directors were effective at their monitoring task, whereas previous
researchers focused on the resource attracting and strategic decision-making tasks of the board.
The focus was on the market value of the firm, which was measured by Tobin’s Q ratio, and the
research goal was to identify whether shareholders have a negative reaction towards the
formation of strong ties among different boards. The researchers found that board interlocks are
associated with weak corporate governance of the firm and high number of board interlocks is
negatively related to the firm performance. This goes along with the findings of Jackling and
Shireenjit (2009), who claimed that the number of interlocks is negatively related to firm
Bøhren and Strøm (2010) continued research to test whether multiple directorships of board
members create more value for the firm, using Tobin’s Q, ROA and ROS as firm performance
indicators and multiple directorships as one of the independent variables. The researchers found
that firm value increases when directors have strong links to other boards, which supports
findings of Kim (2005), but contradicts findings of Jackling and Shireenjit (2009). This
contradiction might be caused by the country selection – in developed economies number of
multiple directorships per board is lower (Mean=1.8), whereas in case of India the number of
board interlocks is significantly higher (Mean=2.94).
Clements et al. (2015) followed research of Carpenter and Westphal to test whether board
interlocks in industry related companies enhanced directors’ effectiveness in the firm. The
results revealed a significant positive relationship between industry relatedness of board
interlocks and director effectiveness. Unlike other researchers, Clements et al. focus not on the
firm financial performance but look more narrowly into internal corporate control of the firm,
which they believe to be representative in terms of assessment of board effectiveness. In other
researchers direct relationship with accounting- and market-based financial performance of the
firm is measured.
Ties with governmental organizations
Luo et al. (2004) analysed three types of firm social capital, which included customer
relationships, business partner social capital and governing-agencies social capital. Although the
first two variables are related to the organization itself, Luo et al. measured the last variable,
governing-agencies alliances, as the number of ties with the government of board members. The
research of 262 Chinese firms revealed that all three variables are positively related to the firm
performance, which was measured as firm’s sales growth in relation to the major competitors
and its ROI.
Hillman (2005) continued research in the direction of governing ties of board members as the
key source of social capital and its relationship to the firm performance. Her research goal was to
analyse whether there was a relationship between a number of politicians on the board and
increased market-based performance of firms. Political experience of board members was
divided by the size of the board and a sample of 50 randomly chosen firms within particular
industries was used for research. What is interesting is that although Hillman’s regression
models for all four variables (Market capitalization, Tobin’s Q, ROS, ROA) remain significant,
only in the models with market-based variables the relationship between dependent variables and
governing experience of the board members was found to be significant.
Lester et al. (2008) continued research on the value of having formal government officials on
boards by measuring depth, breadth and deterioration of board members with prior governmental
experience on a sample of 236 individuals. Companies with an ex-government official on the
board were set to 1, and 0 otherwise. Independent variables chosen were the breadth of board
members’ social capital measured as a number of external ties to governmental organizations
during their term and depth of their social capital measured as a length of their tenure. The
research revealed evidence that firms welcome directors with longer prior experience in
governmental organizations, since they are considered to possess more connections and, thus,
bring more value to the company. That is an interesting insight for the US companies, which rely
highly on board members’ ties with governmental organizations. It might also be a case of
reputation of the board member that makes impact on the firm decision, and it is likely, that
similar attitude might be prevalent in Russian firms.
Kim (2007) measured effect of ties with the government of outside directors and firm’s Tobin’s
Q based on the sample of 473 publicly traded Korean companies in a longitudinal study. The
results showed no significant relationship between affiliation with government institutions and
firm market value.
In their research of board external networks Gray S. et al. (2014) analysed biographies of 6162
directors of 1561 Australian companies listed on the ASX (Australian Stock Exchange) to find
political connections and prior work experience in the governmental institutions. Classification
of governmental experience was based upon Goldman et al. (2009) and included positions such
as a member of parliament, mayor, etc., which were then classified into high-level and low-level
government positions, from which only members of the board with high-level positions were
included as those who have ties with the government. Similarly to Kim (2007) researchers found
no evidence of relationship between firm performance and government connections of board
members, which might be due to the fact that only 2.1% of listed firm directorships in Australia
are held by directors with prior experience in the government.
Youngest branch of the research of social capital of board of directors is the research of internal
social capital of board of directors and its effects on company performance. Stevenson and Radin
(2009) were among the first to conduct research on board internal social capital, which is present
in the relationships between the board members of one board. Researchers suggested that
existence of prior relationships and stronger current relationships between the board members
leads to increased influence of a board member with such network on the board decisions and
increases this member’s influence on other board members. A survey was conducted on board
members of US public companies. Based on the survey it was possible to come to the conclusion
that board interactions outside the meetings were stronger predictors of influence of board
members than their human capital. This means, that ties between the board members have
relationship with the board decision-making and that the internal social capital is a stronger
predictor of influence of board members on the decision-making than the board’s human capital,
which stresses the importance of social capital research.
Barroso-Castro et al. (2015) were one of the first researchers to notice that board external and
internal social capital are interconnected and must be analysed together rather than separately.
They claimed that board external social capital requires internal social capital for the fullness of
analysis and correctness of interpretation. Researchers took a sample of 1158 directors from 103
Spanish firms listed on Madrid Stock Exchange and tested relationships between external social
capital of board of directors, internal social capital of board of directors and firm performance,
measured as ROS. To measure external social capital researchers used multiple directorships
similarly to previous research of external ties. Internal social capital was measured in terms of
co-working experience of board members, which was calculated based on the pairwise
comparison of tenures of each board member, divided by the board size. Researchers found that
internal social capital moderates effects of external social capital, which supports ideas of Kim
and Cannella (2008).
As a result of our analysis of external and internal social capital of board of directors and a more
specific literature review of the articles and empirical research on the relationship between social
capital of board of directors and firm financial performance, especially that of multinational
enterprises, a gap in the research of social capital of the board of directors was found.
Firstly, social capital of board of directors is an emerging concept that has become important in
recent management literature (Adler and Kwon, 2002), which has not been studied thoroughly in
comparison to the other component of board intellectual capital, human capital. Therefore, the
topic is relatively young and prospective in terms of future opportunities for research. Extensive
possibilities for research of internal and external social capital of the board of directors are one
of the key reasons for the topic selection.
Secondly, based on the literature review it was noticed that social capital of board of directors
has been previously studied either in the developed markets (Hillman, A., 2005; Kor, Y. Y.,
Chamu Sundaramurthy, 2008; Lester, R. H., et al., 2008; Stevenson, William B., and Robert F.
Radin., 2009; Devos E., Prevost A., Puthenpurackal J., 2009) but only a few researchers
discussed the relationship between social capital and board performance in the emerging markets
(e.g. China in the study of Luo, X., et al., 2004). However, this example might be separated into
a different category – research of social capital in Easern cultures, since business there has been
dependent on connections for many centuries (Wee and Lan, 1998). Thus, researchers of social
capital of board of directors in China or Korea (Kim Y., 2005; Lee, Ji-Hwan, Chul Choi, and Jae
Min Kim., 2012) might have been driven by the cultural aspect rather than the emerging
economies. Therefore, Russia, as a BRIC country and an emerging market, is of particular
interest in the research of social capital of board of directors.
Last but not least, only a few researchers have applied the concept of MNEs into the research of
social capital of board of directors and its potential relationship with firm performance (Goerzen
and Beamish, 2005), however, it alliance network is crucial for MNEs as a source of competitive
advantage when entering new markets. Thus, it is believed to be a prosperous topic to study.
Therefore, this research is believed to contribute to both academic research and managerial
implications. Hence, this research will be focused on the identification of the relationship
between both internal and external social capital of the board of directors of Russian
multinational companies and the financial performance of these companies, which will be
assessed on two levels: market-based and accounting-based.
