The current issue and full text archive of this journal is available at www. emeraldinsight. com/1469-1930. htm Top management teams’ social capital in Taiwan The impact on ? rm value in an emerging economy Chaur-Shiuh Young Department of Accounting, National Chung Cheng University, Min-Hsiung, Taiwan, ROC Abstract
Purpose – The paper aims to examine the contributions of top management teams’ (TMTs) social capital to the creation of business value. Design/methodology/approach – Least-squares regression is used to estimate the relationship between TMT social capital and Tobin’s Q, while controlling for other ? rm- and industry-speci? c explanatory variables. Findings – The empirical results show that it is TMT extra-business group (but not intra-business group) directorate ties that are viewed as valuable strategic assets by the marketplace, and the bene? s of extra-business group directorate ties mainly come from the relationships’ greater prominence, but not from the relationships’ wider span or better position.
Research limitations/implications – Past research has tended to focus on “who executives are” – their background, personality, etc. Since the results show that executives’ extra-business group social capital is strategically valuable, future research should take note that “whom executives know” – i. e. their social capital – is equally relevant to ? m value. Practical implications – The prominence and prestige measures of a TMT’s extra-business group network can be used by managers, external analysts and investors to assess to what extent ? rms are capable of leveraging relationships with other ? rms, and thereby better predict future ? rm performance and value. Originality/value – This study contributes to the literature by investigating the differential effects of TMT intra- and extra-business group directorships on ? rm values.
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Evidence from the present study may serve as a step toward understanding the role of TMT social capital in creating potentially valuable intangible assets in emerging economies dominated by business groups. Keywords Intellectual capital, Social marketing, Senior management, Team working, Taiwan Paper type Research paper TMTs’ social capital in Taiwan 177 Introduction This study examines the contributions of top management teams’ (TMT’s) social capital to the creation of business value.
An array of studies have shown that in general, current investments in various intangibles, e. g. esearch and development (R&D), advertising and personnel training, are associated with higher future earnings and stock returns (Lev, 2001), yet the importance of social capital is still overlooked in The author is very grateful for the comments of participants in the 2004 Intellectual Capital in Taiwan International Conference, the guidance received from both Se-Hwa Wu (the guest editor) and Nick Bontis (the associate editor), and the ? nancial support from the Taiwan National Science Council (NSC93-2416-H-194-038).
Journal of Intellectual Capital Vol. 6 No. 2, 2005 pp. 177-190 q Emerald Group Publishing Limited 1469-1930 DOI 10. 108/14691930510592780 JIC 6,2 178 ? most research. Canibano et al. (2000) suggested that future studies should not only focus on R&D and advertising, but should also consider other intangibles among the possible determinants of the value of ? rms. It is in response to this research insuf? ciency that this study is addressed. In this study, TMT’s social capital is de? ned as external directorships held by TMT members. This de? nition is ? tting, considering that one of the primary ways in which senior executives invest in social relations is through participation in the network of interlocking directorships among ? ms (Haunschild, 1993; Mizruchi, 1996).
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Haunschild (1993) argued that executives’ external directorships are likely to be the most in? uential of external ties, given the direct involvement of executives both in the acquisition of information and in internal decision making. Technology and globalization are making networks of relationships a decisive business asset (Castells, 2000).
Historically, the prevailing assumption has been that managerial value is embodied in the human capital (including experience, judgment, knowledge, skills, and expertise) that managers bring to the ? rm (Becker, 1964).
Yet recent studies suggest this assumption is incomplete, as executives’ extra-organizational networks also affect organizational strategy and performance (Geletkanycz and Hambrick, 1997).
Leadbeater (1999, p. 152) argued that relationships matter because they foster the co-operation and risk sharing that promote innovation and ? exible responses to change in a global economy. To my knowledge, there is no research linking TMT social capital to ? rm value. This brings me to my research question: Does the quality and quantity of TMT social capital create business value in an emerging economy like Taiwan?
