Hostname: page-component-7c8c6479df-ws8qp Total loading time: 0 Render date: 2024-03-28T04:58:56.263Z Has data issue: false hasContentIssue false

Busy Directors and Shareholder Satisfaction

Published online by Cambridge University Press:  13 August 2019

Kevin D. Chen
Affiliation:
Chen, kch@wharton.upenn.edu
Wayne R. Guay*
Affiliation:
Guay, guay@wharton.upenn.edu, University of Pennsylvania
*
Guay (corresponding author), guay@wharton.upenn.edu

Abstract

Prior research has examined the firm-level performance implications of “busy” boards. Firm-level analysis, however, masks important heterogeneity in the time constraints and expertise of individual busy directors. We develop and validate shareholder voting as a proxy for shareholders’ satisfaction. Our director-specific tests provide compelling evidence that the potential costs of busy directors outweigh their benefits. At the same time, we uncover new sources of heterogeneity among busy directors. For example, the downsides are more pronounced for directors who sit on boards where fiscal year ends cluster in the same month. Our analysis highlights the role of shareholder voting in board composition research.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Jennifer Altamuro, Jere Behrman, Fabrizio Ferri, Susanna Gallani (discussant), Paul Malatesta (the editor), Shane Murphy, Daniel Taylor, Ken Teoh, and Ralph Walkling (the referee) for helpful discussions and suggestions. We also thank seminar participants at the American University of Cairo, Tulane University, The Wharton School, and the 2018 FARS Midyear Meeting. We gratefully acknowledge financial support from the Wharton School of the University of Pennsylvania.

References

Adams, R. B.; Hermalin, B. E.; and Weisbach, M. S.. “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48 (2010), 58107.10.1257/jel.48.1.58CrossRefGoogle Scholar
Adams, R. B.; Ragunathan, V.; and Tumarkin, R.. “Death by Committee? An Analysis of Corporate Board (Sub-) Committees.” Working Paper, available at https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2736027 (2018).10.2139/ssrn.2736027CrossRefGoogle Scholar
Ahn, S.; Jiraporn, P.; and Kim, Y. S.. “Multiple Directorships and Acquirer Returns.” Journal of Banking & Finance, 34 (2010), 20112026.10.1016/j.jbankfin.2010.01.009CrossRefGoogle Scholar
Armstrong, C. S.; Guay, W. R.; Mehran, H.; and Weber, J. P.. “The Role of Financial Reporting and Transparency in Corporate Governance.” Federal Reserve Bank of New York Economic Policy Review, 22 (2016), 107.Google Scholar
Bates, T. W.; Becher, D. A.; and Wilson, J. I.. “Performance-Based Turnover on Corporate Boards.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3190588 (2017).Google Scholar
Cai, J.; Garner, J. L.; and Walkling, R. A.. “Electing Directors.” Journal of Finance, 64 (2009), 23892421.10.1111/j.1540-6261.2009.01504.xCrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Boards: Does One Size Fit All?Journal of Financial Economics, 87 (2008), 329356.10.1016/j.jfineco.2006.08.008CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Board Advising.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2002250 (2014a).Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, 27 (2014b), 17511796.10.1093/rfs/hhu011CrossRefGoogle Scholar
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371406.10.1016/S0304-405X(98)00058-0CrossRefGoogle Scholar
Dass, N.; Kini, O.; Nanda, V.; Onal, B.; and Wang, J.. “Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap?Review of Financial Studies, 27 (2014), 15331592.10.1093/rfs/hht071CrossRefGoogle Scholar
Ertimur, Y.; Ferri, F.; and Oesch, D.. “Shareholder Votes and Proxy Advisors: Evidence from Say on Pay.” Journal of Accounting Research, 51 (2013), 951996.10.1111/1475-679X.12024CrossRefGoogle Scholar
Ertimur, Y.; Ferri, F.; and Oesch, D.. “Understanding Uncontested Director Elections.” Management Science, 64 (2017), 34003420.CrossRefGoogle Scholar
Falato, A.; Kadyrzhanova, D.; and Lel, U.. “Distracted Directors: Does Board Busyness Hurt Shareholder Value?Journal of Financial Economics, 113 (2014), 404426.CrossRefGoogle Scholar
Faleye, O.; Hoitash, R.; and Hoitash, U.. “The Costs of Intense Board Monitoring.” Journal of Financial Economics, 101 (2011), 160181.CrossRefGoogle Scholar
Ferri, F., and Oesch, D.. “Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay.” Contemporary Accounting Research, 33 (2016), 13371374.10.1111/1911-3846.12228CrossRefGoogle Scholar
Ferris, S. P.; Jagannathan, M.; and Pritchard, A. C.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 58 (2003), 10871111.10.1111/1540-6261.00559CrossRefGoogle Scholar
Fich, E. M., and Shivdasani, A.. “Are Busy Boards Effective Monitors?Journal of Finance, 61 (2006), 689724.CrossRefGoogle Scholar
Field, L.; Lowry, M.; and Mkrtchyan, A.. “Are Busy Boards Detrimental?Journal of Financial Economics, 109 (2013), 6382.10.1016/j.jfineco.2013.02.004CrossRefGoogle Scholar
Fischer, P. E.; Gramlich, J. D.; Miller, B. P.; and White, H. D.. “Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections.” Journal of Accounting and Economics, 48 (2009), 172189.10.1016/j.jacceco.2009.09.002CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Common Errors: How to (and Not to) Control for Unobserved Heterogeneity.” Review of Financial Studies, 27 (2014), 617661.10.1093/rfs/hht047CrossRefGoogle Scholar
Gumedze, F. N., and Dunne, T. T.. “Parameter Estimation and Inference in the Linear Mixed Model.” Linear Algebra and Its Applications, 435 (2011), 19201944.10.1016/j.laa.2011.04.015CrossRefGoogle Scholar
Hauser, R.Busy Directors and Firm Performance: Evidence from Mergers.” Journal of Financial Economics, 128 (2018), 1637.CrossRefGoogle Scholar
Larcker, D. F.; So, E. C.; and Wang, C. C.. “Boardroom Centrality and Firm Performance.” Journal of Accounting and Economics, 55 (2013), 225250.10.1016/j.jacceco.2013.01.006CrossRefGoogle Scholar
Lublin, J.“Three, Four, Five? How Many Board Seats Are Too Many?” Wall Street Journal (Jan. 20, 2016).Google Scholar
Masulis, R. W., and Zhang, E. J.. “How Valuable Are Independent Directors? Evidence from External Distractions.” Journal of Financial Economics, 132 (2019), 226256.10.1016/j.jfineco.2018.02.014CrossRefGoogle Scholar
Parrino, R.CEO Turnover and Outside Succession a Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165197.10.1016/S0304-405X(97)00028-7CrossRefGoogle Scholar
Perry, T., and Peyer, U.. “Board Seat Accumulation by Executives: A Shareholder’s Perspective.” Journal of Finance, 60 (2005), 20832123.10.1111/j.1540-6261.2005.00788.xCrossRefGoogle Scholar
Smith, C. W., and Watts, R. L.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263292.10.1016/0304-405X(92)90029-WCrossRefGoogle Scholar
Srinivasan, S.Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members.” Journal of Accounting Research, 43 (2005), 291334.CrossRefGoogle Scholar
Stein, L. C., and Zhao, H.. “Independent Executive Directors: How Distraction Affects Their Advisory and Monitoring Roles.” Journal of Corporate Finance, 56 (2019), 199223.10.1016/j.jcorpfin.2019.02.003CrossRefGoogle Scholar