2.4. Chapter 2 summary
To sum up, in this chapter the theoretical framework of social capital of board of directors is
analysed. First of all, the concept of social capital was defined and researched in relation to the
other forms of intellectual capital. Due to its relevantly young age, the concept has not been
widely studied, however, it has already been applied to the board of directors, one of the key
treasuries of the intellectual capital of the company.
Social capital of board of directors is an emerging concept that has become popular in recent
research of intellectual capital and corporate governance. Particular area of interest is research on
external social capital, defined as board interlocks and ties with governmental organizations, and
internal social capital, defined as ties between the directors within one board. Empirical evidence
from the literature review provides examples of research on the relationship between external
and internal social capital of the board and various financial performance measures of the firm.
A research gap was identified based on the literature review in the field of research of social
capital of board of directors and its relationship to financial results of MNEs from emerging
markets. As there is evidence that social capital of board of directors is a source of competitive
advantage for MNEs that develop in global markets, it is of high importance to test this with an
empirical research. Although, there are external factors that might influence the results (culture,
financial instability, etc.), it is possible to measure the relationship between social capital of
board of Russian MNEs and financial performance of these companies.
Based on the literature review analysis and the identified research gap, we proceed with a
formulation of research hypotheses, which would help us identify whether a relationship
between various elements of external and internal social capital of board of directors and
financial performance of Russian companies exist. As noticed in the first part of this research,
starting from Adler and Kwon (2002) the concept of social capital has been applied to the board
of directors. Existing studies show that both internal and external social capital of board of
directors have an impact on the firm’s financial performance. Out of the factors influencing
social capital of the board of directors, discussed in the previous chapter, two factors of the
external social capital and one factor of the internal social capital were chosen to form
hypotheses. In this section we explore previous empirical studies on the relation between these
factors and firm’s financial performance and form the hypotheses for this research.
Internal social capital: board co-working experience
Companies vary based on the industry; however, even within one industry companies differ.
Individuals need time to adapt to the new industry and company. According to Finkelstein and
Mooney (2003) boards improve their efficiency and decision-making by working together for a
longer period of time. Thus, board members accumulate certain experience after several years of
working together. Since majority of board members have full-time positions outside the
company, these experience and resources they gather during their tenure provide them with firmspecific knowledge. Moreover, board members accumulate certain social resources within the
company, which they use in their governance (Kor & Sundaramurthly, 2009).
Board of directors’ internal social capital is embedded in ties that board members establish with
other board members, which lead to better understanding, hence, more efficiency in the board
collaboration and decision-making. While working several years in the same board, board
members accumulate and share knowledge with other board members: their resources,
knowledge, experience, etc. and are more willing to share information with their colleagues,
since they have higher levels of trust (Kim and Cannella, 2008). According to Fisher and Pollock
(2004) these factors lead to a higher efficiency of the board and positively affects financial
We should understand the board members do not necessarily work as a team, since the amount
and the length of board meetings are limited. Stronger ties between the board members create a
positive environment to work productively at. However, some researchers made an assumption
that the excess of internal social capital of the board of directors may lead to lower level of
Combining these arguments we elaborate the following hypothesis on the influence of the
internal social capital of the board of directors:
H1a: There is a positive relationship between board members’ co-working experience and
H1b: There is a positive relationship between board members’ co-working experience and
company’s market capitalization.
External social capital: board members’ previous experience in governmental
Social capital related to ties with governmental organizations is defined as all social relationships
and connection board members have established and maintain with the government, including
political leaders, governing bureaus, etc.
Board members can influence the firm’s financial performance through the ties with the
governmental organizations that they possess, especially in a country like Russia. Working
experience in governmental organizations is often perceived as supreme due to the contacts in
the governmental organizations the person could have establish, which are considered to be
beneficial both in terms of the inside knowledge and the knowledge of the bureaucratic
Firms often see benefits from inviting people with work experience in governmental
organizations (e.g. government employees, politicians, etc.) to the Board of directors. Pfeffer and
Salancik (1978) mentioned that government is one of the key forces that could potentially
influence firm’s financial performance. An established network with governmental organizations
could allow firms to employ relevant information from external sources, which in turn enhances
Following Pfeffer and Salancik, other authors theorized that the leveraging of network with
governmental organizations enhances firm strategic and financial performance (Peng and Luo
2000; Luo et al., 2004; Abdul Latif et al., 2013). This element of social capital might also affect
firm’s market price, since investors believe that connection with governmental organizations
lead to knowledge of political processes, which in turn posses vital market information.
In Russia the role of the state in economy is rather large, therefore, presence of directors
connected to the governmental organizations on the board might play a significant role in the
firm financial performance. However, between 2008 and 2014 there were a number of laws that
forbid direct governmental officials to sit on the board of directors. After the economic tensions
in the second half of 2014, another law has passed that let governmental officials to become
members of boards. These changes might have influenced a share of those ties with the
government that are embedded into governmental employees and those ties might have been
stronger than the ones that those who have past experience in governmental organizations
possess. Hence, for the year 2013 government might not have had such a strong influence on the
Still, the benefits of ties with governmental organizations are rather influential in Russia.
Relevant information received from the government is a potential source of a) acquisition of
support from particular politicians, who are able to affect a legislation that could benefit the
firm’s performance; b) access to unique public policy information, which could give the firm a
decent competitive advantage (Hillman et al., 2005); and c) certain reputation of a board
member, which increases the perceived value of the company. All these three benefits from
contacts with governmental organizations are thought to improve firm’s financial performance.
Therefore, it is crucial to test the following hypotheses:
H2a: There is a positive relationship between working experience in the governmental
organizations and company’s ROA.
H2b: There is a positive relationship between working experience in the governmental
organizations and company’s market capitalization.
External social capital: ties with other boards
Directors at large listed companies and multinational enterprises have a tendency to hold more
than one directorship. Resource-based view theorists argue that firms benefit from the resources
board members can bring, among others, the connections they create with other board members.
These connections with other board of directors might serve as a source of communication and
information available to the firm and lead to a broader perspective on external environment of
the company, which could influence the firm’s strategy. Presence on multiple boards increases
network and information flow among board members, which positively affects decision-making.
Thus, links to multiple boards of directors is associated with increase of unique information to
the firm. Moreover, presence on several boards increases the reputation of the board member,
which is positively perceived by investors (Carpenter and Westphal, 2001) and represents the
quality of a particular director in terms of their knowledge, resources, networks, etc. (Fama and
Jensen, 1983). One of the reasons could be that a board member with strong reputation would be
desired on multiple boards within one industry.
Another interesting notion is that directors who have seats on multiple boards not only have
knowledge and resources, they also use these multiple boards to control uncertainty (Gilson,
1990). An assumption is made that this is applicable to the periods of economic instability and
crisis, thus, it applies to the situation in Russia starting from 2014. To test whether multiple
directorship is beneficial in the periods of crisis, the following hypotheses are proposed:
H3a: There is a positive relationship between board members’ external directorship ties and
H3b: There is a positive relationship between board members’ external directorship ties and
company’s market capitalization.
Thus, altogether we can form the following graphic description of the research hypotheses:
Social capital of board of directors
Figure 2. A model of influences of board social capital on firm performance
The aim of this research is to identify a possible relationship between external and internal social
capital of board of directors and financial results of Russian MNEs, based on the accounting- and
market-based performance measures. The results obtained from the empirical research will show
relationship between social capital of board members and firm performance.
The framework of the empirical study (Figure 3) depicts the key stages of the empirical research,
which helps us to move towards the results.
Figure 3. Framework of empirical study
Research methodology is based upon quantitative methods, which were chosen based on the
analysis of previous empirical studies, as well as the nature of the research question. Since the
goal of the research is to identify a relationship between variables, a representative sample and
quantitative analysis are required.
Data collection and sample selection
3.3.1. Russian MNEs’ specifics for data collection
Stopford and Wells (1972) define MNE as a company that had operations in more than six
countries. Later Caves (1996) claimed that “MNE is defined as an enterprise that controls and
manages production located in at least two countries”.
