Strat.

Change 25: 471484 (2016)

Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jsc.2074

RESEARCH ARTICLE

Influence of Board of Directors on Corporate

Diversification: Evidence from India1
Dhirendra Mani Shukla
Indian Institute of Management, Lucknow, India

Neeraj Dwivedi
Indian Institute of Management, Lucknow, India

Drawing on resource dependence

and agency perspectives, this
study examines the influence of
board of directors human and
social capital on firm
diversification.
An empirical investigation on a
sample of 99 publicly listed Indian
firms suggests that a boards
experience, competence, and
social capital help firms enter into
and operate in diverse product
markets.
The findings of the study
contribute to the corporate
governance literature by
emphasizing the importance of
the boards resourceprovisioning
role in firms corporate strategy
decisions.

oard diversity in terms of a boards combined human and social capital has a
positive influence on the level of corporate diversification.

Questions related to the role of board of directors (henceforth board) have been
addressed by scholars from the areas of finance and strategy for quite a long time
(Jensen and Meckling, 1979; Pfeffer and Salancik, 1978). The two dominant
streams of research examining the role of board are primarily guided by two theo
retical perspectives: agency theory and resource dependence theory (Chung and
Luo, 2008; Hillman and Dalziel, 2003; Hillman et al., 2000). Agency theorists
emphasize the monitoring role of the board (Eisenhardt, 1989; Jensen and Meck
ling, 1979), while resource dependence theorists emphasize the resource provision
role of the board (Pfeffer, 1972; Pfeffer and Salancik, 1978). A few researchers
have attempted to integrate these perspectives, highlighting that directors are
involved in both these functions (Hillman and Dalziel, 2003; Kor and Sundara
murthy, 2008). These researchers argue that the monitoring role of directors does
not depend only on the right incentives, but also on the abilities of the directors;
similarly, the resource provision role of directors is dependent on directors abilities
and competencies (Hillman and Dalziel, 2003; Kor and Sundaramurthy, 2008).
Consequently, this stream of research, which considers a boards human and social
capital as proxy for their monitoring and resource provision abilities, has become
important in the corporate governance literature (Haynes and Hillman, 2010;
Johnson et al., 2012; Westphal and Milton, 2000).
As far as the effect of the board on a firms strategic behavior is concerned,
researchers have examined the influence of the boards human and social capital
on firm performance (Hillman and Dalziel, 2003; Khanna et al., 2013), inter
nationalization (Rivas, 2012), innovation (Chen et al., 2013), and resource alloca
tion patterns (Haynes and Hillman, 2010). However, there have not been many
1

JEL classification codes: G34, L21, L25.

Copyright 2016 John Wiley & Sons, Ltd.

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Dhirendra Mani Shukla and Neeraj Dwivedi

studies examining the effect of a boards human and social

capital on corporate diversification strategy, despite diver
sification decisions being central to a firms corporate
strategy (Amihud and Lev, 1981; Ansoff, 1965; Denis
et al., 1999; Michel and Hambrick, 1992; Rumelt, 1982).
A few studies have examined the relationship between
board characteristics and firm diversification, but these
studies have considered either board human capital
(Jensen and Zajac, 2004) or board social capital (Chen
et al., 2009), and have not considered the interdependen
cies between directors human and social capital. Prior
studies have noted the interdependent nature of human
and social capital and emphasized that the effects of
human and social capital are often difficult to isolate
(Coleman, 1988; Haynes and Hillman, 2010; Nahapiet
and Ghoshal, 1998). Thus, researchers have argued for
combining them, while examining the overall effect of the
boards competence and experience (Haynes and Hillman,
2010; Hillman and Dalziel, 2003).
Furthermore, the diversification literature, drawing
on agency theory, suggests that managerial motives such
as revenue and employment risk reduction are the prime
reasons behind diversification (Berger and Ofek, 1999;
Denis et al., 1999). Considering such perspectives, it
becomes apparent that diversification decisions may bring
a boards roles both monitoring and resource provision
into conflict, as the boards supervisory role will require
them to act on behalf of the shareholders and control the
managerial temptation to diversify, while the resource pro
vision role may require board members to help executives
and Chief Executive Officers (CEOs) with their rich
experience and social connections. Hence, it is an interest
ing question to understand how a boards human and
social capital influence firm diversification. Our study
attempts to address this question. In particular, it exam
ines whether and how board capital is related to corpo
rate diversification.
In this study, we refer to the board capital term first
conceptualized by Hillman and Dalziel (2003). They
combined a boards human and social capital to coin the
Copyright 2016 John Wiley & Sons, Ltd.

