Encyclopedia of Sustainable Management

Living Edition
| Editors: Samuel Idowu, René Schmidpeter, Nicholas Capaldi, Liangrong Zu, Mara Del Baldo, Rute Abreu

Board Capital

  • Fabrizia SartoEmail author
Living reference work entry
DOI: https://doi.org/10.1007/978-3-030-02006-4_881-1



The “Board Capital” is the combination of human and social/relational capital of board members (Hillman and Dalziel 2003). More specifically, scholars define the Board Capital as the sum of knowledge and skills that directors hold thanks to their educational path and work experiences and the set of relationships established by directors with internal and external stakeholders.


Characteristics of board members that influence firm performance have increasingly been of interest of scholars and practitioners (Daily et al. 2003; Gupte and Paranjape 2014; Agrawal and Chadha 2005). In this regard, a relevant issue in the academic and practical debates has been to answer the question of what enhances directors’ effectiveness in value maximization. Despite there has always been a tacit consensus that individual director characteristics and qualifications are relevant aspects (Jensen 1993), most of studies have mainly focused on broad board attributes such as board size, composition (e.g., independence), appointment methods, structure, equity ownership, and diversity (i.e., gender and ethnicity) (Johnson et al. 2012).

However, against the main stream examining the surface properties of the board of directors, a number of articles have recently explored the determinants of board functioning by focusing on its relational and human capital (Berezinets et al. 2016). Board capital is the sum of human and social/relational capital of board members (Hillman and Dalziel 2003). More specifically, scholars define the board human capital as the expertise, experience, knowledge, and skills that board members possess thanks to their education and work experiences, ranging from the high educational level to the expertise in a specific sector. Differently, scholars identify the board relational (or social) capital in the relationships established by board members with internal and external stakeholders.

Hillman and Dalziel (2003) have been the pioneers of the board capital construct. The authors have claimed that directors contribute to the board through their expertise, experience, and skills, as well as social links and networks. In this regards, scholars have argued that the effectiveness of board functioning relies on the intellectual capital of board members, that is able to overcome the inconclusiveness of the empirical evidence examining the relationship between the surface properties of the board of directors and firm performance until then. Indeed, according to the authors (Hillman and Dalziel 2003), this construct would have allowed to overcome the weakness of choosing one theoretical approach over another on the board (Nicholson and Kiel 2004) and the inability of typical board composition/structure measures to predict its effectiveness (Dalton et al. 1998; Hillman et al. 2000). Differently, board capital represents the preconditions of the board’s ability to engage in all governance activities, such as monitoring or resource provision roles, by explaining and arguing all the theories concerning the board governaning role (e.g., agency theory, resource dependence theory) (Kor and Sundaramurthy 2008; Nicholson and Kiel 2004).

To appreciate how the board capital concept has been able to overcome the limits of the traditional board demographic approach, it seems crucial to understand the process that led scholars to develop it. In particular, it is worth noting that the formulation of the above-mentioned concept takes place thanks to two main contributions (Zona 2013; Berezinets et al. 2016). Within a first paper of 2000, Hillman, Cannella, and Paetzold argue that the traditional board members classification according their independence status allows to proxy for the antecedents of board monitoring function but not for the service role. In their paper, the authors claim that it is possible to overcome this limit by using alternative classifications, for example by measuring if board members have work experiences in comparable firm, or an educational degree in a specific area (e.g., law, banking, commercial). Therefore, the authors develop the belief that building on the “resource dependency theory” perspective, the effectiveness of board directors in providing resources to the company relies on their social and human capital.

As a further step in the development of the Board capital construct, 3 years later, Hillman and Dalziel (2003) publish a seminal paper on the Academy of Management Journal and refer for the first time to the human capital theory and to the social capital theory. More specifically, they argue that board members' capital is able to allow the governing body to perform not only the service role, but also the monitoring one. Indeed, the researchers assert that the directors’ independence does not proxy for the members’ ability to monitor but for their incentive to do so. This incentive can moderate the board’s ability which in turn only depends on the members’ relational and human capital.

In this perspective, the literature highlights that the human and social capital is the best proxy to appreciate the board’s ability to perform its functions. It is worth noting that the concept of the human and social/relational capital, and the related measures represent the only ones that allow to explain and argue all theories related to the governing roles of the board (Nicholson and Kiel 2004). The intellectual capital held by the governing body thus represents the precondition of the board’s ability to carry out all its activities. Scholars argue that the board’s ability to carry out all roles relies on the resources that directors provide to the board (Berezinets et al. 2016; Sarto 2016).