To understand what Russian companies can be addressed as multinational, it is important to
understand why companies go international, especially, why Russian companies seek benefits
from becoming multinational. Based on the results of the study conducted by Luo and Tung
(2007), there are several reasons of why companies from emerging markets such as Russia
decide to become multinational:
Lack of competitive advantages compared to the main rivals from abroad;
Need to overcome the latecomer disadvantage;
Need to overcome existing trading legal barriers and extent their presence;
Getting the opportunity to be less dependent on domestic market in terms of demand and
Need to get rid of preferential treatment offered by state of emerging markets.
According to modern research (Panibratov, 2012) there are several reasons why Russian
companies choose a path of a multinational enterprise and outlined the industries for which it is
more common for companies to become multinationals (see Table 6 below).
Table 6. Ways of establishment for Russian MNEs
Type of internationalization Industry
Internationalization process started in 1990-s
Oil and gas
through exporting products to Germany,
Ukrain, Belarus and other countries that are
close to Russian boards
Internationalization started in 2001 by
establishing a strategic collaboration with
distribution centers in countries with high
demand for a product.
Internationalization started in the middle of
1990-s through launching branches and
subsidiaries in CIS countries
Foreign direct investments Metals
Internalization started in 2003 through
investing in production facilities based in
countries where steel-making industry was
attractive and developing
Mergers and acquisitions Telecom
Internationalization started in 2002 through
acquisition of local market leaders in CIS
International by nature
Company was initially created as an
international organization, but officially got
a foreign subsidiary only in 2009. Company
goes abroad through opening domains in
Thus, in further research we will focus on these industries to discover relationship between
social capital of board of directors and financial performance of Russian MNEs. To identify the
companies which are thought to be MNEs we used the methods, created by Emerging markets
global Players (EmgP) group, coordinated by Vale Columbia Center for sustainable international
investment (VCC) and based upon standards accepted by the United Nations Conference on
Trade and Development (UNCTAD).
3.3.2. Sample selection
The initial sample included 2303 board members across 250 Russian companies ever listed on
stock exchanges. The list was compared to the lists of Russian companies listed on the LSE,
NASDAQ, NYSE and Moscow stock exchanges. As the focus of the research is on Russian
MNEs, it was necessary to identify which Russian companies listed on the stock exchange are
considered as MNEs.
A sample of Russian MNEs was chosen for the research, due to several reasons. Firstly, it is
crucial to define Russian MNEs. Thus, the sample of Russian MNEs would allow us to collect
data from various industries and receive a more objective sample.
Secondly, currently companies from emerging markets, such as Russia, have additional
incentives to become multinational due to a higher competitive advantage and increasing
independence from the sales in the domestic markets, especially in the periods of crisis, etc. (Luo
and Tung, 2007)
Last but not the least, the sample of Russian MNEs allows us to test empirically how internal
social capital moderates the relationship between external social capital and firm performance.
For the representative sample of Russian MNEs all Russian companies ever listed on the stock
exchanges in the world were included. Only listed companies were chosen because of their legal
requirements to publish financial performance reports, which would allow us gain access to the
necessary data. The sample excluded financial service firms, due to the specific regulations of
the industry and the differences in the structure of their balance sheet. Preliminary number of
companies collected consists of 250 companies.
The following criteria of inclusion into the final sample was created:
Company is an open joint stock company
Company has foreign sales
Company has board of directors
The data for the years 2013-2014 is available in the databases
After the sample was created, the financial services companies were excluded from the list due
to the limitation of assessment of its financial performance. The decision to include the firms
was based on the comparison against other firms on total assets, total sales and employment size.
Our final sample consisted of 524 board members across 61 companies across nine industries.
The majority (23%) of the companies belong to the Metals sector, followed narrowly (20%) by
Oil & gas. The share of pharmaceutical industry is low (2%) and is represented by one company
only. Automotive industry included consumer cars, as well as automotive parts manufacturing
and machinery for production needs (trucks, etc.). The detailed distribution is shown in Figure 4.
Figure 4. Distribution of sample across industries
The data on the board members was collected for the year 2013 from databases SKRIN and
SPARK, followed by a more detailed analysis of the financial statements and quarterly reports of
the company, as well as some deeper research of possible connections to the government
conducted on the Internet. Initially it was planned to collect data for the years 2014 and 2015 to
address a two-year lag and measure the diminishing effect of the board social capital, however,
there are several limitations: firstly, a fair amount of data from the year 2015 has not been
published yet, thus, only 2013 and 2014 were possible to analyse; secondly, the financial crisis
of 2014 affected firm performance dramatically and the measurement of dependence between
board social capital and firm financial performance would require a significant research into
mediation and moderation effects of financial crisis.
Data on variables for the empirical research of the firm’s financial performance and social
capital of the board of directors were collected from the following databases: SKRIN, SPARK
and DATASTREAM. Data included annual reports from the focal year 2013 for key financial
data and quarterly reports for further information, e.g. number of board members, their previous
employment, positions on multiple boards, etc.
Main challenges for data collection included manual one-by-one collection of available data and
missing information in some companies’ reports. Little information on the board members is
available online, and for further research biographies of the board of directors members are
required to be analysed. For the reasons stated above, the number of companies was reduced
after detailed screening of the information.
Measurement of variables
In this research the task is to analyse the relationship between internal and external social capital
of the board and firm performance, therefore, it is crucial to select metrics that measure external
and internal social capital in the form of board members’ ties with governmental organizations,
other boards and board members within the board of the focal company. Then, key performance
indicator metrics for Russian MNEs have to be established. Based on the selected variables it is
planned to identify whether there is an existing significant relationship between the social capital
of the board and financial performance of the company.
The methodology chosen for the study of the relationship between market capitalization and
social capital of the board of directors and ROA and social capital of the board of directors is
The goal of the current research is to measure the relationship between the social capital of board
of directors on firm’s financial performance. A broad number of measures were adopted in
previous studies to measure firm performance. The measures that characterize company’s
financial performance can be divided into accounting value and market value measures: the
former is an indicator of the financial results of the company, whereas market value is
accountable for the investor perspective of the company.
Return on assets
Return on assets (ROA) is a widely used indicator to measure the relationship between different
parts of intellectual capital and the financial performance of the company (Dalton et al., 1999;
Bhagat and Bolton, 2008; Hillman, 2010). Sometimes Return on assets (ROS) is also included
(Barroso-Castro et al., 2015) as it measures firm’s operational efficiency, regardless the
investment level. It is also possible to take a two-year lag of ROA or ROS to measure the longlasting effect of the part of intellectual capital. Another variation of the dependent variable was
offered by Penman (2010) and included an average of the ROS, ROE and ROA as an indicator of
firm performance. In this research ROA will be used as the first dependent variable.
In this research ROA is used as a control variable, and it has been calculated for every firm in the
sample based on the formula below:
!"# = %
Market capitalization is an indicator of the market value of the company, thus, it embeds how
investors see the company’s size and potential for development. This indicator was not widely
used until 2000s, however, currently there is still more research on the relationship between the
market and the book value (Bukhvalov, Volkov, 2005). Hence, market value of the company is a
representative indicator of firm’s performance and is widely used in the research of various
Market capitalization for Russian MNEs was gathered for the fourth quarter of the focal year
from the Moscow Stock Exchange website.
The following independent variables will be used for the assessment of impact of intellectual
capital components and their influence on the firm’s performance:
In line with existing research, external social capital is calculated in terms of total number of
external directorship ties of directors with other companies (Ferris et al., 2003; Kiel and
Nicholson, 2006). Due to the fact that larger boards are more likely to develop a broader network
of ties with other boards, the total number of directorships with other companies is divided by
the size of the board of the focal firm. The higher this percentage is, the greater the connection of
the network of the board to other companies is, hence, the greater is the external social capital.
The average number of external ties with other board in my sample is 3.6 per board.
Ties with governmental organizations
Another type of external social capital is the connection to the governmental organizations.
