Social capital as a new board

diversity rationale for enhanced

corporate governance
Darlene Booth-Bell

Abstract Darlene Booth-Bell is

Purpose – The benefits of board diversity are often categorized into five distinct business rationales: Assistant Professor at
talent rationale, market rationale, litigation rationale, employee relations rationale and governance Coastal Carolina University,
rationale. However, if resource dependency theory’s focus on the director’s ability to secure important Conway, South Carolina,
resources for the firm is considered, social capital as a viable additional rationale for board diversity can USA.
also be considered. The purpose of this paper is to argue that diverse members of the board are likely to
have social capital that differs from non-diverse members of the board. Consequently, that diverse social
capital can bridge the board to new resources for advice and counsel, legitimacy, channels for
communication and access to important external elements, thus making a strong argument to be
included as a rationale for board diversity.
Design/methodology/approach – It is intended to provide a conceptual discussion on whether
enhancing the board’s social capital is perhaps a viable and overlooked rationale for board diversity.
Findings – Consistent with the other five rationales for board diversity, this analysis suggests that social
capital should be considered as a sixth rationale for board diversity. Social capital serves a role in
governance and rises to the standard of other rationales for board diversity.
Practical implications – Boards may not recognize that social capital is a strategic resource and
sufficiently diverse groups such as women and minorities may be more likely to contribute non-
overlapping social capital networks, which may translate into greater external influence and thus
additional resources for the firm. This paper may help to influence the viewpoints of directors on who is
valuable as a board member.
Originality/value – Existing board diversity rationales do not include social capital as a primary rationale
for board diversity. It may be possible that social capital becomes a legitimate sixth rationale for board
diversity.
Keywords Social capital, Corporate governance, Board diversity, Resource dependency
Paper type Conceptual paper

Introduction
This paper is intended to provide conceptual discussion on whether enhancing the board’s
social capital is a viable and overlooked rationale for board diversity. The goal of the paper
is to provide a theoretical contribution to existing social capital and board diversity literature
(Kim and Cannella, 2008; Westphal and Stern, 2006; Burt, 2002; Peng, 2004) and provide a
discussion of how corporate directors, and their social capital, provide additional resources
to the firms they govern. The paper is organized into four sections to accomplish this goal.
The first section includes a brief historical discussion of corporate governance initiatives
and a summary of significant corporate governance reports in the USA and the UK. The
second section presents several arguments and established rationales for board diversity.
Received 13 February 2017
In the third section, the paper discusses social capital and how social capital may provide Revised 15 December 2017
benefits to the board. Lastly, it identifies and discusses how social capital from diverse Accepted 23 December 2017

DOI 10.1108/CG-02-2017-0035 VOL. 18 NO. 3 2018, pp. 425-439, © Emerald Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 425
 board members may enhance governance and argues that it is a plausible rationale for
board diversity.

Corporate governance recommendations in the USA and the UK

The prominence of corporate failures and the attending media interest over the past 20
years has propelled modes of governance into the forefront of possible sources of
corporate instability and financial uncertainty. These failures have resulted in an evolution of
corporate governance attention and mandates. This is especially the case in the UK and the
USA. The UK has a general corporate governance approach of “comply or explain”; versus
the USA, which has taken more of a legal approach with fines and prison sentences for
severe corporate governance violations. Consequently, there have been a number of
evolving recommendations of best governance practices that have been suggested as a
means to improve UK and US corporate governance. The recommendations are the
outcomes of congressional acts, or committees that have been tasked with assessing,
developing and responding to the governance matters prominent during their tenure. The
Table below summarizes this evolution of best practice reports.
When reviewing Table I, it is notable that with the exception of a brief mention in the Higgs
(2003) Report, increasing board diversity had not been recommended before the 2011
initiative led by Lord Davies in the UK. While Belgium, France, Germany, Iceland, India,
Israel, Italy, Norway and Spain have migrated to government mandates (World Bank, 2016)
and quotas based on their particular political systems and norms (Terjesen et al., 2014), the
Lord Davies reports do not require quotas but instead set voluntary UK targets of 25 per
cent women directors in Financial Times Stock Exchange (FTSE) companies by 2015 and
33 per cent of women directors in FTSE companies by 2020. However, as of 2016, the UK
lagged other European countries in board diversity. Women held 26.3 per cent of the total
board positions in the UK, compared to 39.7 per cent in Norway, 37.7 per cent in Sweden
and 37.5 per cent in France (Egon Zehnder Global Board Diversity Analysis, 2016). The
USA lagged even further at approximately 20 per cent (Egon Zehnder Global Board
Diversity Analysis, 2016).

