To Conform or Not to Conform: Board Responses to the Financial Crisis

Abstract

The Global Financial Crisis of 2008 resulted in the failure of hundreds of banks in the U.S. alone, significant spikes in unemployment and disastrous consequences for firms and their stakeholders across numerous industries. In this context, with tremendous societal implications, this research draws on institutional theory and the strategic management literature to consider whether environmental shock alters the relationship between strategic conformity and firm performance. In doing so, this research also examines the contingency of board capital, arguing that environmental shock creates an opportunity for the board of directors to exert greater influence on the firm’s strategy-setting and ultimately its performance. These predictions are tested using a sample of 348 banks who were required to report financial information to the Federal Reserve from 2005 to 2013, augmented by information on over 7,000 of these banks’ directors. While the results do not support the assertion that strategic deviation becomes more valuable during crisis, I do find evidence that board composition affects the strategic conformity of the firm. Further, the industry experience of board members is associated with higher firm performance over a multi-year period following a shock. The results also indicate that other related expertise obtained outside of the industry can also prove useful to the firm during periods of environmental shock. In addition to contributing a greater understanding of when and how board capital can affect firm outcomes, this research also provides a deeper understanding of one of the most disruptive economic events of the modern era.