As Taiwan has progressively upgraded into a knowledge-based and global integrated economy, Taiwanese ? rms struggle with a much more complex and increasingly competitive environment. In such context, this study argues that TMT social capital will contribute signi? cant bene? ts to ? rm value, because a larger or better external directorate networks owned by executives can create stronger competitive advantages by accessing, processing, and distributing more information and resources. A special feature of the social network in emerging economies is that business groups are ubiquitous as responses to market failures and high transaction costs.
In this context, group af? liation can be potentially bene? cial because business group can act as an intermediary between individual member ? rms and imperfect markets that provides member ? rms with internal resources (Khanna and Rivkin, 2001).
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This study contributes to the literature by investigating the differential effects of TMT intra- and extra-business group directorships on ? rm values. The ? ndings of this study show that only the prominence and prestige value of a TMT’s extra-business group network is positively associated with a ? rm’s value measured as Tobin’s Q.
This implies that it is the quality of relationships with “real outside” networks that has an enormous bearing on the success of ? rms. And therefore, this study provides ex post support to actions of top managers who have invested in membership on a large or pro? table extra-business group ? rm’s board that provides access to a richer set of network resources. Evidence from the present study may serve as a step toward understanding the role of TMT social capital in creating potentially valuable intangible assets in emerging economies dominated by business groups, such as India, South Korea, Thailand and Turkey, etc.
Literature review and hypothesis development Stemming from Hambrick and Mason’s (1984) upper echelon theory, a long line of research has linked TMT’s composition, measured by demographic age, tenure, and education, with organizational outcomes (e. g. Bantel and Jackson, 1989; Finkelstein and Hambrick, 1990; Michel and Hambrick, 1992).
During the 1990s, extracting from team process research (e. g. Shaw, 1981), another line of research examined how the attributes of the top management process, such as how the team gets along, in? ence organizational outcomes through strategic decision making (e. g. Smith et al. , 1994).
While both the composition and process models contended that top management’s experiences and values and the manner by which top management interacted and communicated would in? uence organizational outcomes through strategic decision making, the results of these two streams of research are fragmented and mixed (Lawrence, 1997).
And thereby, a number of scholars have urged a shift from composition and process research to a relational approach (Burt, 1982; Granovetter, 1985).
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Relational approaches concentrate on the linkages between individual actors in a social system and the information that can be derived from such connections. Most importantly, relationships are not able to be reduced to the demographic characteristics of the individuals or group processes. As such, a key proposition of relational theory is that a set of connections is a valuable information-based resource; relational theory thus seeks to capture the essence of these connections and their impact on outcomes (Gulati et al. , 2000).
In managerial research, social capital promises to bring together a variety of studies relating a person’s ties or network position to signi? cant outcomes such as power, leadership, individual creativity, entrepreneurship, team performance, and level of innovation. Detailed reviews are available by Adler and Kwon (2002).
Empirical research on board interlocks (ties among organizations through a member of one organization sitting on the board of another) has a long history in sociology and management (Mizruchi, 1996).
According to prior literature, interlocking directorates contributes the following potential bene? s to ? rms: . reducing the level of uncertainty about resource availability (e. g. Pfeffer, 1972; Burt, 1980; Mizruchi and Stearns, 1988); . greater access to strategic information (DiMaggio and Powell, 1983; Child and Smith, 1987; Haveman, 1993); and . conferring important legitimacy and status bene? ts (Galaskiewicz, 1985; DiMaggio and Powell, 1983; Podolny, 1994).
Nahapiet and Ghoshal (1998) suggested that TMTs with large networks will be able to obtain information at a faster rate, be capable of accessing a richer set of data, and will draw from a broader set of referrals, and hence increase ? m value. In light of these arguments and theories, TMT social capital is strategically valuable, and thus, contributes to a ? rm’s competitive advantages and thereby ? rm value. The following hypothesis (in alternative form) is proposed: the relationship between TMT social capital and ? rm value is positive.
Methods Dependent variable: Tobin’s Q The dependent variable ? rm value is measured by Tobin’s Q. Tobin’s Q is used to capture TMTs’ ability to create long-term value by building external directorate ties. TMTs’ social capital in Taiwan 179 JIC 6,2 The Q-value is de? ed as the ratio of the market value of the ? rm to the book value of total assets (Bontis, 1999).
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The market value of the ? rm is measured by the sum of the market value of equity and the book value of total liabilities (Chung and Pruitt, 1994).