concept of board capital. Later, Haynes and Hillman

(2010) developed the board capital construct as being
composed of two dimensions: board capital breadth and
board capital depth. Haynes and Hillman (2010), empha
sizing the interdependent nature of a boards human and
social capital, proposed a model of board capital that
isolates the relevant aspects of the human and social
capital of the board with respect to their resource provi
sion and monitoring functions. They proposed that board
capital is composed of breadth and depth. Board capital
breadth captures the heterogeneity of directors func
tional, occupational, and relational experiences, including
their extraindustry ties. Such heterogeneous experiences
of the board are often linked to their resource provision
functions (Hillman and Dalziel, 2003; Hillman et al.,
2000; Kim and Rasheed, 2014). In contrast, board capital
depth captures the embeddedness of the directors in the
firms primary industry, through their industry experience
and interlocking directorship. A boards industry embed
dedness enables them to understand the managerial moti
vations and actions in a better way, and thus improve their
monitoring abilities (Haynes and Hillman, 2010; Hillman
and Dalziel, 2003; Hillman et al., 2000).
The findings of the study provide support for the
hypothesis related to a boards resourceprovisioning role:
that a boards diversity of experience, competence, and
social capital are a source of important resources that a
firm may require to enter into and operate in diverse
product markets. The findings of the study contribute to
the corporate governance literature by emphasizing the
importance of a boards resource provision role in the
firms corporate strategy decisions. Furthermore, the find
ings contribute to the ongoing debate over whether a
boards primary role is supervisory or resource provision
ing (Dalton et al., 1999; Hillman and Dalziel, 2003;
Hillman et al., 2000; Jensen and Meckling, 1979; Pfeffer
and Salancik, 1978).
The rest of this article is organized as follows. First,
we draw on prior literature and theoretical perspectives
agency and resource dependence to hypothesize the
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Influence of Board of Directors on Corporate Diversification: Evidence from India

effects of the components of a boards human and social

capital on corporate diversification. Next, we mention
research design, data and sample, and variables. Then, we
present analysis and results, followed by a discussion on
the findings of the study. Finally, we conclude by sum
marizing the key arguments and findings of the study,
mentioning limitations and providing directions for future
research.

Literature review and hypotheses

Board capital breadth and firm diversification
The resource dependence theory highlights a boards
resource provision role (Pfeffer and Salancik, 1978).
Directors human capital knowledge, skills, experience,
and expertise are important in fulfilling their functional
role (Kor and Sundaramurthy, 2008). Human capital is
developed through investments in education, training,
and experiences. Additionally, directors social capital,
which refers to the directors ability to access resources
through their relationships (Burt, 2000; Mizruchi, 1993),
helps firms reduce their dependencies in the external envi
ronment by accessing strategic resources (Pfeffer and
Salancik, 1978). An individuals human and social capital
are interdependent, since an individuals social capital
adds to his human capital as the information and knowl
edge gained through relationships add to the knowledge
and experience of the individual. In contrast, an indi
viduals human capital shapes his relational abilities
(Coleman, 1988). Thus, a boards combined human and
social capital is a valuable resource for the firm. Since
directors are involved in boardroom decisionmaking and
provide informal counsel to managers, their human and
social capital directly or indirectly influence or shape the
corporate strategies of firms (Johnson et al., 1996).
As knowledge and experience shape the cognitive
bases that individuals use to assess strategic problems and
opportunities (Dearborn and Simon, 1958), directors
from different educational and functional backgrounds
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473

may approach problems differently. Board members

diverse skills, knowledge, and experience may help execu
tives to make unbiased assessments of external opportuni
ties and threats, which in turn may bring richness to their
strategic decisionmaking (Cho and Hambrick, 2006).
Moreover, a heterogeneous board has more breadth of
experience and internal and external knowledge, allowing
firms to consider multiple options and act upon them
(Haynes and Hillman, 2010).
Although the relationship between board human
capital heterogeneity and firm diversification choices is not
established directly, few researchers have shown that the
corporate elites functional background experience is pos
itively associated with a firms diversification and acqui
sition decisions (Finkelstein, 1997; Song, 1982), suggesting
that board diversity in terms of functional and occupa
tional experience may open up a wide array of choices with
respect to entering into new product markets. Further
more, the social capital heterogeneity, which highlights the
extraindustry ties of the board, indicates that the board
possesses the necessary information to assess the opportu
nities arising in different industries (Haunschild and
Beckman, 1998). For example, Chen et al. (2009), in their
study of Australian firms, found a positive relationship
between a boards extraindustry ties and the firms level
of diversification. Hence, drawing on prior findings and
the resource dependence perspective, we expect that board
capital breadth should enable a firm to get access to a wide
array of knowledge and resources needed to operate in
multiple product markets. Thus, we hypothesize:
H1. B
 oard capital breadth is positively associated with
a firms product diversification.
Board capital depth and firm diversification
Board capital depth refers to the industry embeddedness
of the board through intraindustry ties and industry
occupation (Haynes and Hillman, 2010). The industry
specific knowledge of directors makes them valuable to
the firm. Moreover, as these directors may be currently or
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Dhirendra Mani Shukla and Neeraj Dwivedi

