The basic proposition of resource dependence theory is the need for environmental linkages between the firm and outside resources. In this perspective, directors serve to connect the firm with external factors by co-opting the resources needed to survive (Pfeffer and Salancik, 1978). Thus, boards of directors are an important mechanism for absorbing critical elements of environmental uncertainty into the firm. Williamson (1984) held that environmental linkages or network governance could reduce transaction costs associated with environmental interdependency. The organization’s need to require resources and these leads to the development of exchange relationships or network governance between organizations. Further, the uneven distribution of needed resources results in inter-dependent in organizational relationships. Several factors would appear to intensify the character of this dependence, e.g. the importance of the resource(s), the relative shortage of the resource(s) and the extent to which the resource(s) is concentrated in the environment (Donaldson and Davis, 1991).
In the Malaysian context, huge business resources are directly and indirectly controlled by the government. Hence, appointing directors that have influence and access to key policy-makers is seen as an important strategy for business survival. This is because directors’ knowledge and prestige in their profession provided the required resources into their firms. This could enhance the firm's legitimacy in society and helps it achieve their goals and improve performance (Provan, 1980). Gales and Kesner (1994) suggest that in the resource dependence role, directors may also bring resources such as specialized skills and expertise.This concept has important implications for the role of the board and its structure, which in turn affects performance. Hillman (2003) held that if the need for network governance increases, more outsiders would be needed on the board as directors. In summary, resource dependence theory provides a convincing justification for the creation of network governance between the firm and its external environment through boards. Firms that adopt this mechanism could improve their business survival and performance.
Source: Network Governance in GLCs and NGLCs in Malaysia
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