There are several ways to measure ties with governmental organizations. Some researchers
measure these as a percentage of state ownership in the company (Ang and Ding, 2004; Rubi
Ahmad et al., 2008). Another way to measure this type of external social capital is to evaluate
past work experience of every board member in governmental organizations and then divide this
by the board size (Rohaida Abdul Latif et al., 2013). Such connections are seen as strategic
resources that a firm can employ to achieve a competitive advantage in the market (Park and
Luo, 2001), hence, we will use share of past government representatives in the board of directors
as a measure of ties with governmental organizations. The average ratio of ties with
governmental organizations in my sample is 25% out of board.
Internal social capital reflects the strength of the networks between the board members within
one board and their ability to work efficiently together. Intra-board connectedness is defined in
terms of board’s co-working experience (Kor, 2003; Barketma and Shvyrkov, 2007). Board coworking experience reflects the knowledge of specific board members and their habits, which
develops with time and serves to improve board efficiency, due to the mutual knowledge. Hence,
the amount of time directors work together has a positive effect on their decisions’ efficiency.
Co-working experience was measured for the first time by Carroll and Harrison (1998) in terms
of common experience the board members have. In other words the variable captures the tenure
overlap or other shared experience of board members. The formula commonly used to measure
the overlap is defined as pairwise comparison:
where N is the total number of pairwise comparisons (number of years directors worked together
from their initial appointment and the focal year 2013), ui is the tenure of director i and uj is a
tenure of a director j. All pairs are measured in terms of the length of the minimal overlap in
tenure of each board pair min(ui,uj). This formula measures all pairwise overlaps in tenure for all
pairs of board directors.
Although tenure overlap is accumulated throughout the board’s history, the analysis in our
research is cross-sectional at a particular point in time (2013), thus we only take the variables in
this year to estimate its influence on the firm performance. The average length of tenure overlap
is 2,67 years. All data for the measures was acquired from publicly available data via SKRIN,
SPARK and DATASTREAM databases.
Three control variables are going to be used in this research: it is common to use multiple-level
control variables, thus, in this research these variables include board size (board level variable),
firm size (firm level variable) and prior performance as a predictor of future performance.
Pfeffer and Salancik (1978), Dalton et al. (1999) and other researchers investigated influence of
board size on firm performance. The key finding is that of a positive relationship between the
board size and the firm performance, however, it is arguable that after a certain board size the
board size’s positive effect diminishes due to difficulties in coordination of a large group of
people. Thus, the relationship between the board size and the firm performance could be
indicated as an inverted U-shaped.
Firm size is suggested as a control factor by many researchers (De Andres et al., 2005; Kiel and
Nicholson, 2005; Barroso-Castro, 2015) and is measured either as a number of employees or the
firm’s sales or the firm’s assets. Total number of assets for the end of the focal year 2013 is
measured as the indicator of firm’s size, and the logarithm of the total assrts is used as a control
Past performance is used to predict the future performance (Kim, 2005), thus, we use it as a
control variable in our model to mitigate the factors that impact future performance. Past firm
performance is measures as ROS for the year prior to the focal year (t-1).
The variables adopted for this research are presented in Table 7 below.
Table 7. Summary of adopted variables
Return on investment for the company i in year t
Market capitalization for the company i in year t, calculates as
natural logarithm of market capitalization for the focal year
Co-working experience measured as pairwise comparison of the
length of the tenure overlap of board members
Share of government representatives in the board of directors
Number of multiple directorships or board interlocks of the board
memebrs for the focal year divided by the size of the board
Size of the board of directors measured as a number of board
Size of the company calculated as natural logarithm of assets for
the focal year
Past perfromance calculated as a ROA in the year t-1
Before conducting the regression analysis, the sample of Russian MNEs has been analysed for
errors and described. Table 8 below presents descriptive statistics of the selected variables. For
the research the following dependent variables were selected based on the prior research of
social capital of board of directors: 1) ROA, as a measure of accounting-based performance of
the company; 2) Market capitalization, as a measure of market-based value of the company.
Table 8. Descriptive statistics
1655469957000 523657000 10848419140000
Average ROA for the research period equals 7%. Minimum value equals -16%, which means
that the firm had a loss, whereas the maximum equals 26%. Distribution of average ROA by
industries is presented in Figure 5 below.
ROA by industry
ROA by industry
Figure 5. Distribution of ROA by industries
Average Market capitalization for the period is RUB 346150726700. Minimum value equals
RUB 200000000 and is achieved by KZMS and the maximum reaches RUB 3286120325649
(Gazprom). Distribution of average Market capitalization by industries is presented in Figure 6
below. For further analysis the natural logarithm of market capitalization is used based on the
prior research to improve the standard deviation parameters.
Market capitalization by industry
Figure 6. Distribution of Market capitalization by industries
Co-working experience of board members across boards has an average value of 2.67 years. It
must be noted that tenure overlap was calculated on the basis of pairwise comparison of years
directors have worked in the focal firm until the focal year 2013, which means, we have not
calculated the previous overlapping board positions of the board members. However, during the
research it was noticed that quite some board members “migrated” to a different board together,
continuing to form a stronger alliance.
The pie chart below represents the number of ties proportionally across boards, measured by
pairwise comparison as a tenure overlap by the focal year.
Tenure (in years)
2,1 to 3
3,1 to 5
Figure 7. Distribution of co-working experience of board members
Distribution of ties with government agencies reveals that board members of 41 firms have ties
with government. Although we started measuring ties with government as a percentage of
employees who have ties with government in the form of prior work experience and divided by
the size of the board, it was then decided to use governmental experience as a binary variable.
All boards, where at least two board members had prior work experience in governmental
organizations were counted as 1, otherwise – 0. For further research the binary variable gov is
used to measure the relationship between ties with government and financial performance of the
Ties with government
Ties with government
Figure 8. Distribution of board by existence of ties with governmental organizations
Multiple directorships parameter was selected as the third independent variable for this research.
Board interlocks were measured as a sum of number of directorships of each board member for
the focal year 2013 divided by the number of board members (board size). We noticed
previously in the descriptive statistics that the mean of board multiple directorship is 3.32, which
is significantly higher than in the previous research research (Jackling and Shireenjit, 2009; Kim,
2005). This gives an important insight on the situation on the boards of Russian MNEs in
general, especially in comparison to other countries. Board members are likely to sit on multiple
boards in Russia, arguably through their connections. As seen in the Figure 8 below, the largest
proportion of boards have between 3,1 to 5 ties to other boards.
2,1 to 3
3,1 to 5
5,1 to 6
Figure 9. Distribution of board by average number of seats each director holds divided by the
Although Russian directors have a high mean of the board interlocks, from the 524 directors
analysed in this research, the majority, however, sits on one board, followed by decreasing
number of directors as the number of interlocks increasing (see Table 9 below). The maximum
number of board interlocks were 27 and 28, which can be counted rather as exceptions than a
normal situation, since in this case board members are way too busy to govern.
Table 9. Directorships distribution per director
For control variables board size was selected as the board level measurement. Board size is an
important control factor while measuring independent variables related to the board. Prior
researchers discovered positive relationship between the board size and company performance
(Pfeffer and Salancik, 1978; Dalton et al., 1999), thus, it was chosen as a proven control variable.
It is interesting to notice the distribution of the board size in the sample, which is presented in
Figure 10. Boards of MNEs are either medium or large, with only one company that has five
directors in the board.
3 to 5
6 to 9
10 to 15
Figure 10. Board size distribution
Apart from the board size, one firm-based variable is chosen as control – firm size, measured as
natural logarithm of firm’s assets. Moreover, prior firm performance is often selected as a
control variable since it predicts future performance, thus, ROA for the year prior to the focal
To choose control variables for each dependent variable, find possible multicollinearity and
possibly eliminate some variables, the correlations analysis is applied.