Arguments for board diversity

Existing empirical research has generally found a positive link between board diversity and
enhanced firm governance (Reguera-Alvarado et al., 2017; Post and Byron, 2015; Catalyst
2011; Ararat et al., 2010; Singh and Vinnicombe, 2005; Catalyst 2004; Carter et al., 2003;
Erhardt et al., 2003; Fondas and Sassalos, 2000). Research from these studies supports the
argument that diversity enhances governance. For example, Fondas and Sassalos (2000,
p. 172) found that boards with larger proportions of women were less likely to let Chief
Executive Officer (CEOs) dominate the board and more likely to power share, and have
significantly more influence over management decisions than boards without female
directors, providing support for a diverse board, enhancing the governance process.
Lückerath-Rovers (2010) found that firms with women have better Return on Equity than
those without women. Miller and Triana (2009) showed increased innovation and reputation
within the board demographic diversity–firm performance relationship. Terjesen et al. (2016)
found that a diverse board is more important to firm performance than is the presence of
independent directors. Gul et al. (2011) argue that gender diverse boards result in more
corporate transparency. In their study of US firms, they found that gender diversity was
associated with higher disclosure in both large and small firms. Reguera-Alvarado et al.
(2017) studied Italian firms after mandatory gender diversity legislation was enacted, and
found that the increase in the number of women on boards is positively related to higher
economic results.

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 Table I Major US and UK industry and governmental governance reports
Report name Year Commissioning unit Focus

Cadbury Report – UK 1992 Financial Reporting Council, London Stock General board governance principles
Exchange, accounting profession
Greenbury Report – UK 1994 Confederation of British Industry Salary and bonuses of company senior
executives
Hampel Report – UK 1997 London Stock Exchange, the Confederation Review of principles and purposes of
of British Industry, the Institute of Directors, Cadbury
the Consultative Committee of Accountancy
Bodies, the National Association of Pension
Funds and the Association of British
Insurers
The Combined Code – UK 1998 Financial Reporting Council A combination and refinement of a number
of different reports and codes concerning
opinions on good corporate governance
The Turnbull Report – UK 1999, Institute of Chartered Accountants Guidance on internal controls
2005,
2012
The Higgs Report – UK 2003 UK Government Adding specifics to the role of independent
directors and audit committees
Walker Report – UK 2009 UK Government Financial institutions governance
Guidance of Board 2011 UK Government Leadership and effectiveness of the board
Effectiveness – UK
Department for Business, 2011 UK Government Sets voluntary targets for UK listed
Innovation & Skills – UK companies in the FTSE of 25% female board
member representation by 2015
Department for Business, 2015 UK Government Sets voluntary targets for UK listed
Innovation & Skills – UK companies in the FTSE of 33% female board
member representation by 2020
The California Public 2002 US State-led activism Ensured that corporate value would not be
Employees’ Retirement destroyed by the relationships between the
System CEO and the board of directors
Sarbanes–Oxley Act of 2002 US Government Auditor standards and requirements,
2002 – USA penalties for corporate fraud
NY Stock Exchange/ 2002 US NYSE and NASDAQ Director independence and management
NASDAQ provisions oversight
The Conference Board 2002 US Association of Prominent Companies To guide boards in designing top executive
Recommendations compensation
Notes: NYSE = New York Stock Exchange; NASDAQ = National Association of Securities Dealers Automated Quotations