previously employed by rivals, they may provide valuable

information. Such valuable information may help firms
to better tackle the uncertainties present in the external
environment (Pfeffer and Salancik, 1978).
However, industry embeddedness leads to strategic
conformity to industry norms (Geletkanycz and Ham
brick, 1997). Board members with similar industry occu
pation and intraindustry ties may hold similar perceptions
and beliefs about the industry environment and strategic
decisions (Hambrick et al., 1993). Having more knowledge
about the current industry may limit their willingness to
evaluate opportunities in other industries, as such evalua
tion requires them to look beyond their extant knowledge
and competencies, which is a demanding task (Levinthal
and March, 1993). Moreover, industry embeddedness,
because of high intraindustry ties, may limit not only a
firms chance of getting access to information and knowl
edge about opportunities arising in other industries, but
also its ability to evaluate such opportunities even when the
firm receives information through alternative linkages.
From an agency perspective, a board with the neces
sary industryspecific knowledge and skills is well equipped
to make proper assessment of the firms current state of
affairs, as well as the managerial motives behind any diver
sification decision. Directors with industryspecific knowl
edge can perform their monitoring duties in a better way.
Since a high level of diversification is considered value
destroying for shareholders, it can be expected that better
informed directors will fulfill their fiduciary roles and
responsibilities and counsel managers against such
diversification.
In sum, industry embeddedness, in terms of a boards
industry occupation and intraindustry ties, reduces both
the firms ability and motivation to diversify in unrelated
industries. Hence, we expect that a firms board capital
depth is negatively associated with the firms level of
diversification.
H2. B
 oard capital depth is negatively associated with
the firms product diversity.
Copyright 2016 John Wiley & Sons, Ltd.

Methods
Data and sample
We followed a stepwise approach to prepare the dataset
for this study. First, a sample of 110 publicly listed Indian
firms was randomly selected from a population of firms
having minimum annual revenue of Rs. 500 million
(in the time period 201113). As we believe that the
governance mechanism of stateowned firms differs from
that of privately owned firms, we decided to exclude state
owned firms from our dataset. We found 8 stateowned
firms in our dataset. After excluding these firms, our
dataset reduced to 102 firms. Next, data was collected
from the Prowess database, the Bloomberg database, and
the annual reports of these companies. Prowess is a pub
licly available database maintained by the Centre for
Monitoring the Indian Economy (CMIE).
This is a crosssectional study, which examines the
effect of board capital on a firms productmarket diversi
fication. Productmarket diversification for the firms in the
dataset was calculated for the year 2014. The construct
board capital was measured for the period 2013 (Haynes
and Hillman, 2010). Considering that board composition
remains relatively stable over time (Haynes and Hillman,
2010), the measured value of board capital reflects a
boards human and social capital for a longer prior period.
The financial control variables were measured for the
period 2013. Finally, the preliminary analysis on the col
lected variables showed the presence of three outliers in our
sample. We excluded these outliers from the dataset. As a
result, the final sample of this study comprised 99 non
stateowned, publicly listed Indian firms. The firms in the
final sample are spread across 20 twodigit SIC industries,
which represent manufacturing and service sectors.
Dependent variable
Product diversity
We use two measures to capture the level of product
diversification of Indian firms. First, Prod_Div_Cnt_R is
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Influence of Board of Directors on Corporate Diversification: Evidence from India

measured by counting the number of different fourdigit

Standard Industrial Classification (SIC) industries in
which the focal firm is present (Barkema and Vermeulen,
1998). Following Lu and Beamish (2004) and Sanders
and Carpenter (1998), we convert this count variable into
a ratio by dividing the count variable by the sample
maximum value.
The second measure of product diversity (Prod_Div_
Indx) is measured as the entropy index of diversity (Jacque
min and Berry, 1979; Palepu, 1985). The entropy index is
calculated by identifying a firms share of revenue in the
various fourdigit SIC industries it is present in. The
revenue and business segmentrelated data is collected from
annual reports. Following prior studies on board and diver
sification (Jensen and Zajac, 2004; Wiersema and Bantel,
1992), the entropy index of diversification is calculated as

