Networking function of outside directors and firm performance: Evidence from Korean chaebols

Abstract

Using a sample of chaebol groups in Korea, we investigate the impact of outside directors who had been public officials on the firm’s performance. We find that chaebol-affiliated firms prefer to co-opt the outside directors who had positions of higher public rank than the other outside directors who were public officials. By Bonacich power centrality, we find that the network ties among ex-public officials has a positive relation with the firm’s performance, such as asset and sales growth rates. However, their presence is significantly negatively related to Korean Corporate Governance Stock Price Index. Also, we show that appointing ex-supervisory institution official is significantly negatively related to the date ratio and ex-banker is significantly negatively related to operating profit by dummy analysis. By phase analysis, we find that their monitoring role is not an important for them because it does not work properly during crisis period. This paper’s contribution to the corporate governance literature is that we extend the role of the outside directors on the firm’s performance by focusing on their advisory and external networking function, which is little studied. This paper also is the first that measures the political network ties of these directors by using the Bonacich power centrality.