In corporate climates such as the USA with a strong emphasis on shareholder value, it is
natural for researchers to look for the business case for board diversity. However, there are
other arguments for board diversity (Seierstad, 2016; Fairfax, 2005; McCann and
Wheeler, 2011) that encourage board diversity based on a normative view of ethics and
fairness rather than business rationales. Although in general agreement with this normative
viewpoint, this paper is limited to the rationales of board diversity based on the business case.
There is not universal agreement that diversity enhances corporate governance. Some
studies show no effect or an adverse effect. Rose (2007) sampled 1,000 listed Danish firms
to determine whether female board representation influenced firm performance and was
unable to determine any significant link between board diversity and firm performance.
Carter et al. (2010) found no evidence of a negative link between board diversity and
financial performance but could not find any empirical evidence of causation going from
board diversity to financial performance, either positive or negative. Rhode and Packel
(2014) performed an analysis of several studies that have attempted to understand the
relationship between board diversity and firm performance, in an attempt to analyze the
variability of results. They determine that the results of the studies are inconclusive, and
attribute the varied findings to the methodological shortcomings of many of the studies,

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 including small sample size, short-term observations of performance and the difficulty of
controlling for reverse causation, endogeneity and other omitted variables that may be
affecting both board diversity and firm performance. Given this ongoing uncertainty of the
benefits of board diversity, it is helpful to look at a variety of ways that board diversity may
enhance governance.

Rationales for board diversity

Fairfax (2005) summarizes five rationales given by researchers on how board diversity is
valuable to firms: talent rationale (Cassell, 2000), market rationale (Cox and Smolinski,
1994), litigation rationale (Cook and Glass, 2014), employee relations rationale (Creek et al.,
2017) and governance rationale (Fairfax, 2005; Abad et al, 2017; Fondas and Sassalos,
2000). Admittedly, Fairfax (2005) takes a normative viewpoint to increasing board diversity
and argues that diversifying the board should be done because it is the right thing to do,
and not because of the summarized business rationales. However, her research is essential
for this paper, as it helps to inform what researchers have historically determined to be the
primary benefits of diversity. These existing rationales on why board diversity may improve
governance could benefit from a new rationale to strengthen what we know about why
diversity may enhance board governance. This new rationale may be the diverse social
capital afforded to the board because of diverse directors.

Social capital and board diversity

Van der Walt and Ingley (2003) argue that board diversity may have a variety of impacts on
the board, the firm and the stakeholders. These impacts include organizational
performance, board performance, organizational dynamics and stakeholder dynamics.
According to Van der Walt and Ingley, the impact of diversity can include the individual
characteristics of the directors and other situational factors (Bilimoria and Wheeler, 2000;
Burgess and Tharenou, 2002; Burke, 2000). One of these individual characteristics may be
the social capital of a director and how that social capital may enhance the firm.
Social capital is the notion that belonging to a group can have benefits to the individual and
community. Adler and Kwon (2002, p. 18) explain that social capital is guided by a core
intuition of goodwill such as sympathy, trust and forgiveness offered by friends and
acquaintances. Lin et al. (1981) view social capital as the resources embedded within an
individual’s social network and which are accessible through direct and indirect ties. Portes
(1998, p. 6) defines social capital as “the ability of actors to secure benefits by virtue of
membership in social networks or social structures”. Social capital may be defined at the
individual level, or at the collective group level such as a firm, organizational field,
community or nation (Kilduff and Tsai, 2003). Basically, to have social capital, an individual,
group or organization must have relationships with others, and this relationship is the actual
source of value of the social capital (Portes, 1998). Cyert and March (1963) explain that
social capital is the potential benefits of relationships, networks and trust for economic and
political advancement. Firm executives and their experiences, values, specific knowledge
and preferences are reflected in firm decisions, which can influence strategic direction and
outcomes (Haynes and Hillman, 2010; Hambrick and Mason, 1984; Cyert and March,
1963). Social capital provides long-term benefits to directors if they are willing to make
investments in relationships and maintain these relationships through investments in social
networks (Sauerwald et al., 2016). Haynes and Hillman (2010, p. 1159) argue that board
social capital is important for firms as they pursue their strategic direction. Specifically,
“heterogeneous boards are more likely to encourage changes from past strategies”.
Haynes and Hillman do not discuss heterogeneous boards in the context of demographic
diversity such as race and gender; however, it is plausible that the influence of these
demographic factors also impact board social capital and its influence on strategy setting.
Race and family background have an impact on social capital (Loury, 1977), therefore