Pi ln(1/ Pi ) for i = 1 to n.
Here, Pi is the ratio of segment is sales to the firms total
sales. The product diversification is measured across four
digit SIC, which essentially captures total diversification,
both related and unrelated (Palepu, 1985).
Independent variables
Board capital breadth and depth
These variables are measured based on the operationaliza
tion scheme provided by Haynes and Hillman (2010).
Board capital breadth captures the heterogeneity of the
board in terms of board members human and relational
capital, while board capital depth measures the embed
dedness of the board in its primary industry (Haynes and
Hillman, 2010; Hillman and Dalziel, 2003).
Board capital breadth.Board capital breadth (BC_
Breadth) is operationalized using the profiles of board
members as mentioned in the annual reports, Bloomberg
database, and on the companys website. We used the
following process to operationalize board capital breadth.
BC_Breadth is measured along three dimensions: func
tional, occupational, and relational. The functional
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475

dimension captures the heterogeneity of the board in

terms of the functional expertise of its members. Follow
ing Haynes and Hillman (2010), we divided the board
into three functional categories: business experts (knowl
edge and expertise in general management), support spe
cialists (e.g., legal experts, finance specialists, bankers,
venture capitalists, investment bankers, sales and market
ing professionals), and influential community members
(politicians, academics, or other community members
from a nonprofit environment). The occupational dimen
sion of the board capital breadth captures the board
members current and past experience in different occupa
tions. We created 12 different categories for occupational
background: general management, finance/accounting/
banking, sales/marketing, legal, information systems
operations/engineering, R&D, human resources, military
and government, real estate, academics, and others. The
relational dimension captures the breadth of a boards
relational capital. It is captured using the fourdigit SIC
codes of directors interlocked firms. Interlocking direc
toraterelated information is captured for the year 2013
using annual reports and the Prowess database. The inter
locked firms are grouped by fourdigit SIC industries.
Finally, we used Blaus (1977) index to capture het
erogeneity. The heterogeneity index is calculated using the
following formula:
heterogeneity index = 1 Pi 2 for i = 1 to n,
where Pi represents the proportion of a board accounted
for by the ith group and n is the number of groups. Board
capital breadth (BC_Breadth) is measured by taking the
arithmetic mean of the heterogeneity scores along three
dimensions functional, occupational, and relational so
that the scale for the variable varies between 0 and 1.
Cronbachs alpha for this composite construct is 0.45
(Cronbach, 1951).
Board capital depth. Board capital depth measures the
embeddedness of the board in its primary industry. Fol
lowing Haynes and Hillman (2010), board capital depth
(BC_Depth) is operationalized along two dimensions:
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Dhirendra Mani Shukla and Neeraj Dwivedi

relational industry embeddedness and occupational indus

try embeddedness. Relational industry embeddedness is
measured by the ratio of same industry interlock to total
interlock of the board members. We used fourdigit SIC
codes to identify the number of interlocks in the same
industries as those of the focal firm. Occupational embed
dedness is measured by the ratio of directors with current
or past experience in the focal firms main industry to
board size. The value of board capital breadth is calculated
by taking the average of the ratios reflecting relational and
occupational embeddedness. Thus, the scale for the vari
able varies from 0 to 1. Cronbachs alpha for this compos
ite construct is 0.3 (Cronbach, 1951).
Control variables
Prior studies have found that the CEOs power has sig
nificant influence on corporate strategies such as diversi
fication (Jensen and Zajac, 2004; Zajac and Westphal,
1996). A powerful CEO may dominate decisions pertain
ing to corporate diversification. Consequently, the boards
influence on such decisions may be minor. A CEO is more
powerful when he assumes a dual role chairman of the
board and CEO (Jensen and Zajac, 2004; Zajac and West
phal, 1996). Following these prior studies, we measured
CEO_Duality as a dummy variable indicating whether the
CEO is also chair of the board.
Prior studies have identified firm size (Firm_Size) to
have a significant influence on corporate diversification
(Jensen and Zajac, 2004). Following Jensen and Zajac
(2004), we controlled for the firm size too. Firm size is
measured by taking the natural logarithm of total firm
assets. Following Kochhar and Hitt (1998), we controlled
for firm leverage. Firm leverage (Prior_Leverage) is calcu
lated as the ratio of a firms debt to equity. Similarly, prior
studies suggest that a firms liquidity (Gul and Leung,
2004) and free cash flow (Jensen, 1986) may have signifi
cant influence on the firms diversificationrelated deci
sions. Hence, we controlled for these variables too.
Liquidity (Prior_CurrentRatio) is captured using the
current ratio (ratio of current assets to current liabilities).
Copyright 2016 John Wiley & Sons, Ltd.