Independent variables The key independent variables in the study are external directorate network measures that proxy for TMT social capital. Following Geletkanycz et al. (2001), I use a multi-dimensional operationalization of directorate networks; six indicators of each senior executive’s network are created in total. Here I de? e TMT’s members, subject to data availability, as senior executives in a position higher than vice general manager. I detail alternative network measures as follows: .
Network span. One dimension used to measure TMT social capital is network size, which refers to the number of contacts represented by the network (Scott, 1991).
Network size is important as it represents the potential of the team to utilize connections to gather additional information (Nahapiet and Ghoshal, 1998).
A simple count of the number of directorships held by all TMT members gauges the span of a TMT network. Network prominence. The next two indicators assess the prominence and prestige value of a TMT member’s network. One of the central functions of social capital is the ability of the social structure to transmit social credentials to the individual (Adler and Kwon, 2002).
Benjamin and Podolny (1999) argued that the bene? ts of social capital to an individual board member will vary in proportion to the size and status of the ? rms which they serve. Status bene? ts are especially likely to accrue when serving on highly visible boards – i. e. ?rms that are either very large or very well run.
Thus, the average net sales of each directorship held by TMT members are created to proxy for the size of linked ? rms. Next, a second measure is constructed tapping the average pro? tability of each directorship held by TMT members, operationalized as return on equity. The two variables are measured for period t 2 1. . Network position. Social network theory suggests that social capital accrues not only from the characteristics of ties themselves, but also their overall location and structural position (Burt, 1992).
Positioning is critical because ? ms that are more centrally embedded in the overall corporate network enjoy superior access to other ? rms, information, and resources (Pfeffer, 1991).
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Therefore, it is important to measure the overall structural position of TMT members’ directorate networks. In an analysis of network measures, Freeman (1979) concluded that there are three unique aspects of centrality: degree, which gauges the extent of interaction with other members of the network; betweenness, which gauges the extent to which a ? rm is a key intermediary- i. e. in a position to control communication or resource exchange; and ? ally, closeness, which gauges a ? rm’s freedom from dependence on other members of the network. I then constructed these three relational measures that appraise the centrality of ties held by TMT members. First, I build a model of pair-wise ties among all members of the Taiwan Stock Exchange (TSE) and Taiwan’s computerized over-the-counter market (known as GreTai Securities Market (GTSM)) ? rms using proxy and annual report data. The interlock list is input to the UCINET v. 5 network analysis program (Borgatti et al. , 1999), and centrality measures for each member of the 180 TSE and GTSM ? rms are generated.
Finally, these data are matched with the list of ties held by each of the TMT members in our sample, and the average degree, betweenness, and closeness centrality values of each directorship held by TMT members are then created. Control variables Following Bharadwaj et al. (1999), ? ve ? rm-level and three industry-level control variables that could potentially impact a ? rm’s Tobin’s Q ratio are included in the model: (1) Diversi? cation. Palepu’s (1985) dt entropy measure for total diversi? cation. (2) Market share. This is a ? rm’s sales share in the main product market. (3) Advertising expenditures and R&D expenditures.
Annual advertising expenditures and annual R&D expenditures, scaled by sales respectively. (4) Firm size. This is the natural logarithm of total assets in 2001. (5) TMT human capital. TMT tenure, measured as the mean number of years members of the executive team have spent in the ? rm. TMT educational experience, as measured by mean years of education for TMT members, is used as an alternative measure of human capital (Becker, 1970).
The conclusion of this study is not affected by alternative human capital measures. (6) Industry concentration.
This is the sum of the squared market shares for all ? ms in an industry group (i. e. Her? ndahl index).
(7) Industry capital intensity. A three-year (1999-2001) average ratio of ? xed assets/ sales for ? rms in each industry de? ned at the four-digit TIEIC level. (8) Industry average Q. The average level of Q values of the other ? rms in the same industry, which is included in the list since it serves to capture unique industry characteristics not adequately captured by the other controls. Model Least-squares regression is used to estimate the relationship between TMT social capital and Tobin’s Q, while controlling for other ? rm and industry speci? c explanatory variables.
