Does it Pay to Have CIOs on the Board? Creating Value by Appointing C-Level IT Executives to the Board of Directors

Abstract

In an increasingly digital world, C-level information technology experts (CITEs) such as CIOs and CTOs are playing an increasingly indispensable role in leading IT initiatives. Despite this, recent research shows a lack of oversight by the board of directors over the IT function due to the “IT confidence gap” of directors with no IT expertise. This has resulted in the emergence of a recent trend of appointing CITEs to the board of directors. However, there is little research on whether such appointments result in value creation for the appointing firms. We use perspectives from agency and resource dependence theories to examine two value impacts of CITE director appointments to address this question. We suggest that CITE director appointments create signaling value by enhancing the firm’s ability to signal their intention to institute more effective oversight of the IT function and subsequently accumulate value in the form of share price reaction to appointment announcements. Correspondingly, CITE directors’ human and relational capital application also creates substantive value in the form of firm financial performance over a longer duration. Using an event study and hierarchical linear modeling, our analysis of 334 CITE director appointments largely supports our contention that the human and relational capital of CITE directors and their appointment in firms facing IT-related contextual conditions results in both a positive share price reaction and better firm financial performance over the long term. We conclude that appointing CITE directors with the appropriate capital under certain contextual conditions leads to firm value creation.