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supporting the premises of this paper that women and diverse board members may have
different types of social capital which can be brought to the board as a potential resource.
Loury (1977) argues that the achievements of the individual are based on more than just his
or her own efforts, accomplishments and resulting human capital; but are also influenced by
those relationships of the family and community. Coleman (1988) established that
relationships have inherent value because of the access they provide to resources and
opportunities. Consequently, the relationships and resulting social capital of women and
minority directors may be different and hence offer different resources and opportunities.

Resource dependency and social Capital

In addition to the social capital bestowed to individuals and groups, researchers have
shown that social capital is important to firm outcomes (Khoury et al., 2013; Sundaramurthy
et al., 2014; Hitt et al., 2002; Palmer and Barber, 2001). Resource dependency theory
suggests that a board’s successful provision of resources is directly related to firm
performance (Hillman and Dalziel, 2003, p. 386). Haynes and Hillman (2010) argue that
based on resource dependence theory, board social capital is a useful resource for firms as
the breadth of knowledge, experiences and social ties of directors provide the opportunity
for firms to change strategy when needed and explore opportunities outside of their
industries.
Resource dependence theory also describes corporate boards as a critical link between
the firm, its environment and the diverse resources on which a company depends.
Resource dependency views firms as operating in an open system and needing to
exchange and acquire specific resources to survive, creating a dependency between the
firm and external units (Terjesen et al., 2009). Firms seek linkages with the most beneficial
resources, and structure membership on the corporate board on this basis.
While the idea of building social capital through diversity has value to society as an
information channel for social structures, to the corporate sector, social capital has value as
an information channel to improve firm corporate governance. Van der Walt and Ingley
(2003) discuss 18 different elements of diversity. These elements were studied to determine
which items were motivating factors to offering board positions to people of different
backgrounds. Their results support resource dependency theory. Specifically, they
determine that a board of directors represent a pool of social capital for their organization.
They also conclude that board activities that link the board to its environment reduce
uncertainty and secure from external constituencies resources critical to the organization’s
success (additional capital resources). These resources include access to capital and also
prestige and legitimacy. Khoury et al. (2013) also find that social capital can improve
legitimacy by allowing a company to be seen as a quality firm. Ingley and Van der Walt
(2001) purport that the board is potentially a valuable strategic resource for the
organization, especially in linking the firm to external resources, such as providing a linkage
to a nation’s business elite, access to capital, connections to competitors or market and
industry intelligence. The authors propose that when selecting directors, boards need to
focus first on merit and then, ideally, on selecting qualified individuals with demographic
and professional attributes underrepresented on the board. They also recommend that
boards need to recognize that social capital is a strategic resource and sufficiently diverse
groups are more likely to contribute non-overlapping social capital.
Diverse social capital and the resulting additional resources may be an advantage of board
diversity. A diverse group of board members may increase the diversity of social linkages
and connections on the board given their unique and different network ties (Hagan, 1998;
Campbell, 1988; Ibarra, 1992). For example, research suggests that the perception of
human and social capital differs for gender and racially diverse boards. Race has a
stronger effect on the perceptions of work-related social networks than perceptions of
gender-based networks (Ibarra, 1995). Race networks are perceived to be more diverse