Following Billett (1996), free cash flow (Prior_FCFTA) is

measured as the ratio of free cash flow to the total assets
of the firm in the previous year (i.e., one year prior to the
focal year). Free cash flow is measured as operating income
before depreciation less interest, taxes, and dividends
(Billett, 1996; Haunschild, 1993; Lehn and Poulsen,
1989). Prior studies have also found that prior firm per
formance has a significant influence on a firms product
diversity (Markides, 1995; Wiersema and Bantel, 1992).
However, we found that prior firm performance, mea
sured as return on assets (ROA), has a high correlation
(0.94) with prior free cash flow (Prior_FCFTA). Hence,
we did not include prior performance as a control vari
able. All the control variables are lagged by one year with
respect to the dependent variable.
Additionally, we also included sectoral dummies to
control for the effect of industry sector. The sample is
separated into service and manufacturing sectors. The
service sector is considered a reference dummy. The
included dummy variable Ind_Manufacturing indicates
the firms present in the manufacturing sector.

Analysis and results

In this crosssectional study, all the key variables of the
study are continuous. We used hierarchical ordinary least
squares (OLS) regression to test the hypothesized relation
between the dependent variable (product diversity) and
independent variables (board capital breadth, board
capital depth, and control variables). In the first step of
the hierarchical process, we included control variables
only, and added the main explanatory variables subse
quently. Since we used two measures of the dependent
variables, we included four models in the study (two
models for each measure of the dependent variable).
Table 1 presents descriptive statistics of the sample.
The two measures of product diversity entropy index
and normalized industry segment count are significantly
correlated (0.769; p<0.001). Board capital breadth is sig
nificantly correlated with both measures of product
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1
1
0.232*
1
0.340**
0.038
1
0.088
0.133
0.104
1
0.034
0.035
0.066
0.072
1
0.008
0.289**
0.145
0.069
0.126
1
0.165
0.077
0.255*
0.067
0.101
0.111
1
0.321**
0.086
0.060
0.394**
0.115
0.128
0.114
Sample size (N)=99.
* Correlation significant at the 0.05 level (twotailed).
** Correlation significant at the 0.01 level (twotailed).

1
0.769**
0.336**
0.056
0.032
0.221*
0.273**
0.162
0.081
0.444
1.699
0.087
0.106
0.470
1.647
0.065
1.856
0.505
0.687
3.697
0.674
0.425
0.323
11.124
0.078
1.538
1.170
1. Prod_Div_Indx
2. Prod_Div_Cnt_R
3. BC_Breadth
4. BC_Depth
5. CEO_Duality
6. Firm_Size
7. Prior_FCFTA
8. Prior_Leverage
9. Prior_CurrentRatio

Table 1. Descriptive statistics

Mean

SD

Influence of Board of Directors on Corporate Diversification: Evidence from India

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477

diversity. However, board capital depth has no significant

correlation with the measures of product diversity. Among
the control variables, firm size has a significant correlation
with product diversity (both measures) and free cash flow
has a negative and significant correlation with the entropy
measure of product diversity.
Table 2 presents the results of hierarchical OLS regres
sion. For Models I and II, Prod_Div_Cnt_R (normalized
industry sector count) is used as dependent variable (DV).
Model I includes only control variables, and Model II
includes explanatory variables as well. Model I is signifi
cant, with Fstatistic=3.288 and adjusted Rsquare=0.123.
Model I suggests that only firm size has a positive and
significant influence on product diversity. Model II shows
significant improvement (adjusted Rsquare change =
0.045; pvalue<0.05) over Model I. The variable board
capital breadth (BC_Breadth) is positively and signifi
cantly associated with product diversity (coefficient=0.558;
pvalue
<
0.05), supporting our hypothesis 1 (H1).
However, the variable board capital depth has no signifi
cant influence on product diversity. Thus, the findings in
Model II do not provide support for hypothesis 2 (H2).
Out of the control variables, only firm size has a signifi
cant effect (coefficient=0.036; pvalue<0.01) on product
diversity.
For Models III and IV, the entropy measure of diver
sity is used as DV. Model III only has control variables,
and Model IV includes explanatory variables also. Model
IV shows significant improvement (adjusted Rsquare
change=0.078; pvalue<0.01) over Model III. As per
Model III, firm size has a positive and significant (coef
ficient=0.052; pvalue<0.1) and prior free cash flow has
a negative and significant (coefficient
=
1.654; p
value<0.05) influence on product diversity. In the full
model (Model IV), the effect of firm size is not significant,
but the effect of prior free cash flow remains negative and
significant (coefficient=1.507; pvalue<0.05). The neg
ative effect of free cash flow on a firms product diversity
that we found is contrary to the arguments and findings
of prior studies (Jensen, 1986; Jensen and Meckling,
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Dhirendra Mani Shukla and Neeraj Dwivedi

