Connecting the right knots: The impact of board committee interlocks on the performance of Indian firms

Abstract

Research Question/IssueInformation processing, agency, and resource dependence perspectives provide diverging predictions regarding the relationship between board interlocks and firm performance, which are rooted in different perspectives on the roles of boards of directors. This study argues that these various approaches are reconcilable when considering the nature of board committees to which the interlocked directors are assigned.Research Findings/InsightsWe test our hypotheses on a sample of 5133 firm‐year observations in India. Our analyses support our hypotheses. The results show that interlocks between audit committees, whose primary function relates to providing financial oversight and ensuring compliance, are negatively related to firm performance. In contrast, interlocks between nomination and remuneration committees of Indian firms, which provide them with access to resources such as human capital and information on appropriate incentive structures, are positively related to performance.Theoretical/Academic ImplicationsOur study clarifies the relationship between board committee interlocks and firm performance by taking a multi‐theoretical perspective. Our analysis suggests that information processing, agency, and resource dependence theories complement one another in explaining the effect of interlocks on firm performance.Practitioner/Policy ImplicationsOur results show that it is not board interlocks per se that are detrimental to firm performance; in fact, appointing well‐connected directors with experience in serving on other boards might be beneficial for firms. However, firms should not assign specific monitoring‐intensive tasks such as auditing to directors who also serve on other firms' audit committees. Our findings suggest that these directors should have greater independence and focus.

Nomination and remuneration committee: a review of literature

“…Furthermore, the nomination committee must also utilize all its capabilities and the company's social environment to obtain quality board members. Edacherian et al (2024) found a link between the nomination and remuneration committees of companies in India, providing them with access to human resources and information regarding appropriate incentive structures that will improve performance. So based on the two theories above, we conclude that it is very important to study the nomination and remuneration committee to maximize the alignment of interests of the principal and agent and to have superior resources on the board to achieve company goals.…”

“…We have reviewed the literature on nomination and remuneration committees for relevant articles published in the last 26 years in the Scopus index, articles ranging from Conyon and Peck (1998) to Edacherian et al. (2024).…”

“…Furthermore, the nomination committee must also utilize all its capabilities and the company's social environment to obtain quality board members. Edacherian et al. (2024) found a link between the nomination and remuneration committees of companies in India, providing them with access to human resources and information regarding appropriate incentive structures that will improve performance.…”

Women Director Interlocks and Firm Performance Evidence from India

“…As in the case of other countries, a focus on either analysing the pattern of women director interlocks, or their value in inter-firm networks did not receive much attention in India, mainly on account of their marginal presence on company boards. Existing work on India is limited to exploratory analyses to determine the characteristics of social networks of Indian listed companies (Premsankar et al, 2015) 10 and examining the performance effect of committee interlocks on firm performance (Edacherian et al, 2023). None of these, however, factor in the gender of the director in their analyses.…”