Multiple directorships and corporate diversification

This paper investigates the impact of multiple directorships on corporate diversification. We hypothesize that multiple directorships affect the quality of managerial oversight and, thus, influence the degree of corporate diversification and firm value. The empirical evidence lends credence to this notion. Specifically, we find that directors’ busyness is inversely related to firm value. In other words, firms where board members hold more outside board seats suffer a deeper diversification discount. Further analysis also reveals that the negative effect of having overcommitted directors on the board is more pronounced in firms where agency costs are more severe, suggesting that the diversification discount is driven by agency conflicts. Our results aptly fit into the on-going debate on the benefits and detriments of multiple directorships.     

Ineffective corporate governance: Director busyness and board committee memberships

Our paper examines whether holding multiple outside board seats compromises a director’s ability to effectively perform monitoring duties. Analyzing over 1400 firms, we report that individuals who hold more outside directorships serve on fewer board committees. The relation, however, appears non-linear, U-shaped, and in support for both the busyness and the reputation hypotheses. In addition, we find that holding more outside board seats decreases the likelihood of membership on compensation and audit committees. The findings substantiate evidence [Akhigbe, A., Martin, A.D., 2006. Valuation impact of Sarbanes–Oxley: Evidence from disclosure and governance within the financial services industry. Journal of Banking and Finance 30 (3), 989–1006] of value relevance of board committee structures. Additional analysis of committee memberships suggests that women and ethnic minorities are placed on more board committees. Also, directors on smaller and independent boards serve on more committees. Finally, it appears that the Sarbanes–Oxley act had a material impact on the association between the number of multiple board seats and committee memberships.     

Financial fraud,director reputation,and shareholder wealth

We investigate the reputational impact of financial fraud for outside directors based on a sample of firms facing shareholder class action lawsuits. Following a financial fraud lawsuit, outside directors do not face abnormal turnover on the board of the sued firm but experience a significant decline in other board seats held. This decline in other directorships is greater for more severe allegations of fraud and when the outside director bears greater responsibility for monitoring fraud. Interlocked firms that share directors with the sued firm also exhibit valuation declines at the lawsuit filing. Fraud-affiliated directors are more likely to lose directorships at firms with stronger corporate governance and their departure is associated with valuation increases for these firms.     

Board interlocks and the propensity to be targeted in private equity transactions

We examine how board networks affect change-of-control transactions by investigating whether directors’ deal exposure acquired through board service at different companies affect their current firms’ likelihood of being targeted in a private equity-backed, take-private transaction. In our sample of all US publicly traded firms in 2000–2007, we find that companies which have directors with private equity deal exposure gained from interlocking directorships are approximately 42% more likely to receive private equity offers. The magnitude of this effect varies with the influence of directors on their current boards and the quality of these directors’ previous take-private experience, and it is robust to the most likely classes of alternative explanations—endogenous matching between directors and firms and proactive stacking of board composition by management. The analysis shows that board members and their social networks influence which companies become targets in change-of-control transactions.     

Distracted directors: Does board busyness hurt shareholder value?

We use the deaths of directors and chief executive officers as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The loss of such key co-employees is an attention shock because it increases the board committee workload only for some interlocked directors—the ‘treatment group’. There is a negative stock market reaction to attention shocks only for treated director-interlocked firms. Interlocking directors? busyness, the importance of their board roles, and their degree of independence magnify the treatment effect. Overall, directors? busyness is detrimental to board monitoring quality and shareholder value.     

Going overboard? On busy directors and firm value

The literature disagrees on the link between so-called busy boards (where many independent directors hold multiple board seats) and firm performance. Some argue that busyness certifies a director’s ability and that such directors are value enhancing. Others argue that “over-boarded” directors are ineffective and detract from firm value. We find evidence that (1) the disparate results in prior work stem from differences in both sample composition and empirical design, (2) on balance the results suggest a negative association between board busyness and firm performance, and (3) the inclusion of firm fixed effects dramatically affects the conclusions drawn from, and the explanatory power of, multivariate analyses. We also explore alternative empirical definitions of what constitutes a busy director and find that commonly used proxies for busyness perform well relative to more complex alternatives.     