The advantage of employing this approach is twofold. Indeed, on the one hand, as previously stated, it allows to grasp the ability of the governing body to fulfill all its roles and activities, from the monitoring role to the provision one, overcoming therefore the competition between the different theoretical approaches. On the other hand, it also allows to look at the board as a collegial body, representing a proxy to appreciate some of the processes defined by Forbes and Milliken (1999), such as the presence of cognitive conflicts or the use of the knowledge and skills available in the board (Sarto 2019).

Aside the theoretical contributions that have developed the Board capital construct, it is also relevant to mention those studies that have identified the dimensions that characterize the board capital. In this regards, Haynes and Hillman (2010) conceptually identify the “breadth” and “depth” as two dimensions of board capital. While the former captures the human and relational capital heterogeneity of board members, the latter refers to the embeddedness of the board in the focal firm’s industry. Some authors have enlarged the dimensions of board capital by identifying also its quality, in terms of educational level, as well as professional prestige. Moreover, additional scholars have enlightened the board capital complementarity, that concerns the level of complementarity between the directors’ background and the firm activities (Zona 2013; Sarto et al. 2020).

The Board Human Capital

Focusing the attention on the human capital element of the board capital, it is worth noting that the idea of human capital finds its origin in 1960s when the economists Schultz (1961) and Becker (1962) defined and formalized the Human Capital Theory. Indeed, over the early 1960s, scholars of economic growth found out a number of difficulties in explaining the boost of US economy in terms of traditional tangible factors of production (Krueger 1968). Indeed, researchers used to neglect “the residual” factors that instead were crucial determinants of the economic gap, that is, the human capital (Becker 1962; Schultz 1961; Weisbrod 1966). Differently, Schultz (1961) and Becker (1962) interpreted this gap through the lenses of the human capital theory. The base principle of the theory is that within an organization peoples’ learning capacities are valuable as well as the other resources that are employed in the production (Lucas 1988). In this sense, if these resources are empowered through investments and are effectively used, the results are profitable not only for the individual but also for the organization and the overall society (Becker 1962; Schultz 1961). Therefore, according to the human capital theory the human capital is a crucial determinant for the organizational outcomes. Building on this assumption, as previously stated, corporate governance literature has developed the concept of human capital as a part of the wider notion of board capital (Hillman et al. 2002).

Research investigating the board human capital provides a number of classifications (Gibbons and Waldman 2004; Lester et al. 2008). Most studies distinguish between general and specific human capital. While the former includes the overall expertise that is generally applied across settings, the latter considers the one that matters for a specific firm, industry, and function (Behrens et al. 2012; Ganotakis 2010; Kor and Sundaramurthy 2008; Marvel and Lumpkin 2007). In particular, studies on general human capital focus on the director education by examining the educational qualification awarded by prestigious universities and management schools or the educational degree (e.g., PhD and master degree) (Arena et al. 2015; Bond et al. 2010; Barroso et al. 2011). As for the specific human capital, research distinguishes among firm, industry/sector, and functional expertise (Ganotakis 2010).

As generally reported for the board capital, the human capital of board members determines the board ability to effectively execute both monitoring and resources provision roles (Hillman and Dalziel 2003).

Concerning the former, having firm and industry experience/expertise allows to better know the typical management job tasks and skills useful, for example, to perform the board’s duties of nominating top executives (Tian et al. 2011). Expertise in the firm or in the sector is also relevant for the management evaluation process as it fosters the better identification of appropriate activities as well as the estimation of changes to cope with future firm contexts and environments (Carpenter et al. 2001; Jensen and Meckling 1976). The assessment and the evaluation of managerial activities also benefits from the breadth of knowledge of board members. Indeed, the presence of heterogeneous board members, with a wide range of skills and expertise, allows to observe the problem from different points of view.

Concerning the second role, board human capital improves the provision of advice and counsel as well as legitimacy for firm operating activities (Hillman and Dalziel 2003).

