Does Increased Equity Ownership Lead to More Strategically Involved Boards?

According to Jay Lorsch, boards will be increasingly expected to exercise more leadership, even strategic leadership, in the running of a firm. In order to align directors to the best interest of the firm, directors are increasingly required to purchase the equity of the companies on whose board they serve, and in the majority of cases, the minimum shareholding is 1000 shares. The rationale for this is that the directors will take the perspective of real owners of the company, partly based on a study by the National Association of Corporate Directors in 1995. Using behavioral economics, this paper makes some counterintuitive predictions about how involved boards are likely to react to an offer for a hostile takeover. By studying their reactions, the paper inductively analyzes the use of equity ownership as an incentive mechanism.