Seminar with Ronald Masulis, Australian School of Business

Independent Director Incentives: Where do talented directors spend their time and energy?

Abstract:

We find that reputation incentives matter for independent directors with multiple directorships. As a directorship increases in relative importance, independent director attendance rates at board meetings increase and when firm performance suffers they exhibit a greater willingness to remain on (depart from) the boards of their larger (smaller) directorships. Firms with a greater proportion of independent directors where the directorship is one of their largest are associated with better firm performance and exhibit more performance sensitive forced CEO turnover. These firms are also associated with a lower likelihood of non-performance related forced CEO departures. Director attendance and firm performance results are also robust to exogenous changes in a directorship’s ranking arising from a change in the size of another firm where the same director holds a board seat.

Together these findings reveal that directors distribute their efforts non-uniformly across their directorships and have varying incentives to remain on these boards of directors based on the reputational benefits they obtain. These findings reconcile the fact that more talented and experienced directors tend to have multiple directorships with the fact that busy directors have less time to devote to their board duties. Our evidence reveals that talented directors concentrate their valuable skills and effort in those firms with the greatest reputational benefits. Thus, busy directors can still be very valuable to the boards where they spend a larger portion of their time and energy.

Read the paper here

Seminar organized by Department of Finance at Copenhagen Business School