The effectiveness of the mandatory disclosure of independent directors’ opinions: Empirical evidence from China

Since 2001, the regulatory authority of the Chinese stock market has required the independent directors of listed firms to disclose their opinions on important board decisions. Using a novel dataset of independent directors’ opinions, this study examines the effectiveness of that mandatory disclosure requirement. We find that the stock market reacts negatively to announcements of independent directors saying ‘no’. Firms with more severe agency problems are prone to experiencing independent directors saying ‘no’. Independent directors are also more likely to say ‘no’ when they have multiple directorships, longer tenure, financial expertise, or live in places other than where the firms they serve are located. Consequently, firms with independent directors who say ‘no’ tend to experience cuts in inter-corporate lending, a lower propensity to pay dividends, reduced bank loans, and greater turnover of top executives. In addition, these firms are more likely to receive a modified audit opinion, obtain ‘special treatment’, or be subject to regulatory enforcement action in the year after independent directors say ‘no’. Overall, the results indicate that independent directors saying ‘no’ can help to protect the interests of outside investors, and thus lend support to regulations mandating the disclosure of independent directors’ opinions.     

Differential market valuations of board busyness across alternative banking models

Review of Quantitative Finance and Accounting - This study comparatively assesses the influence of board busyness (i.e., multiple directorships of outside directors) on stock market valuations of...     

Multiple board appointments and firm performance in emerging economies: Evidence from India

This paper extends the literature on multiple directorships, busy directors and firm performance by providing evidence from an emerging economy, India, where the incidence of multiple directorships is high. Using a sample of 500 large firms and a measure of “busyness” that is more general in its applicability, we find multiple directorships by independent directors to correlate positively with firm value. Independent directors with multiple positions are also found to attend more board meetings and are more likely to be present in a company's annual general meeting. These findings are largely in contrast to the existing evidence from the US studies and lend support to the “quality hypothesis” that busy outside directors are likely to be better directors, and the “resource dependency hypothesis” that multiple directors may be better networked thereby helping the company to establish more linkages with its external environment. Multiple directorships by inside directors are, however, negatively related to firm performance. Our results suggest that the institutional specificities of emerging economies like India could work in favor of sustaining high levels of multiple directorships for independent directors without necessarily impairing the quality of corporate governance.     

Independent director incentives: Where do talented directors spend their limited time and energy?

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship's relative prestige. When directors experience an exogenous increase in a directorship's relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced Chief Executive Officer departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.     

EVIDENCE ON THE MARKET FOR PROFESSIONAL DIRECTORS

Using the temporary increase in the supply of directors associated with successful tender offers, we examine characteristics of directors who are valuable in the market for board seats. We find that after a takeover, professional directors are three times more likely to receive new appointments than other types of directors released from their respective boards. We find that the proportion of professional directors in above‐average performing targets is significantly greater than that in underperforming targets. Our results indicate that professional directors generally have valuable general human capital that more than offsets the costs of multiple directorships.     

Are All Inside Directors the Same? Evidence from the External Directorship Market

Agency theory and optimal contracting theory posit opposing roles and shareholder wealth effects for corporate inside directors. We evaluate these theories using the market for outside directorships to differentiate among inside directors. Firms with inside directors holding outside directorships have better operating performance and market‐to‐book ratios, especially when monitoring is more difficult. These firms make better acquisition decisions, have greater cash holdings, and overstate earnings less often. Announcements of outside board appointments improve shareholder wealth, while departure announcements reduce it, consistent with these inside directors improving board performance and outside directorships being an important source of inside director incentives.     

Takeover bids and target directors’ incentives: the impact of a bid on directors’ wealth and board seats

I investigate the nature of the incentives that lead outside directors to serve stockholders’ interests. Specifically, I document the effect of a takeover bid on target directors, both in terms of its immediate financial impact and its effect on the number of future board seats held by those target directors. Directors are rarely retained following a completed offer. All target directors hold fewer directorships in the future than a control group, suggesting that the target board seat is difficult to replace. For outside directors, the direct financial impact of a completed merger is predominately negative. This documents a cost to outside directors should they fail as monitors, forcing the external control market to act for them. Future seats are related to pre-bid performance. Among outside directors of poorly performing firms, those who rebuff an offer face partial settling-up in the directorial labor market, while those who complete the merger do not.     

