Value of Director Social Capital—How Connectivity Impacts Corporate Compensation Highlighted in Wharton Research Data Services Best Paper

PHILADELPHIA–(BUSINESS WIRE)–Wharton Research Data Services (WRDS), the award-winning data research platform and business intelligence tool for corporate, academic and government institutions worldwide, is pleased to announce Stephen Ferris, Senior Associate Dean for Graduate Studies and Research, Trulaske College of Business, University of Missouri; David Javakhadze, Assistant Professor of Finance, Florida Atlantic University College of Business; and Yun Liu, Assistant Professor of Finance, Keck Graduate Institute as the winners of the WRDS Best Paper Award at the Southern Finance Association Conference. Their paper, The Price of Boardroom Social Capital: The Effects of Corporate Demand for External Connectivity examines the role that social capital plays in Director compensation and firm performance.

While there has been significant public focus and research on CEO compensation, there is limited information on Director compensation, despite the essential advisory and monitoring role of the board. This paper adds significantly to the literature by quantifiably measuring social capital and its relation to Director compensation.

The researchers offer evidence of the impact of boardroom social capital, defined as network benefits derived from Directors’ personal associations with corporate executives or Directors of other firms, on board total compensation. Their findings indicate that firms benefitting the most from social capital pay the most. Specifically, companies facing adverse events and other negative situations hire directors with better networks to help restore firm reputation and overcome adversity.

The research quantifies both the value added to the firm of highly networked Directors, and the corresponding compensation for those Directors. Ferris, Javakhadze and Liu revealed that, while all directors face the same compensation schedule, those with more networks enjoy more leadership positions and sit on more committees, and are therefore paid more. In addition, their paper questions the prevailing theory that smaller, more independent boards serve firms more effectively.

“WRDS is pleased to present the WRDS Best Paper Award to Professors Ferris, Javakhadze and Liu for their exceptional work to determine the boardroom value of social capital,” said Robert Zarazowski, Managing Director of WRDS. “Their research, which was in part conducted via WRDS, adds significantly to the literature and has broad implications for Board compensation and structure. I congratulate Ferris, Javakhadze and Liu on their impactful work.”

Key points:

  • Board social capital is related to pay. The more necessary it is for firms to have highly networked Directors, the higher the compensation.
    • The paper answers the question of causation, examining whether Directors get paid more because of connections or have connections and thus get paid more by conducting cross-sectional tests.
    • Firms pay more for highly networked board members when the firm can benefit most from that network.
  • Challenges the theory that overly connected and busy Directors are less desirable.
  • Research was conducted using the BoardEx, ExecuComp, CRSP, Compustat (via WRDS).
  • Future research on how social capital evolves in firm life cycle, managers’ and executives’ careers, and investment policies and corporate behaviors is planned.

“We are truly grateful to WRDS for this SFA Best Paper Award,” said Stephen Ferris. “It is an honor to be recognized for our work, and to have an opportunity to share our findings with the WRDS and SFA communities.”

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Wharton Research Data Services
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