Table 2. Results of hierarchical OLS regressiona

Variables

Model I

Model II

Model III

DVc=Prod_Div_Cnt_R
Constant
Control variables
Firm_Size
Prior_FCFTA
Prior_Leverage
Prior_CurrentRatio
CEO_Duality
Ind_Manufacturingb
Predictor variables
BC_Breadth (H1)
BC_Depth (H2)
N (sample size)
Adjusted R2
Fstatistics
Adjusted R2 change

DVc=Prod_Div_Indx

0.009(0.158)

0.350(0.232)

0.042(0.011)***
0.211(0.299)
0.005(0.011)
0.029(0.037)
0.033(0.038)
0.020(0.046)

0.036(0.012)**
0.159(0.293)
0.008(0.010)
0.036(0.037)
0.026(0.037)
0.016(0.045)

99
0.123
3.288**

Model IV

0.558(0.212)**
0.080(0.177)
99
0.168
3.472**
0.045*

0.260(0.385)

0.747(0.553)

0.052(0.027)
1.654(0.726)*
0.010(0.026)
0.054(0.090)
0.034(0.093)
0.018(0.112)

0.033(0.029)
1.507(0.699)*
0.021(0.025)
0.072(0.088)
0.013(0.089)
0.030(0.109)

99
0.064
2.120

1.625(0.507)**
0.255(0.422)
99
0.142
3.035**
0.078**

Unstandardized coefficients reported, with standard errors in parentheses.

Service sector used as reference dummy.
c
DV=dependent variable.

p<0.1; * p<0.05; ** p<0.01; *** p<0.001.

b

1979; Jensen and Zajac, 2004). Possible reasons for this

contrary finding are discussed later below. The effect of
board capital breadth (BC_Breadth) is in line with our
expectations (H1), with coefficient=1.625; pvalue<0.01.
However, the effect of board capital depth (BC_Depth)
remains insignificant. Thus, H2 is not supported. The
possible reasons and implications of this finding are dis
cussed in the next section.

Discussion
Drawing on resource dependence, human capital, and
social capital perspectives (Haynes and Hillman, 2010;
Hillman and Dalziel, 2003; Jensen and Meckling, 1979;
Pfeffer and Salancik, 1978), we argue that board capital
breadth (or board capital heterogeneity) helps firms access
valuable resources that may influence their corporate
strategyrelated decisions. Since the board plays a resource
provisioning role, in addition to its supervisory role, a
Copyright 2016 John Wiley & Sons, Ltd.

board that is diverse in terms of human and social capital

may suggest a wide array of options with respect to the
firms decisions to expand or diversify. Thus, we hypoth
esized (H1) that firms board capital breadth would be
positively associated with their level of diversification. We
examined this hypothesis by capturing the product diver
sity of 99 publicly listed Indian firms, which have annual
revenue greater than Rs. 500 million. Models II and IV
of Table 2 suggest that the relationship is positive and
significant, as hypothesized, at the p<0.01 level. Thus, the
data provide support for H1, for both measures of product
diversity.
Although a vast literature exists which examines the
relationship between topmanagement characteristics and
firm diversification (Jensen and Zajac, 2004; Michel and
Hambrick, 1992; Song, 1982), the effect of a boards
characteristics on firm diversification is relatively less
explored (Chen et al., 2009). A few researchers have exam
ined the moderating role of corporate diversity on the
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Influence of Board of Directors on Corporate Diversification: Evidence from India

relationship between the focal firms board heterogeneity

and firm performance (Kim and Rasheed, 2014). Our
findings suggest that board characteristics have a direct
role in firms strategic decisions. Our findings are thus in
line with the prior work of Haynes and Hillman (2010),
who examined the influence of board capital on firms
strategic changes. Moreover, the findings of this study are
also in line with prior work on interlocking directorates,
which suggests that extraindustry ties have implications
for a firms corporate strategy, such as diversification (Chen
et al., 2009) and acquisitions (Haunschild, 1993). Thus,
our findings contribute to understanding the role of the
board in a firms strategic decisions, and provide empirical
support to the arguments drawn from resource depen
dence, human capital, and social capital perspectives.
On the contrary, the agency theory perspective sug
gests that the boards supervisory role is instrumental in
addressing agency problems that may arise due to separa
tion of ownership and control (Jensen and Meckling,
1979). A betterinformed board will be able to monitor
managerial decisions in an effective way. Additionally,
board members with similar industry occupation and
intraindustry ties may hold similar perceptions and
beliefs about strategic decisions (Hambrick et al., 1993).
Hence, we hypothesized that board capital depth (or
board industry embeddedness) would be negatively asso
ciated with the diversification of the firm. As indicated in
Models II and IV of Table 2, the relationship is insignifi
cant. Thus, the data does not provide support for H2.
There could be two possible reasons. First, most of the
firms (80 percent) in our sample are business group affili
ated firms, in which promoters hold key managerial posi
tions and also have representation on the board. These
business groups are generally highly diversified (Khanna
and Palepu, 2000), and the affiliated firms are generally
interlocked through directors (Khanna and Rivkin, 2006).
Thus, a firms interlock with sameindustry firms is low
compared with its interlock with extraindustry firms.
Moreover, in line with the institutional void argument
advanced by Khanna and Palepu (2000), one can argue
Copyright 2016 John Wiley & Sons, Ltd.