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 and therefore more beneficial to firms than gender networks. Additionally, findings by Hilde
(2009) indicated that more pronounced community heterogeneity is associated with lower
levels of social capital. This might also apply to heterogeneity on boards. According to
Hansen (1999) and Uzzi (1997), social capital allows access to new knowledge and
facilitates the transmission of difficult-to-transfer knowledge. Therefore, diversity on the
board could assist in acquiring new social capital resulting in new knowledge, and unique
social ties.
Burt (2002) argues that social capital is the contextual complement to human capital that
enables those who are better connected to do better. Burt suggests that strong connections
do not always translate into productive social capital. Network people or groups are
connected to network members and groups, to whom they have an implicit obligation to the
other members of the network, trust these certain others, are obligated to these certain
others and are dependent on exchange with certain others. Therefore, those who hold a
position within these exchanges hold an asset (Burt, p. 32) which is social capital. He states
simply, “Better connected people enjoy higher returns” (Burt, p. 32).

Structural holes
Within-group cohesion is stronger than between-group cohesion (Burt, 2002). In the
absence of any relationship between two groups, a structural hole exists. Structural holes
can be filled by individuals who are members of both groups, or who are willing to serve as
a go-between or bridge between the two groups. Such individuals span the two groups and
thereby often improve the social capital of both groups. Holes in the social structure
“structural holes” create a competitive advantage for those individuals whose relationships
span those holes. As such social capital can function to brokerage opportunities in a given
network of relationships, or become the broker in relations between people or groups who
would otherwise be disconnected in the social structure. These brokers are thought to seek
out partners with whom they can form unique, or “non-redundant”, relationships that bring
new information and the possibility of negotiating between competing groups. An individual
fills the structural hole between the two groups, either as a leader or as a member of both
groups. This individual then provides an opportunity for spanning of two individual closed
networks, where they are now connected and have enhanced social capital beyond what
each group had separately. This paper was partly interested in discussing whether diverse
directors provide unique social ties, therefore at least in part, spanning those holes between
the firm and potentially new markets, thus producing a competitive advantage. If this is the
case, it is conceivable that diverse directors span different connections, thereby spanning
new and diverse structural holes.
Organizations are related through their members’ professional connections, joint suppliers
and customers and industry associations. These commonalities may be sources of
information about competitor behavior, new technological developments and other industry
trends (Walker et al., 1997). According to the structural holes concept (Burt, 2002), it is
feasible that if diverse directors enjoy different types of network ties and belong to different
types of social or community groups, the firm should acquire (with their appointment) the
ability to span some of these structural holes. Burt asserts that contacts strongly connected
to each other are likely to have similar and therefore redundant information. In contrast, a
contact with connections to different groups provides a bridge to information available in
other groups. This gives them an advantage in access to information. Assuming this as true,
the firm should enjoy the benefit of the director’s ability to bridge, and also, the individual
should enjoy greater individual opportunities. This is an interesting consideration by Burt,
and other researchers have also considered if diverse directors provide linkages or bridges
to different types of groups. Singh et al. (2008) found that women directors had a higher
level of community influence. They found a statistically significant difference in the
backgrounds of women and men directors. Women were more likely to be community

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leaders, thus falling into his “community influential category”, and over a quarter of the women
in the business expert category were additionally community influentials. These women
directors, as community leaders, may provide a bridge to unique and important groups.
Given the plethora of literature that establishes the importance that social capital has on a
firm’s success, it is possible that when a board appoints a diverse director, it also provides
the board new opportunities for the firm to span existing structural holes and enhances
social capital of the board and potential firm success.

