Can you catch two birds with one stone? The impacts of nominating committee composition on board monitoring and resource provision

Abstract

While it has long been recognized that boards of directors perform two primary functions – monitoring and resource provision – little research has systematically examined the relationship between these two functions in public corporations. Given the growing external emphasis on the monitoring function by investors and advocates of corporate governance reforms, it is important to understand how such an emphasis impacts the resource provision function. In addition to identifying the composition of the nominating committee as a key to understanding the relationship, we propose two mechanisms through which the formation of an independent nominating committee in response to the external emphasis on monitoring leads to a decline in board resource provision. One mechanism is through a decline in information sharing between top managers and the nominating committee in new director selection, which results in a divergence between board capital and the firm's specific resource needs. The other is through decreased trust between the CEO and the board, which results in a less collaborative CEO-board relationship. To alleviate this negative impact that an external emphasis on monitoring has on resource provision, we propose that boards can bring non-CEO executives back onto nominating committees as inside directors. Our theoretical analysis contributes to the understanding of how the composition of the nominating committee influences board monitoring and resource provision, and has important implications for corporate governance research and practices.