Regarding the strategic process, literature reports that taking complex strategic decisions requires, in strict time constraints, managing information overload as well as effectively recognizing the long-term implications of the alternatives to consider (McDonald et al. 2008). In this sense, experts are generally better able to solve these troubles as they hold highly developed problem-solving skills and better knowledge of critical issues in the area where they are experts (Kor and Sundaramurthy 2008). Moreover, experiences in the same firm/industry allow them to better understand firm business, technology, human assets, and the specific setting conditions so as to overcome decision challenges (Kroll et al. 2008). Still concerning the strategic board process, the advice and counsel role of the board benefits from the presencecds (e.g., educational and functional) (Bunderson and Sutcliffe 2002; Forbes and Milliken 1999; Li and Hambrick 2005). Literature in this tradition reports that the board human capital heterogeneity improves the directors’ decision-making and results in positive corporate outcomes. Indeed, scholars suggest that the background diversity connected to the cognitive heterogeneity of board members stimulates the debate among directors and enhances the board problem-solving (Lester et al. 2008; Cho and Hambrick 2006). In addition, scholars claim that the board human capital heterogeneity increases the information available to board directors, fostering the proper appraisal of company opportunities with positive implications for their decision making activity (Brodbeck et al. 2007).

Turning the attention to the provision of legitimacy, directors with relevant expertise/experience like business founders (Kor and Sundaramurthy 2008), former government members and politicians (Hillman et al. 2000; Hillman 2005; Lester et al. 2008), or generally business/industry experts (Hillman et al. 2000; Kor and Misangyi 2008), increase the reputation of both board and organization (Certo 2003; Hillman and Dalziel 2003). Moreover, the board members’ educational qualification awarded by prestigious universities and management schools, or board educational level (in terms of PhD, master degree, or bachelor degree), improves the reputation of the board functioning (Arena et al. 2015; Bond et al. 2010; Barroso et al. 2011).

Empirical studies report supportive findings in this sense. As human capital enhances the effectiveness of governance roles, and as an effective governance function improves company output (Nicholson and Kiel 2004), this literature explores the relationship between industry expertise, firm expertise, functional background and heterogeneity, and the organizational outcomes.

More specifically, it is possible to highlight the existence of four main streams of research.

The first stream examines the implications of the quality of board human capital, in terms of level of expertise and experience. Studies in this tradition have investigated the implications of the educational level on the innovation (Wincent et al. 2010; Dalziel et al. 2011) and the internationalization (Barroso et al. 2011). Others have explored the effect of the educational level of board members on financial performance (Jermias and Gani 2014; Arena et al. 2015) and IPO value (Certo 2003; Sundaramurthy et al. 2014).

The second stream of research investigates the implications of having working experience in specific activities or specific functions (i.e., the functional expertise), as well as a training/education in a specific area. More specifically, some studies have reported the implications of board financial expertise for the debt level (Burak Güner et al. 2008), strategic choices (Jensen and Zajac 2004; Westphal and Fredrickson 2001), innovation (Dalziel et al. 2011), firm performance (Kim and Lim 2010; DeFond et al. 2005), and finally, accounting practices (Dhaliwal et al. 2010). Other studies have investigated the performance implications of having expertise in specific activities and contexts such as M&A operations (McDonald et al. 2008), strategic alliances (Chen and Lai 2017), internationalized organizations (Chen et al. 2016), and green setting (Cowden and Bendickson 2015).

The third research stream is composed by articles investigating the implications of board members expertise/experience consistent with the characteristics of the company in which they have been appointed. This is the case of industry and firm expertise. Concerning the former, several articles have explored the relationship between this measure of board human capital and firm outcomes such as the start-up success (Kor and Misangyi 2008), the outcome of M&A operations (Kroll et al. 2008), the firm growth (Kor and Sundaramurthy 2008), the earnings management (Wang et al. 2015), the level of internationalization (Barroso et al. 2011; Volonté and Gantenbein 2016), the market value (Tian et al. 2011), and the firm performance (Dass et al. 2014; Veronesi et al. 2013). Turning the attention to the firm expertise, a less copious group of papers have explored the positive implications of board members with previous experiences in the same firm. They mainly investigate firm outcomes in terms of growth (Kor and Sundaramurthy 2008), internationalization (Barroso et al. 2011), and market reaction (Fahlenbrach et al. 2010).

Finally, the fourth stream of research has explored the relationship between, on the one side, the board background heterogeneity and, on the other side, the financial outcomes (Antonelli et al. 2013; Wellalage and Locke 2013; Harris and Helfat 1997; Volonté and Gantenbein 2016; Vandenbroucke et al. 2016) and the corporate innovation (Midavaine et al. 2016; Van Knippenberg et al. 2011; Kim and Kim 2015; Bianchi et al. 2012; Sarto et al. 2020; Heyden et al. 2015).