Social capital as a rationale for board diversity

As mentioned previously, there are five traditional business rationales commonly given to
support board diversity. These are talent rationale, market rationale, litigation rationale,
employee relations rationale and governance rationale (Fairfax, 2005; Dallas, 2002; Catalyst
2004). The goal of this paper is to explore theoretically whether director social capital
enhances any of these five rationales, or whether enhancing the board’s social capital can
be considered as a plausible sixth rationale for diversifying boards. This investigation is
important, as some boards may rely heavily on director social capital in their attempts to
procure resources for the firm. Enhancing this social capital may result in direct or indirect
benefits for their companies.
The five rationales of board diversity are primarily thought to increase firm economic value
directly. However, the social capital provided to the board by virtue of the directors
provides another potential rationale for board diversity. This can include providing
additional resources such as legitimacy (Khoury et al., 2013), advice and counsel, and links
to other organizations (Hillman and Dalziel, 2003), or other attributes associated with social
capital that the director may bring to the firm due to his or her selection to the board. This
social capital may also serve as a resource to span or bridge structural holes or
weaknesses. Demographically diverse directors may have unique social ties they can use
to assist in spanning structural holes between the firm and potential new markets, or
suppliers thus providing a potential competitive advantage. This potential social capital
benefit, which has not yet been discussed within the existing five rationales, is introduced
here as a potential sixth rationale.

Social capital – the sixth rationale for board diversity

Per resource dependency functions
Resource dependency theory argues that the role of board members includes providing the
firm with particular resources. Pfeffer and Salancik (1978) outline the board’s four main
governance roles. Figure 1 shows how social capital can contribute to these roles, and
specifically how diversity may enhance them. These roles are:

1. Quadrant (1) advice and counsel;

2. Quadrant (2) legitimacy;

3. Quadrant (3) channels for communicating information between external organizations

and the firm; and
4. Quadrant (4) preferential access to commitments or support from important elements
outside the firm.

Each of these resource areas can be aided by social capital.

The director’s role of advice and counsel, Quadrant 1, shows how these governance roles
can be positively impacted by social capital. Diverse directors and their social capital can
provide access, via the bridging function, to a diverse group of individuals, thereby

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 Figure 1 How social capital may improve governance

diversifying and enhancing the potential advice and counsel available to the firm. These
new networks may contribute new sources of unique or “non-redundant” relationships (Burt,
1992) that bring new information and advice. Quadrant (2), legitimacy, shows how the
legitimizing role of directors can be positively impacted by social capital. Prestigious or
legitimate persons or organizations represented on the board provide confirm to
stakeholders and customers of the value and worth of the organization (Khoury et al., 2013;
Pfeffer and Salancik, 1978). The social capital of directors can provide access, and
potential alignment between the firm and powerful members of the community (Provan,
1980) and the community influence of women directors may serve to increase firm
legitimacy. This is shown to be particularly important for firms who need to increase their
legitimacy and may have a greater need for social networks outside their existing network
(Hillman and Dalziel, 2003; Kim and Cannella, 2008). Quadrant (3) shows how social capital
can improve the communication role of directions. The social capital of directors can assist
the firm in communicating useful information to the firm’s external environment by increasing
information channels via the diverse social connections of directors. Social networks expand
both the epistemic environment (what is known) and the rate at which that environment is
accessed (how rapidly). Information can be expected to spread across actors in the same
market, but it will circulate within networks before it circulates between networks (Burt, 1992).
A diversity of board social capital can expand firm networks which can assist the board in
spreading information within networks of diverse groups, thereby helping to spread the firm’s
information in a faster more efficient manner. Quadrant (4) shows how social capital provides
the firm with improved access to commitments or support from important elements outside
the firm. A diverse group of board members may increase the diversity of social linkages
and connections to the board given their unique and different networks. It is not unusual for
people within the same social networks to seek commitments or support from those within
that social network. Choosing diverse directors can assist in broadening the number of
potential contacts that are able to provide commitment or support to firm objectives.
These benefits of diverse social capital make it a plausible contender for inclusion as the
sixth rationale for board diversity. However, to further investigate whether social capital
should be considered an additional rationale, it is necessary to determine whether there is a