Table 10. Correlation analysis
Table 10 presents correlation matrix for the variables. The variables did not correlate strongly
with each other or any of the control variables, which eliminated concerns about
multicollinearity. For the dependent variables ROA and Market capitalization we chose one
board level variable (board size), one firm level variable (firm’s total assets for the focal year,
taken as a natural logarithm) and prior firm performance, measured as ROA (t-1) as control
Data analysis and results
Regression analysis was performed using SPSS package. Pooled ordinary least squares (OLS)
regression appeared to be the best model for both dependent variables as it is the methodology
most commonly used in similar research (Yermack, D., 1996; Carpenter, Mason A., and James
D. Westphal., 2001; Kor, Y. Y., Chamu Sundaramurthy, 2008; Jackling, Beverley, and Shireenjit
Johl., 2009). The regression equation for both models is presented below:
Formula 1. Regression equation for Market capitalization and ROA models
Y = b0 + b1gov + b2interlock + b3tenure + b4boardsize + b5(ln)assets + b6ROA(t-1) + ɛ,
gov = binary variable of existing ties with governmental organizations
interlock = number of ties with other boards (multiple directorships)
tenure = co-working experienced measured as pairwise comparison of board members
boardsize = number of directors in the board of directors
(ln)assets = logarithm of number of total assets of the firm
ROA(t-1) = Return on Assets ratio for the year prior to the focal year 2013
The estimated coefficients for both models are presented in the Table 11 below.
Table 11. Summary of regression analysis results
Beta coefficients for variables Beta coefficients for variables
in Market capitalization model in ROA model
significant at 0.1 level
significant at 0.05 level
significant at 0.01 level
Table 11 presents the results of regression analysis. Model 1 is the model for the market
capitalization in the year 2013, Model 2 is the model for ROA in the year 2013. Both models are
statistically significant at 1% significance level, which is a good indicator. The R2 for Market
capitalization model is high (0.916) and R2 for ROA model is fairly high (0.595).
After regression analysis was conducted, each variable was checked for significance accordingly
with the hypotheses formulated in the beginning. In Model 1 the estimated coefficient of board
co-working experience (tenure) was not significant, thus, we can neither accept nor reject
hypothesis H1b regarding the relationship between internal social capital and firm financial
performance. Dummy variable ties with governmental organizations was not significant, thus,
the hypothesis H2b is rejected, since it is a dummy variable. The estimated coefficient of board
interlocks was statistically significant at a 0.05 significance level (b=0.153); thus, the hypothesis
H3b is accepted. All three control variables of firm size, board size and prior firm performance
are statistically significant in the Market capitalization model. This result supports resourcebased view theory of corporate governance, which states that external resources of the board
members benefit firm’s performance. It also proves the existing thought that board members
possess value to the board. Internal social capital showed no significant relationship to the
market capitalization, which can be seen as a variable that requires primary data on the board
meetings. Moreover, as mentioned above, only tenure overlap in the focal firms was counted to
estimate the co-working experience. It is highly possible that the results could have been
different in case all co-working experience of the board members would have been taken into
In Model 2, where relationship between independent variables and firm’s ROA was measured,
the estimated coefficient of board co-working experience was not significant either, thus, we can
neither accept nor reject hypothesis H1a. This supports our suggestion regarding extra
information required for the analysis of such a variable. Ties with governmental organizations
showed significance with a negative sign (b=-0.206), which was an unexpected effect. Although
there is no significant relationship to the market capitalization model, it is interesting that
dummy variable revealed negative relationship to the ROA. This means that the hypothesis
should be reformulated into the following statement: There is a negative relationship between
ties with governmental agencies and firm ROA. There has been research proving a negative
relationship (Yu and Main, 2010), thus it is an unexpected, but a possible outcome. In the
discussion part of this research that outcome will be discussed in more detail. A significant
relationship between board interlocks and firm’s ROA was detected in the regression analysis
(b=0.219), thus, for Model 2 we can accept hypothesis H3a. This means that board interlocks
have significant positive relationship with the firm’s ROA. Three control variables that have
been chosen in this research remained significant in the ROA model.
Chapter 3 summary
Chapter 3 was focused on the methodology, data collection, sample and variables selection. The
final sample selected for analysis consisted of 61 Russian MNE. Two variables were selected as
dependent variables (Market capitalization and ROA). Board interlocks, ties with governmental
organizations and board co-working experience were selected as independent variables. Then
three control variables were selected: board size, which according to the research has a positive
effect on the firm performance based on the recourse dependency theory (Jackling and
Shireenjit, 2009); firm size as a natural logarithm of total assets, another commonly used control
variable; ROA with one year lag as past performance, which serves as a predictor of future
performance. (Yermack, 1996; Eisenberg et al., 1998; Hillman, 2005). The sample and variables
were collected for the purpose of quantitative analysis of the sample based on the variables of
interest. The sample statistics were presented in the chapter for deeper understanding of the
The analysis was conducted with SPSS software and the results for Market capitalization and
ROA models were discussed. Multiple linear regression model was selected for the test of
relationship between dependent and independent variables, due to the prior studies that used this
method of analysis (Carpenter and Westphal, 2001; Ferris et al., 2003; Kim, 2007). Thereafter,
the results of the regression have been analysed for both Market capitalization and ROA models.
Both models were statistically significant with valid R2. Confirming prior empirical studies,
three selected control variables were significant. Results for the independent variables varied
depending on the model. Board interlocks was significant in both models, which confirmed the
hypothesis that there is a positive relationship between board interlocks and firm performance.
Board co-working experience was insignificant in both models, which meant that we could
neither accept not reject the hypothesis that there is a relationship between board tenure overlap
and firm performance. Lastly, ties with government organizations had no significant relationship
on market capitalization model, thus, the hypothesis was rejected. What is interesting, is that in
the ROA model the governmental ties had negative relationship, however, a positive one was
DISCUSSION AND CONCLUSIONS
Goal of this study was to investigate a possibility of an existing relationship between social
capital of board of directors and financial performance of Russian multinational companies. The
relationship was tested with both external and internal social capital of board of directors and
both accounting-based and market-based performance measures were used in the analysis as
indicators of firm financial performance. The following research question was raised in the
research: is there a relationship between social capital of board of directors and financial
performance of Russian MNEs?
Based on the previous researches in the field of social capital of the board of directors, that used
similar methods to the ones chosen in this research, it was predicted that social capital of board
of directors affects financial performance of the company positively. Nevertheless, the
macroeconomic factors are currently affecting Russian MNEs, thus, the conclusions based on the
international companies’ samples may not be confirmed on the sample of the Russian
companies. It was expected that the quantitative research would define the key factors of the
social capital that impact the firm’s financial performance.
Since there are two main types of social capital of board of directors – external and internal – the
hypotheses were formulated as sub-questions to the main research question. A clear distinction
between relationship between internal social capital and firm financial results and external social
capital and firm financial results was made. Moreover, there was a distinction between market
based and accounting based valuation of firm financial results.
Hypothesis 1a: there is a positive relationship between board co-working experience and firm
Hypothesis 1b: there is a positive relationship between board co-working experience and firm
These two hypotheses can be discussed together, since no significant relationship between board
co-working experience and either ROA or market capitalization was found. Although BarrosoCastro et al. (2015) found a significant positive relationship between co-working experience of
board members and firm’s ROS, another researcher who did an extended analysis of board
structure and its relationship with firm performance did not manage to find a significant
relationship between board meetings or co-working experience, as indicators of internal social
capital, and firm financial performance. There could be two main reasons for such results: firstly,
it is possible that a research on 103 Spanish companies (Barroso-Castro et al., 2015) was
significant due to the selected dependent variable, ROS. ROS is a more short-term indicator,
which is also highly dependent on the industry. It is possible that board co-working experience
might influence the short-term monitoring better, however, it does not add to the long-term
strategic decision-making. Secondly, a more likely explanation of no significant relationship is
based on the scarcity of data on the board of directors. It was possible to measure the tenure
overlap from the appointment on the board until the focal year, however, this analysis did not
include co-working experience outside the tenure selected by the focal year or even outside
particular board. Personal relationships are highly difficult to capture, therefore, primary data is
required to measure the relationship between internal social capital of the board of directors and
firm financial performance.
