Busy Directors and Shareholder Satisfaction

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.

Board busyness and firm productivity

“…In other words, 33% of the boards in the sample are busy. The value is relatively higher than those (20–27%) reported in prior literature (e.g., Perry and Peyer, 2005; Chen and Guay, 2018; Moursli, 2019).…”

“…Research method 3.1 Board busyness As previously mentioned, board busyness is frequently defined as outside directors who serve on three or more boards. Thus, following prior studies (e.g., Chen and Guay, 2018), the measure of board busyness (BB) is the proportion of the directors on a board who are busy, i.e., sit on three or more boards. Specifically, BB is the number of outside directors who hold three or more board appointments scaled by the number of directors on the board.…”

“…On the other hand, the board busyness develops opportunities for directors to gain a wide range of experience and knowledge by serving in governance capacities at other firms (e.g., Chen and Guay, 2018) and thus, to enhance skills, refine the processes of decision-making, and observe best practices at other firms. Hence, board busyness can be viewed as high competencies (Cuadrado-Ballesteros et al , 2017; Brown et al , 2019).…”

“…Generally, the term board busyness refers to the state in which a board of directors includes directors who serve on at least three firms (e.g., Falato et al , 2014). Therefore, to measure board busyness, following prior research (e.g., Chen and Guay, 2018), current paper computes the percentage of directors on a board who sit on three or more boards. Furthermore, the term firm productivity refers to the efficiency of transforming input to output in the business process (Banker et al , 1984).…”

Equity Carve-Outs, Dual Directors, and Internal Labor Markets

“…Indeed, Feldman (2016) found dual directors displaying a tendency to expropriate the wealth of minority shareholders in spinoff firms. In addition, busy boards have been documented to be less effective in terms of monitoring function (Chen and Guay 2020;Core et al 1999). Using the sample of Forbes 500 firms, Fich and Shivdasani (2005) found that firms with busy outside directors are associated with lower profitability and firm value.…”