The Impact of Director Reputation and Performance on the Turnover and Board Seats of Target Firm Directors

Abstract:  This study examines factors that explain the turnover and board seats held by target firm directors post-takeover. Following successful takeovers the proportion of the board replaced is lower when the target has better performance. In failed takeovers, executive directors have lower turnover and the rate of turnover is reduced after a hostile takeover. Inconsistent with ex-post settling-up, actions that advance target shareholder wealth during the takeover does not assist a director obtain an increase in future board seats. Confirming a reputation effect, directors with multiple directorships have a lower rate of turnover and a higher increase in future board seats.     

LABOR MARKET CONSEQUENCES FOR BUSY DIRECTORS: EVIDENCE FROM INTERNATIONAL MERGERS AND ACQUISITIONS

Using 13,233 acquisitions from 57 countries, we examine merger and acquisition (M&A) decisions made by busy boards. We find that few busy acquirers originate from emerging markets and that they tend to undertake cross‐border mergers, favor public targets, finance with cash and equity, pursue nondiversifying mergers, avoid targets with multiple bidders, and long‐term underperform relative to nonbusy acquirers. Importantly, we discover a nonlinear relation between an acquirer's board busyness and merger announcement returns. We find that the labor market penalizes directors who approve bad acquisitions but does not reward them for good mergers. We find a similar nonlinear relation between an acquirer's board busyness and its long‐term performance along with a suggestion of an optimal board busyness.     

Social capital,human capital,and board appointments

This study investigates whether who a director knows is more important than what they know when it comes to gaining additional board seats. Specifically, we investigate the relative impact of human capital (a director's experiences, skills, and knowledge) and social capital (a director's connections to other directors) in gaining additional directorships. We employ a uniquely constructed index to measure human capital and Social Network Analysis to estimate a director's connectivity to other directors to proxy for social capital. We apply these to a sample of directors from publicly listed companies in New Zealand between 2000 and 2015. We observe that both human and social capital are positively related to acquiring additional board seats. Additionally, we find that directors gaining additional human capital are more likely to acquire additional board seats. We conclude that both human and social capital are important in determining which directors gain additional board seats, although directors should focus on acquiring additional human capital to enhance their chances of further appointments.     

Better directors or distracted directors? An international analysis of busy boards

This study examines the effect of busy directors and boards on the value of a set of non-U.S. firms from 1999 to 2012. We find that busy directors and boards are a global phenomenon, but that national culture helps to explain the cross-sectional variation in director and board busyness. Firms with busy boards exhibit lower market-to-book ratios and reduced profitability, but this effect is reversed for younger firms. We conclude that the advising ability of these networked directors is most useful for younger firms. A demographic analysis shows that multiple directorships are positively associated with firm performance and education, but negatively associated with female directors.     

Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.     

Board Overlap, Seat Accumulation and Share Prices

We examine the board overlap among firms listed in Switzerland. Collusion, managerial entrenchment, and financial participation cannot explain it. The overlap appears to be induced by banks and by the accumulation of seats by the most popular directors. We also document that seat accumulation is negatively related to firm value, possibly because of the conflicts of interest that multiple directorships induce and the time constraints directors face. Contrary to popular beliefs, however, the directors of traded firms do not generally hold more than one mandate in other traded firms. They do hold multiple seats in non-traded firms.     

New Evidence on the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310

We examine the relation between a board's decision to reject antitakeover provisions of Pennsylvania Senate Bill 1310 and subsequent labor market opportunities of those same board members. Compared to directors retaining all provisions, directors rejecting all protective provisions of SB1310 are three times as likely to gain additional external directorships and are 30 percent more likely to retain their internal slot on the board of that same Pennsylvania company. For external board seats, the results are driven by nonexecutive directors who are not members of the management team; for internal board seats, the results are driven by executive directors.