479

that the role of the board in the Indian context may be

more to minimize the transaction costs arising because of
a poor institutional environment than to address agency
problems. Thus, we believe that a better understanding
can be achieved by separating the business group affiliated
and nonaffiliated firms. Future studies can examine the
relationship between board capital depth and corporate
diversity on a balanced sample of business group affiliated
and nonaffiliated firms. Second, the board capital depth
construct has two components the industry occupa
tional embeddedness of board members and the ratio of
sameindustry interlock. Cronbachs alpha for the com
posite construct is poor (0.3). The measure of board
capital depth can thus be reexamined. We carried out an
analysis by separating the board capital depth construct
into its two components, but neither of the two compo
nents were related to the corporate diversity. Thus, we
believe that one can find a more plausible explanation by
examining the business group affiliated and nonaffiliated
firms separately.
Furthermore, out of the control variables, firm size
and prior free cash flow have a significant effect on a firms
product diversity. The relationship between firm size and
corporate diversity is in line with prior studies, which
emphasize that larger firms tend to be more diversified
(Jensen and Zajac, 2004). But, interestingly, the effect of
free cash flow on a firms product diversity is negative,
which is contrary to the prior findings based on agency
theory (Jensen, 1986; Jensen and Meckling, 1979). This
finding further raises a question on the plausibility of the
agency perspective in explaining a firms diversification
behavior in the Indian context (Khanna and Palepu,
2000). This may be one possible reason why we could not
find any support for H2, which was drawn on the agency
perspective. Furthermore, we could not find any signifi
cance of the coefficients of other control variables. More
empirical studies in the Indian context may provide useful
insights into the debate on the role of the board in resource
provision vs. supervision. Furthermore, future studies in
an emerging markets context will be interesting, as most
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Dhirendra Mani Shukla and Neeraj Dwivedi

of the prior findings that suggest a significant relationship

between control variables such as CEO power, firm size,
free cash flow, liquidity, and leverage are based in a US
context, and the corporate governance structure in an
emerging markets context is quite different from that in
the US context (Khanna and Palepu, 2000).
The findings of the study make several contributions
to the corporate governance literature. First, the findings
add to the extant understanding of the influence of the
board in corporate strategy decisions by emphasizing the
significance of the boards resourceprovisioning role.
Second, the findings contribute to the ongoing debate
over whether the boards primary role is supervisory or
resource provisioning (Dalton et al., 1999; Hillman and
Dalziel, 2003; Hillman et al., 2000; Jensen and Meckling,
1979; Pfeffer and Salancik, 1978). In this regard, our
findings suggest that the boards resourceprovisioning
role has more explanatory power with regard to firms
corporate strategy decisions, at least in the Indian context.
Third, the study provides empirical support for the theo
retical predictions of the resourcedependence perspective
about the effect of the board on corporate diversification.
Fourth, the majority of prior studies on the role of the
board, related to agency and resourcedependence per
spective, have been conducted in a US context. However,
considering that the corporate governance structure in an
emerging markets context is quite different from that in
the US context (Khanna and Palepu, 2000), the findings
of this study add to the extant understanding of the role
of the board in an emerging markets context. Fifth, only
a few prior studies have considered the interdependence
of a boards human capital and social capital, while exam
ining the effect of the boards overall human and social
capital (i.e., board capital) (Haynes and Hillman, 2010;
Hillman and Dalziel, 2003). Thus, our study extends
these prior works by examining the effect of board capital
on corporate diversification in an emerging markets
context. Finally, the findings of the study have implica
tions for business practitioners and shareholders with
regard to identification and selection of board members,
Copyright 2016 John Wiley & Sons, Ltd.

as a boards diverse experience and social capital may help

firms to access important information and resources.

