Companies invest a fair amount of resources in building up and maintaining external connections. The need for social capital beyond the organizational boundary is particularly salient for executives and board directors. In Huber’s (2013) survey, directors and senior management rated external contacts as the most important source for information, four times more important than mid-level engineers and twice important as R&D directors or chief technology officers. But, does it pay off?

Information is the most obvious benefit of directors’ external networking. Important business news more or less spread out through the grapevine, such as business opportunities, latest technological developments, sudden challenges, personnel moves, and upcoming policy changes. The good hope is that new information from external contacts could stimulate corporate innovation and growth. Nevertheless, in the same survey study of Huber, directors and senior managers also reported that external connections are less helpful for solving problems than for providing up-to-date information. The question is clear: Do external connections of directors really pay off in forms of productivity and innovation? How can companies maximize the gain of such external social capital?

Research suggests that, the impact of directors’ external social capital on corporate financial performance is not negligible, yet not always positive. It heavily depends on the characteristics of connected firms and power dynamics between two partners. Companies receive better financial outcomes (e.g., ROI) when board directors link the firm with more superior partners— companies that are more resourceful or more powerful (i.e., those that hold a large scope of industrial impacts) than themselves.

With respect to its impact on corporate innovation and creativity, however, the question is more elusive. Soh (2010) suggested that it is not merely about with whom the firm is connected, but more importantly about the local industrial network in which the firm is situated. The more central a firm is connected within the industrial network, the more likely it will gain on innovative performance.

The logic is clear. Innovation is a comparative term in the sense that it reflects deviance from industrial norms and requires companies to act fast upon creative ideas. The innovative advantages of directors’ networking is thus not absolute, but depends on how it outperforms other firms that seek for external connections. Moreover, such innovative gains from central connections within the industrial network is enhanced by mutual connections among external partners, as well as by the focal firm’s own strategic intension to explore technological developments.

To conclude, leveraging directors’ external connections for corporate gains require strategies. Being selective on making connections is one thing. More importantly, companies ought to organize all external contacts they possess. In terms of stimulating innovative performance, it is more important to form a densely connected club than to develop plentiful but scattered connections. By doing so, the central firm is more likely to elicit from all partners innovative support that may be otherwise too risky to share.

Dr. Yingjie Yuan (yingjie.yuan rug.nl) is Assistant Professor of Human Resource Management & Organizational Behavior at the Faculty of Economics and Business, University of Groningen, with expertise on Creativity/Innovation, Social networks, Team information processing, and Team composition

References

Huber, F. (2013). Knowledge-sourcing of R&D workers in different job positions: Contextualising external personal knowledge networks. Research Policy, 42(1), 167-179.

Soh, P. H. (2010). Network patterns and competitive advantage before the emergence of a dominant design. Strategic Management Journal, 31(4), 438-461.