HMN 2025: How Are there upsides to ‘overboarding?’

How many board seats is simply too many for one director? That’s the query on many buyers’ minds, as they confront the potential for “overboarding”—administrators being unfold too skinny to do their work successfully. BlackRock, for instance, voted to oust one in every of Twitter’s board members in 2022 as a result of he sat on the boards of six different corporations.

However, new research led by Sebahattin Demirkan, affiliate professor of accounting within the Costello College of Business at George Mason University, suggests there could also be upsides to board administrators holding a number of seats on the identical time. His paper within the Asian Review of Accounting finds that deeply networked boards are extra versatile and inventive in terms of a key aggressive space: open-ended strategic alliances.

The paper’s co-authors are Robert Felix of The Catholic University of America and Nan Zhou of the University of Cincinnati.

The researchers used a metric known as “board centrality” to quantify the entire social capital held by an organization’s board of administrators.

“Centralized administrators are leaders who’ve been within the business a very long time,” says Demirkan. “They sit on a number of boards. And they’re deeply related inside an business, similar to if Nvidia and Intel have a relationship and that particular person is working as a board member for each.”

The researchers used the SDC strategic alliances database to seize new alliances fashioned throughout the interval 1998–2011. Their dataset included 18,412 firm-year observations.

First, they divided the alliances into joint ventures and incomplete contracts. Joint ventures, which contain establishing a wholly separate enterprise entity, entail a lot much less complexity and uncertainty than do contractual alliances, which by definition can’t account for all of the shocking challenges which will lie forward. The paper finds that centralized boards had been extra prone to embark upon each sorts of strategic alliances, however the impact was strongest for contractual alliances.

Demirkan stresses that the 2 varieties aren’t mutually unique; a contractual alliance could be a precursor to a profitable three way partnership.

“I at all times use marriage as a comparability… Some cultures do organized marriage as a result of households know one another very properly, as a result of they had been neighbors and so forth and so forth. It’s trial and error, however you do not need to make too many errors as a result of these preparations could damage your mother or father firm enterprise,” he says.

“That’s where board capital is available in. Centralized board members know which strategic alliances will work for this specific firm.”

Further, centralized boards took on extra strategic alliances when their CEOs had been comparatively new, underscoring boards’ customary advisory position. Similarly, diversified corporations, which usually require extra steerage from the board, noticed a stronger relationship between board capital and propensity for strategic alliances. The identical was true of corporations with extra intangible belongings—in different phrases, modern corporations partaking in heavy R&D.

The researchers additionally appeared into whether or not the improved alliance exercise paid off for these corporations. Their evaluation confirmed that the particular means of centralized boards to kind profitable strategic alliances was related to greater market efficiency, steadier returns and decrease audit charges.

This strikes an fascinating distinction with a few of Demirkan’s earlier publications on related subjects. For instance, a 2014 paper in Journal of Business Research discovered that corporations with contractual alliances suffered from decrease earnings high quality, making them a riskier wager for buyers. A 2015 paper in Contemporary Accounting Research linked contractual alliances to greater audit charges.

“The market would not like corporations with contractual alliances,” Demirkan says. “It reductions their stock costs, as a result of the data atmosphere shouldn’t be good; it is fairly complicated and the boundaries will not be properly outlined.”

However, the brand new paper signifies that centralized boards act as a reassuring sign to capital markets that offsets a few of the inherent threat of contractual alliances.

“Boards with excessive social capital could handle this higher, as a result of they’re much extra educated,” Demirkan says. “They know which contractual alliances are good, and the market additionally trusts them to select these alliances properly.”