Supply chain representation on the board of directors and firm performance: A balance of relational rents and agency costs

Abstract

AbstractAppointing individuals drawn from suppliers and customers to a firm's board of directors is an increasingly popular practice that can enhance the interorganizational relationship and generate relational rents. Yet, such board members may act in the best interest of their primary employer rather than the shareholders of the firm whose board they serve on, thus creating potential agency conflicts. Drawing on the relational view and agency theory, we explore the tension between rent generation and agency costs and consider how a firm can design governance mechanisms to effectively leverage customer or supplier representation on the board of directors. The associated hypotheses are tested using a large panel dataset constructed from multiple archival sources, and our findings suggest that supplier and customer board members are a double‐edged sword: While they generate value in some instances, they can also be associated with lower performance depending on the levels of two key governance mechanisms—the number of inside directors on the board and the proportion of outcome‐based board member compensation.