Top Executives' Directorate Networks and Business Value Creation: Vertical vs. Horizontal Ties

Abstract

Technology and globalization are making networks of relationships (or so-called social capital in the intellectual capital literature) a decisive business asset. Historically, the prevailing assumption has been that managerial value is embodied in the human capital (including experience, judgment, knowledge, skills, and expertise) that managers bring to the firm. Yet recent studies suggest this assumption is incomplete, as executives' extra-organizational networks also affect organizational strategy and performance through fostering the co-operation and risk-sharing among firms that promote innovation and flexible responses to change in a global economy. While there is growing evidence supporting the importance of social capital, objective evidence on the linkages between external networks and business value creation that uses publicly available data in analysis is still lacking. In light of this, the object of this research is to explore, using objective secondary data, whether top executives' external directorate networks can lead to the creation of business value and if so, what kinds (vertical vs. horizontal ties) are effective? Using a sample of information electronics firms in Taiwan, this study relates top executives' directorate networks to two aspects of business value creation: increased customer benefits and reduced organizational costs. We find that firms with better-horizontally-networked executives create more business value of increased customer benefits, while firms with better-vertically-networked top executives create more business value of reduced organizational costs. For other countries intending to develop their high-tech industries, our results provide evidence on what kind of directorate network (vertical or horizontal) is most associated with particular business values, which provides insights into Taiwan's practices in network organizing and management that can serve as a referable model to build firms' networks. This study adds credence to the notion that top executives' external ties can be seen as value drivers that provide competitive advantage to information electronics firms. For accountants, it is suggested that assessing the quality of an executive's external directorate networks and the potential contribution of this valuable resource to the creation of business value is possible. For instance, the network centrality measures used in this study to assess the quality of an executive's social capital could be used to broaden balanced scorecard type business performance measurement systems. Furthermore, qualitative measures of top executive relationship networks can be used by external analysts and investors to learn to what extent firms are capable of leveraging relationships with other firms, and thereby better predict future firm performance and value.