The Impact of Social Dependence on Directors' Effectiveness in Monitoring and Advice-Giving Tasks

Abstract

Prior work has mostly focused on independent directors’ engagement in monitoring but research finds little systematic support for the positive effects of director independence. We highlight three reasons for this inconsistency, namely: (1) formally independent directors can still be socially dependent on the CEO, (2) director engagement in monitoring does not necessarily translate into higher monitoring effectiveness, and (3) in addition to monitoring the CEO, directors also provide advice. In this study, we demonstrate that director social dependence negatively impacts director effectiveness when monitoring but not when giving advice. This effect is robust across a survey and a randomized field experiment. Our study provides a micro-level examination that acknowledges the fundamental difference between (1) director engagement in board duties and (2) director effectiveness in these board duties, and thus contributes to a more nuanced understanding of director effectiveness. Our findings have implications for corporate governance in contexts where a majority of directors is formally but not socially independent. We highlight that best practices should not limit themselves to structural changes to mitigate negative effects of social dependence but raise awareness for the psychological pitfalls of board work.