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common attribute that social capital shares with the five existing business rationales for
board diversity. First, each of the board diversity rationales assumes that race or gender
benefits the board in some specific way. The rationale describes how it is beneficial, or
more specifically what function it serves in improving governance. Resource dependency
theory argues that the board functions to provide resources to the firm (Figure 1). Arguably,
each of the existing rationales for board diversity can be identified as an important way of
helping to bridge a specific gap to necessary firm resources. Figure 2 serves to show how
each rationale helps to acquire needed resources.
Each of the board diversity rationales acts as a potential bridge to fill gaps in the
resources needed by the corporation for the most effective governance. For example, the
talent rationale (first box in Figure 2, counting clockwise from lower left) argues that given
the diversity of the labor market, firms cannot ignore portions of the labor pool when
accessing talent. Corporations that ignore portions of the labor pool may miss out on the
talented individuals in that ignored labor segment. The firms that ignore segments of the
labor pool will not have the most talented group of directors. Board diversity, by insuring
that the board is accessing all segments of the labor pool for board positions, functions
as a way to ensure that the resources of talented women and minorities are not absent
from boards.
The second box in Figure 2 is the governance rationale. This rationale argues that board
diversity aids in helping the board to make better quality decisions. The governance
rationale also assumes that a diverse board can potentially prevent “group-think”. This
argument assumes that heterogeneous groups make better quality decisions and therefore
a board that is not diverse will not be at their optimal decision-making capabilities and may
be at risk of group think (Ramirez, 2003). This rationale argues that the function of board
diversity is to bridge the board to a diverse set of directors and their intellectual resources,
which is necessary for optimal decision-making.

Figure 2 Rationales for board diversity including social capital

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 The third box in Figure 2 is the marketing rationale. This rationale argues that firms with
diverse directors will be better at marketing to diverse populations, as well as developing
products which will appeal to those populations. Board diversity functions as a method for
ensuring that the firm creates the best marketing strategies. Without diverse board
members, the firm will not have this necessary resource to improve their marketing efforts.
The fourth rationale is presented in the fourth box of Figure 2. This rationale is referred to as
the employee relations rationale and argues that a diverse board will facilitate company
policies which reflect the concerns of all employees, and diverse board members will act as
a signal that the firm is operating fairly (Bilimoria, 2006). These fair policies will assist in
maintaining a satisfied workforce that believes the firm to be fair, and therefore will produce
higher productivity. The function of this rationale for board diversity is to bridge this gap to
diverse perspectives to the board when policies are written. Without these diverse board
members, the board will not have access to these diverse perspectives.
The fifth rationale is the litigation rationale. The litigation rationale is related to the employee
relations rationale; this rationale assumes that there is a gap in the directors knowing what
types of policies the firm should pass. The assumption is that diverse directors have a
perspective and sensitivity to issues of discrimination that can get the board sued.
Therefore, these diverse directors can anticipate the problems and appropriately suggest
actions which will help the firm to avoid discrimination litigation. Therefore, the function of
this rationale is to provide the board with a bridge to these diverse perspectives. Without
these diverse members of the board, the board would not have this important resource.
The final box, representing the new sixth rationale, is social capital. Like the other five
rationales, the rationale assumes that race or gender benefits the board in a specific way
that provides resources. Like the other rationales, the rationale describes how it is
beneficial, and what function it serves in improving governance. Looking specifically at
social capital functionality, like the other five rationales, diverse social capital performs the
important function of bridging a specific gap to necessary firm resources.
The primary role of diverse social capital is to bridge the firm to new advice and counsel,
increase legitimacy, improve communication and access to different social networks. These
could be in the form of personal relationships of the directors, diverse clubs or other social
activities, or other non-employment-based contacts. These diverse social contacts present
an opportunity for the board to access the benefits accrued to them by virtue of these
unique groups. Additionally, diverse social capital may interact with the other rationales in a
way that improves their function. For example, having diverse social capital and networks
may help the company to identify and recruit women and minority talent (talent rationale)
who would otherwise be unknown to a more homogenous board. The firm’s governance
(governance rationale) may be enhanced, as social capital enhances the board’s ability to
identify a broader number of potential board members who span a more comprehensive set
of backgrounds.
Consistent with the other five rationales that function as a bridge to new social capital, this
analysis suggests that social capital should be considered as a sixth rationale for board
diversity. Social capital serves a role in governance (Figure 1) and rises to the standard of
other rationales for board diversity by providing necessary resources to the firm.