Conclusion
This study empirically examined the relationship between
board capital and firm diversification. It used the concep
tualization of board capital as given by Hillman and
Dalziel (2003), which considers a boards combined
human and social capital. It examined the relationship
between board capital and firm diversification on a ran
domly selected sample of 99 publicly listed Indian firms.
The study hypothesized that board capital breadth
(or board capital heterogeneity) is positively associated
with firm diversification (H1). In contrast, board capital
depth (a boards industry embeddedness) is negatively
related to firm diversification (H2). The results of the
study provide support for the first hypothesis that a diverse
board in terms of combined human and social capital
positively influences a firms level of diversification.
However, the second hypothesis about the negative rela
tionship between board capital depth (industry embed
dedness) and diversification is not supported at all.
Limitations and future research
There are a few limitations that any future study may
consider. First, the study considered only the product
market dimension of diversification. Since a firms diver
sification is considered with respect to both product
market and geography (Geringer et al., 2000; Hitt et al.,
1997; Rumelt, 1982), any future study should consider
both measures of firm diversification. Second, the study
did not control for the business group affiliation of firms.
The prior literature in the Indian context has emphasized
the role of the business group in firms key strategic deci
sions and performance (Kali and Sarkar, 2012; Khanna
and Palepu, 2000). Considering that the majority of the
large firms in India are affiliated to business groups, it will
be prudent to identify the influence of business group
affiliation on firm diversification. We could not control
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Influence of Board of Directors on Corporate Diversification: Evidence from India

this, because more than 80 percent of the firms in our

sample were business group affiliated. A future study with
a balanced sample can examine the relationship between
a firms board capital and firm diversification separately
for business group affiliated and nonaffiliated firms.
Third, the study is crosssectional. In order to understand
the relationship between board capital and corporate
diversification, a longitudinal study would be more suit
able. Fourth, although we used sectoral dummies to
control for the effect of industry sectors (i.e., manufactur
ing and services), a better approach would have been to
control for each industry, as prior studies have mentioned
the effects of industryspecific factors on firm diversifica
tion behavior (Alessandri and Seth, 2014; Bowen and
Wiersema, 2005; Ramaswamy et al., 2002). However,
since our sample firms are spread across 20 twodigit
industries and the research design is crosssectional, the
inclusion of 19 dummy variables reduces the degree of
freedom substantially. Thus, we chose to include sectoral
instead of industryspecific dummies. Our approach is in
line with a few prior studies which have adopted a
randomsampling procedure (Jensen and Zajac, 2004).
Finally, we operationalized the board capital construct
developed by Haynes and Hillman (2010) in the Indian
context directly, considering that the construct has already
been validated and has strong face validity (Haynes and
Hillman, 2010; Hillman and Dalziel, 2003). However, the
reliability scores (Cronbachs alpha) of the board capital
breadth and board capital depth constructs are poor: 0.45
and 0.3, respectively. We did not attempt to revalidate the
construct in the Indian context for two reasons. First, the
sample size of the study is small, which limits our ability
to revalidate the construct. Second, the indicators of board
capital breadth are significantly positively correlated with
each other and negatively correlated with the indicators of
board capital depth. The same is true for the indicators
of board capital depth. Furthermore, when the effects of
the indicators of the formative constructs were examined
separately, we found that a boards functional and occupa
tional heterogeneity have separate significant positive
Copyright 2016 John Wiley & Sons, Ltd.

481

effects (pvalue<0.001 and pvalue<0.1, respectively) on

firm diversification. However, the effect of a boards rela
tional heterogeneity became insignificant (pvalue<0.15).
In contrast, the separate effects of the components of
board capital depth remain insignificant. Thus, we con
clude that the results of our study remained qualitatively
similar, and the poor reliability scores of the constructs had
no major implications for our study. However, we recom
mend that future studies in an emerging markets context
should validate the board capital construct proposed by
Haynes and Hillman (2010).
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Dhirendra Mani Shukla and Neeraj Dwivedi

BIOGRAPHICAL NOTES

Dhirendra Mani Shukla is a doctoral student in

Strategic Management department at the Indian
Institute of Management Lucknow. His research
interests include corporate governance, interlocking
directorates, and strategic alliances.

Neeraj Dwivedi is Professor of Strategic

Management at the Indian Institute of Management
Lucknow. His teaching, research, and consulting
interests include corporate governance, boards of
directors, and internationalization strategies.

Correspondence to:
Dhirendra Mani Shukla
FPM 29, Hostel 2
Indian Institute of Management Lucknow
Prabandh Nagar, IIM Road
Lucknow 226013, India
email: fpm14014@iiml.ac.in

Copyright 2016 John Wiley & Sons, Ltd.

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DOI: 10.1002/jsc