H2a: There is a positive relationship between working experience in the governmental
organizations and company’s ROA.
This hypothesis turned out to be the most unexpectedly confronted one. Based on the regression
analysis there is a significant negative relationship between board members’ experience in
governmental organizations and firm’s ROA. This can be explained by a different type of
resource that ties with government provide for the company. In case of external networks to
other firms we talk about the resource dependency – networks available for board members help
attract resources for the firm. In case of networks with government, no direct resources can be
attracted to the company. It is reputation of board members who have prior work experience in
the government that can offer benefits for the company, and it was proven that reputation is
highly important for directors (Ferris et al., 2003). However, Melkumov and Khoreva (2015)
found a negative relationship between resource-provision tasks and ties with the government.
Thus, it can be argued that governmental employees who start to work on the board do not
possess enough market or industry specific knowledge, which has no direct effect on the market
capitalization, but it does on the internal accounting based measures of financial performance.
All in all, it is not possible to accept this hypothesis.
H2b: There is a positive relationship between working experience in the governmental
organizations and company’s market capitalization.
No significant relationship was found between prior working experience in government and
company’s market capitalization. It was expected to see a positive relationship due to the fact
that researchers found a positive relationship between ex-politicians on the board with marketbased performance, especially in heavily regulated industries (Hillman et al., 1999; Hillman,
The absence of a significant relationship can be explained by several factors. Firstly, Russian
governmental structure is fairly hierarchical and complicated, which leads to many levels of
power. Some of the titles of board members can indicate governmental experience, however, in
fact the person had no real access to the powerful politicians. Therefore, for a certainty a more
thorough research must be conducted, including the length of the governmental employment and
possible strength of connections the person possessed after leaving governmental position.
It is interesting to notice, that some researchers found that firms are more willing to invite a
director with past experience in government, especially if they had longer term of service (Lester
et al., 2008). This, however, would not have any effect on the market perception of the company
and might influence other financial performance indicators negatively.
H3a: There is a positive relationship between board members’ external directorship ties and
H3b: There is a positive relationship between board members’ external directorship ties and
company’s market capitalization.
Multiple directorship or board interlocks were proved to have a significant relationship with
firm’s market capitalization and ROA. This confirms a theory proposed by Ferris et al. (2003)
that directors with seats on multiple boards increase their reputation, which can influence firm’s
market capitalization due to a better perception from investors. Board members who seat on
large boards in large firms are more likely to be asked to take a tenure in more boards, they are
more likely to develop more interlocks. Moreover, there is a reversed relationship: if the firm is
performing well, the director is more likely to be asked to take more directorships, which is
followed by the reputation of a director on a board of financially profitable company.
Another similar research was conducted by Bøhren and Strøm (2010) and resulted in findings
that supported a positive relationship between directors’ strong links to multiple boards and
firm’s Tobin’s Q and ROA.
There has been research conducted that proved that board interlocks are negatively related to the
market capitalization (Devos et al., 2009), since shareholders do not trust such directors. It is
indeed a controversial issue, which is supported by the agency theory. Moreover, other
researchers found negative relationship between board interlocks and firm market value based on
a sample of Indian firms (Jackling and Shireenjit, 2009). It might not have been the case in our
sample for two reasons: either board members in Russia have fewer ties in general; or the data
on board interlocks is not open for public, which can also include the fact that some directors
might be present on boards of smaller companies, which were not included in this research.
Current research is focused on a relatively new branch of research of intellectual capital of board
of directors – social capital. Additionally, little research has been conducted for specifically
multinational enterprises, however, social capital of board of directors is argued to be important
for the development of companies when going abroad and serves as a source of competitive
advantage for multinationals.
The main theoretical contribution of current research is the addition of analysed information
regarding the social capital of board of directors on the example of Russian MNEs, which
include companies from various industries. Both internal and external social capital indicators of
the board were analysed and theories of social capital and corporate governance were applied to
the research. Moreover, a vast amount of prior studies on board social capital was analysed in the
frame of the literature review and a table of definitions of social capital of board of directors was
presented in this research for the first time. Furthermore, links with existing researches were
emphasized. Last but not the least, the presented analysis can be further applied for other
samples of Russian companies.
The topic of social capital of board of directors is a new field, which has not been explored much
and lacks practical evidence. Results of this research possess not only theoretical contribution in
the existing line of research, but also some useful managerial implications for managers and
other stakeholders of the firms. Topic of this research is supposed to attract attention of firm’s
stakeholders to the consideration of social capital when forming board of directors of a
multinational company and a careful analysis of potential candidates when selecting new board
members. This research shows that external social capital is highly important, especially
connections to other boards, if the firm is interested in raising its market value. Shareholders and
other stakeholders must be aware of this in order to be able to manage the board, as well as
influence the company’s performance.
Moreover, the sample of Russian multinationals analysed in the empirical part of this research
includes companies from various industries, which leads to a conclusion that similar model and
indicators are appropriate for testing on a larger sample of companies. That means that there is a
large number of firms that can benefit from a similar analysis of board social capital and
managers may base the directors’ selection upon it. For example, if the company is looking for
investment or increase in its market value for IPO or stock issue, managers may decide to revise
the composition of the board to invite directors with strong social capital, which will affect the
firm’s market value. Thus, the results of current research are useful for multinational enterprises;
however, other firms can conduct similar research and gain from such analysis.
Limitations and direction for further research
The key objective of this research was to understand the relationship between social capital of
board of directors and financial performance of Russian multinational corporations. Despite the
reached objectives and both theoretical and managerial contributions of the work, this research
has some limitations, which suggest directions for further research and define the interpretation
of the results of the empirical findings
The first limitation is the variables chosen for the research. In the literature review of analyses of
board social capital and its relationship with the firm financial performance, we revealed a large
number of variables used for the research. Since the goal of the research was to measure the
extent of boards’ both internal and external social capital, the variables most commonly used in
prior researched were chosen as most representative indicators (Kor and Sundaramurthy, 2009;
Stevenson and Radin, 2009; Haynes and Hillman, 2010). However, it would also be appropriate
to consider other variables for further research, which could extend the scope of the study and
develop a deeper understanding of relationship between board social capital and firm
performance. To give one example, some measures of directors’ reputation could be analysed to
gather in-depth insights into both internal and external social capital; however, such indicator
would require studies of detailed biographies of each member of the board. Furthermore,
additional firm performance indicators can also be added in further research to analyse
relationships between board social capital and other measures of firm financial profitability, e.g.
ROS would show up-to-date results of the company, whereas Tobin’s Q could show relationship
between social capital of the board and the ratio of company’s market to book value.
The second limitation is related to the sample size chosen for current research. This could be
addressed from two perspectives. Firstly, the sample represents a whole population of Russian
multinational companies, which planned to be analysed from the very beginning of the research.
Therefore, the sample is homogenous and complete, therefore, objective conclusions can be
achieved regarding the influence of social capital of board of directors on financial performance
of Russian multinational corporations. Secondly, the literature does not provide a consistent
answer to the question of a sample selection for a representative result. Harris (1975)
recommended that the sample size be at least 50+k, where k is the number of predictor variables
in a multiple regression analysis. Alternatively, Tabachnick and Fidell (1989) suggested that the
sample size should be at least 5k, while Nunnally (1978) recommended a sample size of at least
100 for k=3 and a sample size of 300–400 for k as large as 9 or 10. Finally, Combs (2010) noted
that there is no simple rule of thumb (e.g. although it is widely assumed that 100 observations is
a representative sample, it does not take into account k). However, none of these rule-of-thumb
recommendations are completely satisfactory and the eventual sample size depends not only on
the number of variables but also on the research question. All in all, this research is focused on
the multinational enterprises. However, as models presented in the research revealed significant
relationship between the analysed variables, in further research there is no requirement to limit
the sample, thus, similar models and variables can be used to further investigate relationship
between social capital of board of directors and firm financial performance on a random sample
of Russian companies.
