The Influence of Board Institutional Expertise on Firm Performance

Abstract

Boards are an organizational rejoinder to the firm’s external environment. Yet, relatively little attention has been paid to boards’ role in managing pressures emanating from the diverse institutional environments facing the multinational firm. We predict that outside directors’ exposure to institutionally dissimilar contexts represents a previously overlooked source of information, skills and networks that will improve their collective ability to exercise board service. In our longitudinal, cross-industry sample of European firms, we find board institutional expertise to be the strongest board-level predictor of firm performance. We also find that the effect is weaker when outside directors serve on multiple boards, lending support to our prediction that busyness strains the capacity required to fully utilize board expertise in shaping organizational outcomes. Overall, our work suggests that the versatility of institutional perspectives and experiences represented at the board may be a thus far understudied strategy to mitigate uncertainty and dependency with the firm’s external environment.