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

Abstract

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.LABOR MARKET DISCIPLINEFBY MEANS of ex post settling upFcan motivate managers and directors to act in the interests of the shareholders of the firms they serve (e.g., Fama and Jensen (1983)). If the labor market, either internal to the firm or externally, provides opportunities that managers and directors care about, and the availability of those opportunities is sensitive to ''on-the-job'' performance, then the incentives of managers and directors will be aligned, at least somewhat, with shareholder interests. On the other hand, if performance has little connection to future opportunities, then the incentive effects of the labor market are minimal and shareholders must rely on other mechanisms to align the incentives of managers and directors with shareholder interests.In this paper, we use the passage of Pennsylvania Senate Bill 1310 (hereafter SB1310, Act, or Bill) and related events to investigate the operation of the labor market for directors. In particular, we study the relation between the decision by boards of Pennsylvania companies covered by the Bill to reject or retain antitakeover provisions of SB1310 and subsequent service by those board members as directors. Our study is quite broad in that we include both executive and nonexecutive directors and subsequent service both on the board of the relevant Pennsylvania firm and on boards of other companies.The sample contains approximately 1,000 directors of the Pennsylvania firms examined in Szewczyk and Tsetsekos (1992) and Wahal,Wiles, and Zenner (1995). We track the board service of these directors for three years following the enactment of SB1310. We find a statistically significant and economically important relation between a board's decision to reject or retain protective provisions of the Act and directors' subsequent service on boards of directors.On average, directors of firms that rejected all or some of the law's antitakeover provisions gain external directorships over the three years after SB1310. This effect is driven by the subsample of nonexecutive directors 1 (i.e., directors who are not CEO, president, chairman, a family member, or any other current or recent member of management), and the effect is not statistically significant in the subsample of executive directors. In our multivariate formulation, nonexecutive directors are almost three times as likely to obtain at least one additiona...

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