The third limitation is related to the source of data. In some researches on social capital of board
of directors primary data from the board members is obtained through questionnaires. Although
primary data is often viewed as more reliable, key works on social capital of board of directors
and its effect on firm performance use the secondary data from annual reports and databases,
which does not decrease the reliability of the results. These, as well as conclusions of the
research, can be used by various stakeholders of the company, who need to be aware of the
effect social capital of board of directors potentially has on the firm market value and how an
effectively acting board composition of a multinational corporation in Russia should look like
based on the findings on internal and external board social capital. Moreover, questionnaire is
applicable to more in-depth studies of individual board members, which was not the goal of this
Although there are clear limitations, these do not diminish the reliability of results in conducted
research. These, as well as conclusions of the research, can be used by various stakeholders of
the company, who need to be aware of the effect social capital of board of directors potentially
has on the firm market value and how an effectively acting board composition of a multinational
corporation in Russia should look like based on the findings on internal and external board social
Adler, P. S., & Kwon, S. W. (2000). Social capital: the good, the bad, and the ugly. Knowledge
and social capital, 89.
Adler, P. S., & Kwon, S. W. (2002). Social capital: Prospects for a new concept. Academy of
management review, 27(1), 17-40.
Baker, W. E. (1990). Market networks and corporate behavior. American journal
of sociology, 589-625.
Barroso-Castro, C., del Mar Villegas-Periñan, M., & Casillas-Bueno, J. C. (2015). How boards’
internal and external social capital interact to affect firm performance. Strategic Organization,
Bøhren, Ø., & Strøm, R. Ø. (2010). Governance and politics: Regulating independence and
diversity in the board room. Journal of Business Finance & Accounting, 37(9‐10), 1281-1308.
Bontis, N. (1998). Intellectual capital: an exploratory study that develops measures and
models. Management decision, 36(2), 63-76.
Bontis, N., & Fitz-Enz, J. (2002). Intellectual capital ROI: a causal map of human capital
antecedents and consequents. Journal of Intellectual capital, 3(3), 223-247.
Bourdieu, P., & Wacquant, L. J. (1992). An invitation to reflexive sociology. University of
Brooking, A. (1996). Intellectual capital. Cengage Learning EMEA.
Burt, R. S. (2005). Brokerage and closure: An introduction to social capital. OUP Oxford.
Burt, R. S. (2009). Structural holes: The social structure of competition. Harvard university
Carpenter, M. A., & Westphal, J. D. (2001). The strategic context of external network ties:
Examining the impact of director appointments on board involvement in strategic decision
making. Academy of Management journal, 44(4), 639-660.
Chen, M. C., Cheng, S. J., & Hwang, Y. (2005). An empirical investigation of the relationship
between intellectual capital and firms' market value and financial performance. Journal of
intellectual capital, 6(2), 159-176.
Coleman, J. S. (1990). Commentary: Social institutions and social theory. American Sociological
Review, 55(3), 333-339.
Dakhli, M., & De Clercq, D. (2004). Human capital, social capital, and innovation: a multicountry study. Entrepreneurship & regional development, 16(2), 107-128.
Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L. (1998). Meta-analytic reviews of
board composition, leadership structure, and financial performance. Strategic management
journal, 19(3), 269-290.
Devos, E., Prevost, A., & Puthenpurackal, J. (2009). Are interlocked directors effective
monitors?. Financial Management, 38(4), 861-887.
Edvinsson, L., & Sullivan, P. (1996). Developing a model for managing intellectual
capital. European management journal, 14(4), 356-364.
Edvinsson, L., & Malone, M. S. (1997). Intellectual Capital: Realizing Your Company\'s True
Value by Finding Its Hidden Brainpower.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law
& Economics, 26(2), 301-325.
Ferris, S. P., Jagannathan, M., & Pritchard, A. C. (2003). Too busy to mind the business?
Monitoring by directors with multiple board appointments. The Journal of Finance, 58(3), 10871111.
Firer, S., & Mitchell Williams, S. (2003). Intellectual capital and traditional measures of
corporate performance. Journal of intellectual capital, 4(3), 348-360.
Galunic, D. C., & Anderson, E. (2000). From security to mobility: Generalized investments in
human capital and agent commitment. Organization Science,11(1), 1-20.
Goerzen, A., & Beamish, P. W. (2005). The effect of alliance network diversity on multinational
enterprise performance. Strategic Management Journal, 26(4), 333-354.
Guthrie, J. (2001). The management, measurement and the reporting of intellectual
capital. Journal of Intellectual capital, 2(1), 27-41.
Hendry, K., & Kiel, G. C. (2004). The role of the board in firm strategy: Integrating agency and
organisational control perspectives. Corporate Governance: An International Review, 12(4),
Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating
agency and resource dependence perspectives. Academy of Management review, 28(3), 383-396.
Hillman, A. J., Cannella, A. A., & Paetzold, R. L. (2000). The resource dependence role of
corporate directors: Strategic adaptation of board composition in response to environmental
change. Journal of Management studies, 37(2), 235-256.
Hitt, M. A., Lee, H. U., & Yucel, E. (2002). The importance of social capital to the management
of multinational enterprises: Relational networks among Asian and Western firms. Asia Pacific
Journal of Management, 19(2-3), 353-372.
Horibe, F. (1999). Managing knowledge workers: New skills and attitudes to unlock the
intellectual capital in your organization. John Wiley & Sons.
Ireland, R. D., Hitt, M. A., & Vaidyanath, D. (2002). Alliance management as a source of
competitive advantage. Journal of management, 28(3), 413-446.
Jackling, B., & Johl, S. (2009). Board structure and firm performance: Evidence from India's top
companies. Corporate Governance: An International Review,17(4), 492-509.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency
costs and ownership structure. Journal of financial economics, 3(4), 305-360.
Johnson, S. G., Schnatterly, K., & Hill, A. D. (2012). Board composition beyond independence
social capital, human capital, and demographics. Journal of Management, 0149206312463938.
Kamukama, N., Ahiauzu, A., & Ntayi, J. M. (2010). Intellectual capital and performance: testing
interaction effects. Journal of Intellectual Capital, 11(4), 554-574.
Kim, Y. (2005). Board network characteristics and firm performance in Korea. Corporate
Governance: An International Review, 13(6), 800-808.
Kim, Y., & Cannella, A. A. (2008). Toward a social capital theory of director
selection. Corporate Governance: An International Review, 16(4), 282-293.
Knight, D. J. (1999). Performance measures for increasing intellectual capital. Strategy &
Leadership, 27(2), 22-27.
Kor Y. Y., Sundaramurthy C. Experience-based human capital and social capital of outside
directors //Journal of Management. – 2008.
Krishna, A., & Shrader, E. (2000). Measuring Social Capital. World Bank Social Capital
Initiative Working Paper Series.
Kwon, S. W., & Adler, P. S. (2014). Social capital: Maturation of a field of research. Academy of
Management Review, 39(4), 412-422.
Lee, J. H., Choi, C., & Kim, J. M. (2012). Outside directors' social capital and firm performance:
a complex network approach. Social Behavior and Personality: an international journal, 40(8),
Lester, R. H., Hillman, A., Zardkoohi, A., & Cannella, A. A. (2008). Former government
officials as outside directors: The role of human and social capital. Academy of Management
Journal, 51(5), 999-1013.
Lev, B. (2001). Intangibles: Management, measurement, and reporting. Brookings Institution
Lin, N., Cook, K. S., & Burt, R. S. (Eds.). (2001). Social capital: Theory and research.
Lövingsson, F., Dell'Orto, S., & Baladi, P. (2000). Navigating with new managerial
tools. Journal of Intellectual Capital, 1(2), 147-154.
Luo, X., Griffith, D. A., Liu, S. S., & Shi, Y. Z. (2004). The effects of customer relationships
and social capital on firm performance: A Chinese business illustration. Journal of International
Marketing, 12(4), 25-45.
Martín-de-Castro, G., Delgado-Verde, M., López-Sáez, P., & Navas-López, J. E. (2011).
