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Monday, February 15, 2021

Board connections and crisis performance: Lessons from East Asia

By Richard Carney, Travers Barclay Child and Xiang Li

A recent study of nearly 1,300 East Asian firms has revealed that companies with strong board networks may perform better during times of crisis.

Professional, family, state and political networks are important to the organisation of business throughout East Asia and board networks have been demonstrated to boost the performance of firms in the region. Furthermore, leading explanations for this effect emphasise the role of board networks as conduits of information flow.

Access via board associations enables connected firms to benefit from information which is otherwise privy to external networks (often without incurring the costs associated with membership in those networks). Moreover, shocks – such as those created by the 2008-09 global financial crisis or the COVID-19 pandemic – can create conditions in which this information may become potentially more valuable.

In conducting our research, we considered boards with connections tied to family-owned business groups, state ownership and political allegiances. We also focused on three potential ways in which these types of network interactions may generate value: by maintaining or boosting performance, securing trade credit or improving debt financing.

Our analysis determined that some firms with strong board networks may experience significantly greater accounting and stock performance during periods of crisis. In particular, we found that companies with board connections to state-owned firms and family business groups may have greater crisis-period accounting performance and stock returns.

Surprisingly, however, we found that political networks do not generally appear to boost crisis performance. That said, in economies with weak institutions (as measured by GDP per capita, financial development or investor protections), we found that political networks may improve outcomes.

With regards to trade credit, our findings revealed a significant positive relationship with family and political networks. While the effects of these networks in relation to obtaining trade credit were not robust, we contend this is still one possible channel through which benefits are conferred through these networks.

Finally, our evidence suggests that firms with high levels of maturing debt may benefit from all types of board networks during crisis. For example, firms with political connections or state ownership may have preferential access to government resources, such as bank credit or government-linked financial institutions that will modify financing arrangements. Notably, however, we also found that the benefits to firms do not typically include direct reductions in the interest cost of debt.

Although our results are based on data from East Asia, the prevalence of business networks in other regional contexts allows us to extract some general managerial and policy implications.

On the managerial side, for example, our finding that firm networks can result in higher trade credit, implies that managers might gain from identifying, cultivating and maintaining director ties to organisations capable of modifying finance or trade credit arrangements.

At the same time, we believe that policymakers may target firms lacking networks as they are more vulnerable to underperform during a crisis. This is particularly concerning if those firms offer products or services of national strategic importance (e.g. drug manufacturing or financial services). If governments seek to level the playing field, they should ensure equitable access to information on support from regulatory agencies or state-owned organisations.

Ultimately, maximal transparency about which policies or programmes are likely to benefit or harm companies/industries in the near future would reduce the disproportionate benefits conferred to firms with access to privileged information via director networks.

This article refers to a paper entitled, “Board connections and crisis performance: Family, state, and political networks,” published in the Journal of Corporate Finance here.

Richard Carney is an Assistant Professor of Strategy at CEIBS. For more on his teaching and research interests, please visit his faculty profile here. Travers Barclay Child is an Assistant Professor of Finance at CEIBS. For more on his teaching and research interests, please visit his faculty profile here. Xiang Li is a Research Assistant at Boston College.