The Influence of Board Composition on Top Management Team Industry- and Firm-Specific Human Capital in Young IPO Firms

Top management team (TMT) human capital is critical for the survival and growth of young entrepreneurial firms (Eisenhardt and Schoonhoven, 1990; Fischer and Pollock, 2004; Reed et al., 2006). TMT human capital includes the knowledge, skills, and experience top executives bring to the organization, and can be categorized into general and specific knowledge (Becker, 1964; Dimov and Shepherd, 2005; Hatch and Dyer, 2004; Nonaka, 1994). Specific human capital can be further classified as industry-specific (training and experience applied to a particular context or industry) and firm-specific (knowledge more applicable to a particular firm [Becker, 1964]). Scholars have examined human capital's impact on firm performance (Dimov and Shepherd, 2005; Pennings et al., 1998) and other outcomes such as innovation (Subramaniam and Youndt, 2005) and acquisitions (Coff, 2002). Although the value of such human capital to organizations and investors would seem apparent, scholarly inquiry aimed at understanding the acquisition and development of TMT human capital is scant (Finkelstein et al., 2009). The present study seeks to fill this gap by investigating how board structure influences the value of industry- and firm-specific human capital in the context of young entrepreneurial IPO firms. As a young firm transitions through the initial public offering (IPO) process and beyond, the acquisition and retention of human capital is a crucial governance task. At the same time, changes in the composition of the board of directors are perhaps more profound at this stage than at any other. The hiring of executives and staff to interact with new investors and handle Securities and Exchange Commission reporting requirements and the increasing formalization of governance procedures, and changes in managerial discretion dramatically increase the importance of board roles (Fischer and Pollock, 2004). The board is thus in a position to exert influence and set in motion policies that can affect the acquisition and retention of valuable TMT human capital. Despite suggestions that firms be structured to foster the development of human capital (Becker, 1964; Birley and Norburn, 1987; Spender, 1996), investigation of how different types of human capital are acquired and developed is lacking. Board research has suggested that the board affects strategies, processes, and performance (e.g., Baysinger et al., 1991; Dalton et al., 1998). Specifically, the board influences managers' discretion, leadership (Finkelstein and D'Aveni, 1994), and turnover (Weisbach, 1988). Thus, the board likely has an important role in shaping the nature and form of TMT human capital. Yet, little is known about how board composition impacts the acquisition and development of different types of TMT human capital, and certainly not in the context of young firms. This study investigates the impact of board composition, which is measured as the percentage of outside board members, on the market value of TMT industry- and firm-specific human capital in young IPO firms, based on two theoretical premises. First, according to human capital theory (Becker, 1964) and the behavioral agency model (Wiseman and Gomez-Mejia, 1998), managers' motivation to invest in their industry- and firm-specific human capital depends on their perceived return on such investment. Board membership may help enhance top managers' sense of security regarding their position in the firm and the return on their human capital investment. Second, this study draws on governance-related theories including agency (Fama and Jensen, 1983), resource dependence (Pfeffer and Salancik, 1978), signaling (Certo et al., 2001; Higgins and Gulati, 2006), and other organization theories to identify the board's effects on TMT firm- and industry-specific human capital. Previous studies have often used TMT demographics such as tenure and experience as measures of TMT human capital. Such measures may not always capture the actual value of TMT human capital. …