Community Social Capital and Board Advising: Evidence from the Structure of Board Committees

Abstract

AbstractWe investigate how community social capital, captured by the strength of cooperative norms and social networks within a geographical community, affects the internal structure of corporate boards. We find that firms headquartered in high‐social‐capital US counties have a more advising‐intensive board structure, as they are more likely to set up specialized advisory committees and appoint more advisory directors. These findings are robust to endogeneity concerns and a battery of sensitivity tests. Our mediation analysis shows that the increased board advising intensity, induced by community social capital, reduces investment inefficiency. We further reveal that community social capital reduces board monitoring intensity and directors’ monitoring efforts. Overall, our results are consistent with the argument that community social capital serves as a societal monitoring mechanism to reduce firms’ need for board monitoring, and, hence, firms’ boards located in high‐social‐capital communities focus more on advising.