How Do Institutional Environments Affect Directors' Behaviors and Their Effectiveness?

• Main Authors: YOSHIKAWA, Toru, Zhu, Hongjin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Outside directors; Institutions; Economic exchange; Culture; Business
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3285; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4284/viewcontent/Yoshikawa_Zhu.pdf
• Institution: Singapore Management University

We examine how institutional environments affect outside directors’ behaviors and their effectiveness. Extant research on the board of directors has indicated that outside directors play a significant role in exercising independent control over management and providing resources. However, we know little about whether and how the relative importance of the two functions varies across different institutional environments characterized by distinct dominant exchange modes (contractual vs. relational). By differentiating between relationship-based and contract-based exchange regimes, we develop a conceptual model to show how the differences in transaction structures influence the relative importance of outside directors as monitors and resource providers, and consequently the effectiveness of outside directors. We also argue that the relative emphasis on the two roles is contingent on culture. Furthermore, taking a dynamic perspective of institutions, we explore how outside directors’ behaviors change as institutions evolve from a relational one into a contractual one.