Conclusion
In closing, this paper adds to the overall understanding of why diversity is a positive for
firms. Different directors not only bring their individual human capital but also provide a
bridge to the human capital of other people through their social capital and networks.
Therefore, social capital like race and gender, or education and experience, is an attribute
of a director. Social capital can have an impact on board governance along with the other
five board diversity rationales. Increased social capital as manifested in intensifying or

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extending social networks would seem to be a decision to which firms may need to give
more explicit attention. In particular, if firms select directors who offer essentially identical
external social capital to incumbent directors, they are likely to strengthen existing social
networks and continue in current strategic norms. The firm, however, must be careful that
strengthening of existing relationships does not become a source of redundant information
(Burt, 2002). A given configuration of board social capital will not yield identical effects on
firm performance in all environmental conditions (Kim and Cannella, 2008). Instead, a firm
will determine its social capital needs based on the firm’s strategic plan, which includes its
need to bridge to new groups or lack thereof. More homogenous boards are less likely to
encourage strategies that differ from those of industry competitors and historical norms.
Boards may not be aware of the advantages that diverse social capital may have for the
board, or they may not believe that contacts outside of their established social network are
valuable to board. As such, boards may not recognize that social capital is a strategic
resource, and sufficiently diverse groups such as women may be more likely to contribute
non-overlapping social capital networks, which may translate into greater external influence
and thus additional resources for the firm. When and if boards adopt this view, it may be
possible that social capital becomes a legitimate sixth rationale for board diversity.
Boards of Directors play an important role in company oversight and strategic
management. Boards are a vital mechanism in the shaping of firm governance. Because of
the critical role of boards, directors are often blamed for firm problems and credited with the
power to improve corporate governance (Aguilera, 2005 p. S39). Board diversity can be an
important element of whether the board can operate effectively.
This paper in particular, seeks to contribute to what reasons are given as rationales for
board diversity (Fields and Keys, 2003; Burke, 200; Fondas and Sassalos, 2000). The
evidence from the empirical findings of previous research has been revealing in the
complexity of attitudes on board diversity. This complexity may occur partly due to
perception differences by virtue of one’s race, gender and cultural norms of one’s country.
This paper provides a perception that is based primarily on the Anglo-American
governance point of view from the UK and USA. This Anglo-American perspective
influences the conceptual discussion in this paper.
This paper provides a discussion on how board diversity impacts board governance,
including various often-repeated rationales for board diversity (Fairfax, 2005; Dallas, 2002;
Catalyst 2004). Recourse dependency theory, which focuses on the resources the directors
may bring to the firm, is the framework, versus the existing five rationales which seem to
focus on traditional agency theory arguments which focus on the oversight function of the
board. These rationales include the idea that diverse directors will help the firm to:

1. attract diverse customers (marketing rationale);

2. develop policies that provide equal opportunity and fairness (legal rationale);
3. provide an example to employees about company values (employee relations rationale)
and signal to the market that the company operates fairly;
4. ensure that new and different professionals are on the board (talent rationale); and

5. providing a diverse viewpoint for the board and preventing board group think (super-
outsider or governance rationale).

This paper furthers prior studies, as it provides a discussion of whether other rationales,
such as social capital are worth considering. To fully determine whether social capital is an
additional rationale for board diversity, additional research is needed which asks directors
whether social capital considerations are a part of the selection process for new directors
and whether in the opinions of the directors, diversity of social capital brings additional
value to board governance.

VOL. 18 NO. 3 2018 j CORPORATE GOVERNANCE j PAGE 435

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Corresponding author
Darlene Booth-Bell can be contacted at: [email protected]

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