Professionals on Corporate Boards: How do they affect the bottom line?

Licensed professionals, such as accountants and lawyers, play a variety of roles when they sit on corporate boards. This paper sheds light on what role professional-directors play under what circumstances, and its consequences for corporate performance. We develop a two-dimensional framework, enabling us to identify the ‘wise counsel’ role in relation to the professional-capital dimension, and the ‘cop’ and ‘entrepreneur’ roles in relation to the risk-taking dimension. Using a dataset of all publicly quoted companies in Japan during 2004-2015, we demonstrate that the presence of professional-directors increases profitability and corporate value in all sectors, indicative of their ‘wise counsel’ role. We also show that the presence of professional-directors leads to higher stock return volatility in regulated industries, evidence of their role as ‘entrepreneurs’. By contrast, professional-directors lower stock return volatility in less regulated industries, indicative of their role as ‘cops’. Our theory and findings on the contingent effects of professional roles on firm performance have implications for corporate governance. They also shed light on a key question in strategic management, that is, the role of professionals as a specific type of resource in explaining performance heterogeneity.