Towards ‘an intellectual capital-based view of the firm’: origins and nature. Journal of Business
Ethics, 98(4), 649-662.
McElroy, M. W. (2002). Social innovation capital. Journal of Intellectual Capital,3(1), 30-39.
Mu, J., Peng, G., & Love, E. (2008). Interfirm networks, social capital, and knowledge
flow. Journal of knowledge management, 12(4), 86-100.
Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational
advantage. Academy of management review, 23(2), 242-266.
Nicholson, G. J., Alexander, M., & Kiel, G. C. (2004). Defining the social capital of the board of
directors: An exploratory study. Journal of Management & Organization, 10(01), 54-72.
Payne, G. T., Moore, C. B., Griffis, S. E., & Autry, C. W. (2011). Multilevel challenges and
opportunities in social capital research. Journal of Management,37(2), 491-520.
Petty, R., & Guthrie, J. (2000). Intellectual capital literature review: measurement, reporting and
management. Journal of intellectual capital, 1(2), 155-176.
Pfeffer, J. (1972). Size and composition of corporate boards of directors: The organization and
its environment. Administrative science quarterly, 218-228.
Powell, W. W., & Snellman, K. (2004). The knowledge economy. Annual review of sociology,
Putnam, R. (2001). Social capital: Measurement and consequences. Canadian Journal of Policy
Research, 2(1), 41-51.
Romer, P. M., & Kurtzman, J. (2004). The knowledge economy. In Handbook on Knowledge
Management 1 (pp. 73-87). Springer Berlin Heidelberg.
Roos, G., Roos, G., Pike, S., & Fernstrom, L. (2007). Managing intellectual capital in practice.
Roos, G. (2005). Intellectual capital and strategy: a primer for today's manager. Handbook of
business strategy, 6(1), 123-132.
Salancik, G. R., & Pfeffer, J. (1978). A social information processing approach to job attitudes
and task design. Administrative science quarterly, 224-253.
Sveiby, K. E. (1997). The new organizational wealth: Managing & measuring knowledge-based
assets. Berrett-Koehler Publishers.
Stevenson, W. B., & Radin, R. F. (2009). Social capital and social influence on the board of
directors. Journal of Management Studies, 46(1), 16-44.
Stewart, T., & Brainpower, A. (1991). How Intellectual Capital Is Becoming America’s Most
Valuable Asset. Fortune, 123(1), 1.
Stewart, T., & Ruckdeschel, C. (1998). Intellectual capital: The new wealth of organizations.
Stiles, P., & Taylor, B. (2001). Boards at work: How directors view their roles and
responsibilities: How directors view their roles and responsibilities. OUP Oxford.
Tian, J. J., Haleblian, J. J., & Rajagopalan, N. (2011). The effects of board human and social
capital on investor reactions to new CEO selection. Strategic Management Journal, 32(7), 731747.
Wang, W. Y., & Chang, C. (2005). Intellectual capital and performance in causal models:
Evidence from the information technology industry in Taiwan. Journal of intellectual
capital, 6(2), 222-236.
Wu, W. Y., Chang, M. L., & Chen, C. W. (2008). Promoting innovation through the
accumulation of intellectual capital, social capital, and entrepreneurial orientation. R&d
Management, 38(3), 265-277.
Youndt, M. A., Subramaniam, M., & Snell, S. A. (2004). Intellectual capital profiles: an
examination of investments and returns*. Journal of Management studies,41(2), 335-361.
APPENDIX 1. Empirical articles on social capital of board of directors
APPENDIX 1. Social capital of board of directors and its relationship with firm’s performance
(Carpenter, Mason A., and How external network ties
Survey, followed by a
Strategically related board ties
James D. Westphal.,
determine a board’s ability
enhance board involvement of
2001) The strategic
to contribute to the strategic analysis.
firms in stable environments.
context of external
Sample: 600 large and
network ties: Examining
the impact of director
appointments on board
involvement in strategic
(Ferris S. P., Jagannathan
M., Pritchard A. C., 2003)
Too busy to mind the
business? Monitoring by
directors with multiple
(Luo, Xueming, et al.,
2004) The effects of
and social capital on firm
performance: A Chinese
Is there a relationship
directorships and firm
minimum $100 million
in total assets.
Firm performance has a positive
effect on the number of board
seats held by a director =>
reputation is important for
Is there a relationship
relationships, businesspartner social capital and
capital on firm performance
(strategic and financial)?
Sample: 262 randomly
selected firms from
China Basic Statistical
All three types of external
social capital positively affect
firm performance performance.
(Goerzen, Anthony, and
Paul W. Beamish., 2005)
The effect of alliance
Is there a relationship
between alliance network
diversity and multinational
Latent variable structural
MNEs with more diverse
alliance networks experience
lower economic performance on
network diversity on
(Hillman, A., 2005)
Politicians on Board of
Sample: 580 MNEs
average than those with less
diverse alliance networks.
Is there a relationship
between a number of
politicians on the board and
performance of firms from
heavily regulated industries
and firms from less
Sample: 300 firms from
heavily and low
Only for models with marketbased measures as dependent
variables of firm performance is
the number of politicians on the
board significant (p < .01 for
(Fich E. M., Shivdasani
A., 2006) Are busy boards
Is there a relationship
between a number of board
interlocks and firm
Firm performance is inversely
related to the presence of
directors that serve on three or
(Kim, Y., 2007) The
proportion and social
capital of outside directors
and their impacts on firm
value: Evidence from
What are the effects of
proportion and their social
capital on firm value?
(Kor, Y. Y., Chamu
capital and social capital
of outside directors
What are the effects of
outside directors’ human
and social capital on firm
(Stevenson, William B.,
and Robert F. Radin.,
Does existence of prior
relationships with other
Survey of board
members of US firms.
Sample: longitudinal (7
years) of firms from
Sample: 473 publicly
traded Korean companies
from 1998 through 2003.
sample of 72 high
Relationship between outside
director social capital and firm
Outside directors’ membership
on multiple boards has positive
effects on firm growth.
Ties to others in a network of
strong ties among those who
2009) Social capital and
social influence on the
board of directors
board members or having
more current ties to other
board members increase a
board member’s influence
Does existence of
relationships with board
members in other
companies increase a board
member’s influence on
(Devos E., Prevost A., Is presence of interlocked
Puthenpurackal J., 2009) directors on a board is
Are interlocked directors associated with weak
corporate governance? Is
there an association
between the presence of
interlocked directors and
meet outside of board meetings
were more important predictors
of social influence than human
capital or ties across boards.
coefficient estimates are
generated using the twostage probit least squares
Sample: 3,566 firms.
Shareholders react negatively to
board interlocks, which affects
negatively firm performance.
No support of resource
dependency theory: no
significant relationship between
frequency of board meetings
and performance. Outside
directors with multiple
directorships have a negative
effect on performance.
Positive relationship between
directors with strong ties to
other boards and firm
(Jackling, Beverley, and
Shireenjit Johl., 2009)
Board structure and firm
Is there a relationship
governance structures and
financial performance of
Sample: top Indian
companies listed on the
Bombay Stock Exchange
(BSE) by market
capitalization in the year
ended March 21, 2006.
(Bøhren Ø., Strøm R. Ø.,
2010) Governance and
Is there a relationship
between directors with
multiple seats and firm
diversity in the board
(Lee, Ji-Hwan, Chul Choi,
and Jae Min Kim., 2012)
Outside directors' social
capital and firm
performance: a complex
Ma del Mar VillegasPeriñan, and José C.
How boards’ internal and
external social capital
interact to affect firm
Whether or not the social
capital of outside directors
has an impact on firm
financial performance and
Sample: 480 directors
from 125 large
A negative impact of outside
directors’ social capital on firm
performance and value.
How relationship between
internal and external social
capital influence firm’s
Sample: 1158 directors
of 103 firms listed on
The Madrid Stock
Positive relationship between
the board’s external social
capital and firm performance