Publication Type

Working Paper

Publication Date

2012

Abstract

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.

Keywords

Outside directors, Institutions, Economic exchange, Culture

Discipline

Business

Research Areas

Finance

Included in

Business Commons

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