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The Importance of Board of Director Networks

Director networks are distinctive features of corporate interaction in the UK. UK companies profit from boards that are well networked, and, if corporate governance functions well at a company, the two can drive significantly improved results.

Director networks have been a distinctive feature of UK business since the end of World War II, according to the Oxford Handbook of Corporate Governance. “In recent years, director networks have been more ‘concise’ compared with those in the US. Directors usually do not have more than two connections with other boards. The connections between companies are often maintained by one common director. Nevertheless, there are still some UK ‘superstar’ directors: Andy Hornby, CEO of one firm, sat on four other boards. Peter Cawdron was a non-executive director on nine boards.  UK financial services firms tend to have closely networked boards with many directors serving at multiple companies – this is not permitted under US law.” Information and skills exchange is, of course, the principal value of director networking. The danger, on the other hand, is excessive collaboration, which could lead to poorer corporate performance.

A study on the relationship between UK director interlocks and corporate performance examined UK firms with annual turnover of £100 million (US$142.44 million) or more. Social network and regression analysis was used to detect significant relationships between the pattern of director interlinking and corporate performance. The study found that there is a significant positive association between director networking and the price/earnings ratio. “Director networking is associated with higher profit margins and higher returns on shareholders’ funds. While this may represent the benefits of broad knowledge of the business environment, the business scan, there is some evidence of director networking addressing specific resource uncertainties. In line with US findings, UK firms facing capital adequacy difficulties have a greater propensity to network.” In fact, research shows that there can be significant positive effects on corporate performance through director networking, but there can be disadvantages as well.

According to a report by researchers at the University of Stirling (UK): “Director networks can potentially affect firm performance positively and negatively. The impact can arise from two main sources. First of all, the ‘Reputation Hypothesis’ proposes that the number of directorships may proxy for director reputation (Fama and Jensen, 1983). Most outside directors also hold directorships in other firms. Directors can use their board positions to signal that they have expertise in decision-makings and can provide better advice and monitoring to the board; they understand the importance of the separation of ownership and control (Fama and Jensen, 1983). Thus, a company with more multiple directors may experience an increase in firm value. On the other hand, the ‘Busyness Hypothesis’ (Ferris et al., 2003) states that directors who hold more directorships are more likely to be overcommitted and thus lack time to adequately monitor management, which could increase agency problem and therefore adversely affect firm value.”

Director networks: Quality is better than quantity

Director networks that are larger are not necessarily better, the report shows. “We find evidence that board networks increase firm value. This finding implies that the positions of firms within a network are important. According to the social network analysis, the centrality of a node (e.g., firm) depends upon the number of connections with other nodes (e.g., firms). Thus, well-connected firms normally occupy very central position in the network. A firm that occupies central position is able to accumulate significant power and influence and therefore increase its value.” There is, it seems, great value to having a director network composed of well-known and highly respected directors. What’s more, centrality, or being a kind of hub among such well-respected directors, provides even more value with respect to both the network itself and overall corporate performance, according to the report. It is not surprising that the report finds the combination of effective corporate governance with solid director networking is even more of a corporate performance driver. Good corporate governance is well known as making boards more effective, and so the addition of an exchange of information and skills with other companies works together with it, according to the report.

It is, perhaps, surprising that larger boards perform better than smaller boards, according to the report. This is because they can have more commercial connections and can very easily obtain scarce resources and information. Larger boards also possess more specialised skills and opinions compared with those of a smaller board. However, larger boards risk suffering from coordination and communication problems, and thus reduce the effectiveness of corporate governance.

See how a Diligent Messenger can allow the board of directors a better means of communication.

Strong networks build board of directors reputations

Another report finding is that good director networks build reputations both for the directors themselves and for the companies at which they serve. “Directors are motivated to improve their reputation since they can use their directorships to signal to the market that they are good at decision-making, and at providing advice and monitoring management. Therefore, a board with more multiple directors increases firm value. In particular, we find that board networks (both business and social networks) have a positive and significant effect on firm performance. However, the average number of board seats (i.e., business networks) held by directors is not significantly related to firm performance. This suggests that social networks play a more significant role in affecting firm performance.”

Director software: Diligent Messenger supports director networking

Diligent Messenger supports director networking by providing an effective and secure support. As part of the Governance Cloud ecosystem, Diligent Messenger was developed by the global leader in governance technology for secure messaging in healthcare, education, financial services and banks, corporations and nonprofits. Moving confidential board communications out of personal and corporate email systems is easier than ever. Diligent Messenger integrates with virtual board meeting software, like Diligent Boards, to enable secure messaging and real-time collaboration. It operates just like the popular text and email tools directors use every day, reducing the temptation of workarounds. The platform’s intuitive features are informed by Diligent’s work with 145,000+ executives worldwide.

Diligent Messenger delivers the functions security-conscious users seek while on-the-go, including:

  • Auto-sync of groups, contacts and messages across devices
  • Blocks against email forwarding and “copy and paste”, plus a special feature for message retraction
  • Pre-set groups and contacts (to eliminate an email address “oops!”)
  • Notification for when messages are sent, delivered and read, with additional notifications for unread messages or announcements across boards.

High-grade security permits taking control of who sees, sends and saves what. As with Diligent’s virtual board meeting software, administrators will be able to customise settings to governance and regulatory requirements. For Diligent Messenger, this includes:

  • Log-in authentication and access that can be adjusted with the click of a button or the swipe of a screen
  • Message retention, for preserving what’s required (and purging the rest)
  • Message archival that saves what’s needed and makes it easily searchable
  • Swift “wiping” capabilities for lost or compromised devices

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