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Writer's pictureKumari Ranjeeni

New Research: Outside Directors Accumulated Firm Specific Knowledge Valuable during COVID-19. How?

Updated: Jun 30

COVID19 lockdowns caused changes in the usual style of board meetings and directors had to make important decisions rapidly. Technology played an important role when face to face meetings were not possible. However, without knowledge, the contribution to important decision making by directors may not have been effective.


Formal board meetings and informal catch-ups over coffee were abruptly replaced with virtual meetings. Imagine that some directors may have been camera shy!


Such a sudden shift in meetings from face-to-face to virtual mode may have affected the cognitive abilities and behaviour of directors, hence adversely affecting their decision-making abilities during virtual meetings.


How did outside directors contribute to decision making when nothing usual seemed to work during the COVID19 lockdowns?


In my latest co-authored research paper, we examined whether outside directors accumulated firm specific knowledge helped them to contribute to timely decision making. During the crisis and lockdowns, outside directors had limited opportunities to understand about their firm’s core competencies and operating conditions. This may have been particularly challenging/overwhelming for newly appointed directors.


In our paper, we argue that outside directors who have accumulated firm-specific knowledge during their tenure were able to better contribute to decision making and firm performance. We find an inverted U-shaped relation between outside directors’ average board tenure and firm performance during initial phase of COVID19. Our results suggest that optimal firm performance was achieved at average board tenure of around 10 years.


Some Benefits of Outside Directors pre COVID19 Coffee-Catch ups and social interactions with Inside Directors!


We further argue that outside directors needed recent, timely and soft information about their firm’s operating conditions and this may have been facilitated by inside directors if outside directors had developed a good relationship with them before the crisis. This concept referred as internal social capital provides a medium through which outside directors and inside directors shared information more willingly. Information sharing requires trust and cooperation which we argue was built among outside directors and inside directors during their social interactions prior to COVID-19. Our results show that the inverted U-shaped relation is stronger for firms with more inside directors and inside directors with a longer average board tenure.


Our Research

Our research paper is published in Australian Journal of Management as Open Access.


I co-authored this paper with Dr Dharmendra Naidu from Monash University in Australia.


You can download and read our published research paper for free using the link below:


“Our research is the first to show how prior social interactions between outside directors and inside directors over their tenure positively contributed to firm performance during the COVID-19 crisis. We contribute by advocating on the relevance of outside directors’ accumulated knowledge about a firm to decision-making during the COVID-19 crisis” (Naidu and Ranjeeni 2023, p. 4).

Reference

Naidu, D., & Ranjeeni, K. (2023). Did outside directors’ firm-specific accumulated knowledge benefit the firm’s stock performance during COVID-19? Australian Journal of Management, 0(0). https://doi.org/10.1177/03128962231166831

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