The Board Social Capital

Shifting the attention to the other side of the coin, that is, the board social capital, literature defines it as the directors’ ability to extract future economic benefits from the resources that they obtain through the established relationships with external and internal stakeholders, at board and company level (Berezinets et al. 2016).

Previous studies have identified several board social capital classifications. However, the most widespread classification distinguishes the internal social capital from the external one. The first element includes director’s ties within the governing board, and refers to the relationships established among the same directors. Differently, the external capital includes the links established by board members with the external environment (inside and outside the firm), thanks to which they gain information, power, legitimacy, and other critical resources for the achievement of the firm competitive advantage (Pérez-Calero et al. 2016). In this regard, the board external social capital can be in turn divided into two sub-elements. On the one side, it refers to the relationships between board members and the manager/employees inside the firm. On the other side, it includes the links that directors create with stakeholders outside the company. Finally, it is worth noting that aside the internal and external board social capital, scholars suggest the existence of a borderline social capital element that can be considered either internal or external and that refers to the director’s social standing and reputation (Sarto 2019).

Focusing the attention on the external board social capital, and specifically on the established links with stakeholders outside the company, scholars distinguish the single-type bonds from double-type ones. In the first case, they represent relationships that a director directly establishes with another company. This phenomenon occurs when a non-executive director sits on the board of the “X” company and is fully employed in the “Y” company. Differently, double links occur when a board member of “X” company also sits on the board of the “Y” company and correspond to the interlocking directorship phenomenon (Johnson et al. 2012). In this regard, scholars suggest that there are a number of positive implications of the existence the above-mentioned links. Firstly, relationships allow the access to useful and timely information, fostering the information sharing. This is beneficial for board processes, and for the fulfillment of the advice and counsel role, especially with regard to the strategy formulation (Ferris et al. 2003), thus positively affecting company outcomes (Kor and Sundaramurthy 2008; Hoitash 2011; Jiraporn et al. 2008). From a different point of view, relationships with external stakeholders allow firm to access to crucial resources as well as to acquire them at more favorable conditions, with positive effects for business performance (Hillman 2005; Kor and Sundaramurthy 2008).

Still concerning the external capital, but focusing on the links among board members and manager/employees/owners of the same firm, scholars claim that these relationships can occur in three specific cases (Johnson et al. 2012). First of all, board members can be “affiliated,” as they have been appointed on the board due to previous working relationships with the firm, such as in the case of suppliers, consultants, or customers. Second, directors can be appointed on the governing body based upon a CEO’s request. Finally, there is the case of members with personal relationships with company managers, based on family or friendship links (Jones et al. 2008). Research on the topic suggest that personal and trust relationships can favor the information sharing between the board and the company, thus improving the board strategic process. Indeed, directors with friendship links are better able to express their doubts about corporate strategies (Westphal and Bednar 2005). From a different point of view, other studies document that “affiliated” directors as well as members with personal ties carries weight in the decision-making process and are more influential compared with their peers (Stevenson and Radin 2009).

Turning the attention to the internal social capital, studies show that the links among directors are consequences of their previous work experience within the same team. In this regard, the board functioning takes advantage from the co-working experience and this positively affects company performance (Tian et al. 2011). Indeed, board members develop tacit knowledge of the firm and its characteristics, and this is especially useful for independent members. In addition, thanks to the co-working experience, the team increases its ability of coordination and integration of various skills represented in the group.

Shifting the focus on the last dimension of the board social capital, literature has highlighted the crucial role played by the directors’ social status. Indeed, research suggests that the reputation and prestige of a board member act as a signal, by increasing the external legitimacy of the firm (Certo 2003). Indeed, it is able not only to increase the overall trust of external stakeholders toward the firm, but also to allow the company access to crucial resources.


This entry illustrates the main characteristics of Board capital. More specifically, it examines in depth both the human and social dimensions of board capital, by explaining their implications for the board of directors’ effectiveness and firm outcomes.



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Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  1. 1.Department of Economics, Management, InstitutionsUniversity of Naples “Federico II”NaplesItaly

Section editors and affiliations

  • Kristijan Krkač
    • 1
  1. 1.Zagreb School of Economics and ManagementJordanovacCroatia