3.6.2 Board composition according to the resource dependence theory

‘Lawrence and Lorsch (1967) have noted that successful organisations tend to have internal structural characteristics that are congruent with environmental demands’ (Pfeffer 1972: 226). As stressed in the previous subsection, these environmental demands can be met by the inclusion of directors on the board: cooptation. These ‘board interlocks’ can be established in a direct and indirect manner (Schoorman et al. 1981: 246). A direct interlock entails a director of one company who is also a member of the board of another company. An indirect interlock is more complex: a director of company X and a director of company Y are both members of another organisation. This other organisation may be another company, but also a social club or family. In this regard Schoorman et al. also distinguish strong and weak ties (1981: 246). Strong ties are characterised by emotional and social bonds between two individuals, which make them communicate better as they spend more time together. These strong linkers have the same social status and are members of the same clubs.

Pfeffer (1972) and Pfeffer and Salancik (1978) have made several hypotheses about the composition of the board in accordance with the resource dependence theory. These are especially relevant to companies in need of financial funding and companies in regulated industries. The need for financial resources is reflected in the composition of the board. A company with large capital requirements is more likely to have a board with representatives from financial institutions. As regards access to capital, the number of representatives from financial institutions is not the only matter of concern, but also the percentage of NEDs in general. These NEDs may serve on the board of a bank or financial institution, or are associated with other people in the financial industry. This higher percentage of NEDs enables the company to have better and stronger ties to debt providers. The higher demand for external capital requires more legal support. Therefore companies with demands for capital tend to have a high percentage of lawyers on their boards.

Moreover, companies in regulated industries can benefit from having NEDs with political or economic power. These NEDs are important to communicate with and influence regulatory organisations. So, companies in a regulated industry tend to have more NEDs on their board. Due to the higher levels of regulations, legal advice is also needed to a higher degree. Companies in a regulated industry tend to have a higher percentage of lawyers on their boards. The size of the board is positively correlated with the size of the company and the number of external resources it depends on. To control the dependence, directors are invited to take place on the board. More external resources tend to lead to larger boards.

According to Pfeffer, size and composition of the board are ‘rational organisational responses to the conditions of the external environment’ (1972: 223). Selecting directors with connections to external resources of dependence will lead to high company performance (Nicholson and Kiel 2007: 589). This implies that the resource dependence theory – unlike the agency theory, TCE theory and stewardship theory – does not focus on independence, but on the composition of the board. However, the fact that resource dependence theorists propose to include representatives of among others advisors, lawyers, banks and suppliers on the board, suggests that low levels of independence are advocated by this theory. Lists of independence criteria in corporate governance codes generally consider relations with advisors, bankers, lawyers and suppliers to be a reason for labelling a director non-independent. The next section describes the stakeholder theory, which also does not focus on independence.