Better Directors or Distracted Directors? An International Analysis of Busy Boards

Stephen P. Ferris is Professor and Director of the Financial Research Institute at the University of Missouri’s Scheller College of Business. Narayanan Jayaraman is Professor of Finance at Georgia Institute of Technology’s Scheller College of Business. Min-Yu (Stella) Liao is Assistant Professor at the Illinois State University. This post is based on a recent paper by Professor Ferris, Professor Jayaraman, and Professor Liao.

The issue of multiple directorships on corporate boards has come under increasing scrutiny from both academicians and practitioners. There is conflicting evidence in the academic literature about the impact of multiple directorships on firm value and performance. Core, Holthausen, and Larcker (1999) report that busy directors require an excessively high level of compensation, which in turn, leads to poor firm performance. Ferris, Jagannathan, and Pritchard (2003) find, however, no relation between the number of directorships held by a director and firm valuation as proxied by the market-to-book ratio. This evidence is disputed by Fich and Shivdasani (2006) who report that firms with busy boards exhibit lower market-to-book ratios, reduced profitability, and a weakened sensitivity of CEO turnover to firm performance. More recently, Field, Lowry and Mkrtchyan (2013) hypothesize that busy directors offer advantages for many firms, with such individuals providing significant advising abilities to younger firms. They argue that the positive benefits of busy boards extend to all but the most established firms.

The corporate world, however, appears to see busy directors as ineffective directors. Several practitioner organizations have adopted resolutions limiting the number of directorships held by directors. For instance, Institutional Shareholder Services (ISS) sought to place limits on multiple directorships in 2009. ISS ultimately adopted a policy beginning in 2017 that lowers limits on multiple directorships from six board seats to five. A 2012 survey by Spencer Stuart indicates that three-fourths of S&P 500 firms place restrictions on the number of directorships their directors can hold. Five years prior, in 2007, only 55% of the S&P 500 firms had such limitations. Over the period, 1999 to 2012, the average number of directorships held per director decreases from 5 to 3 for U.S. firms. This change is not only statistically significant, but also economically significant, representing as it does a 40% decrease. Although a similar reduction can be observed for non-U.S. firms, it is not as pronounced as that for U.S. firms.

The corporate finance documents conflicting evidence about the impact of multiple directorships on firm value and performance. It is important to note, however, that this literature is based on an analysis of either exclusively U.S. firms or a single country. For example, DiPietra et al. (2008) find that busy directors are associated with a higher market value of Italian firms. Andres et al. (2013), however, report that German firms with busy directors captured by their social network exhibit lower levels of firm performance. Both studies contend that busy directors are well connected through their social networks, but their findings are contradictory [1] Thus, the literature regarding the international effect of busy boards does not provided unambiguous insights or conclusions.

Yet there are important reasons to believe that both the incidence and effect of multiple directorships demonstrates meaningful international differences. The desirability and social acceptance of sitting on multiple boards can differ across countries due to cultural norms (Hostede, 1980: 1989; Schwartz, 1992). Ethical standards and their ability to influence managerial behaviors are likely to differ across borders. There will also be legal or regulatory differences regarding the ability of individuals to serve simultaneously on multiple boards. The supply of individuals sufficiently skilled and experienced to serve as directors varies across countries. Thus, the very feasibility of such appointments is likely to differ internationally. Finally, the power of the board to influence corporate activities, especially with respect to entrenched or family management is different across countries (Morck and Yeung, 2003; Hu and Kumar, 2004). All of these considerations make the desirability of directors with multiple appointments sensitive to country characteristics and institutions.

Examining the board appointments of a large set of international firms, in our recent paper, we develop four hypotheses regarding the nature of international boards and director busyness. First, we test whether busy boards are a global phenomenon. Second, we investigate the extent to which national cultures might explain the distribution of busy boards across countries. Related to this hypothesis, we examine more thoroughly the effect of existing corporate affiliations or desirable personal characteristics on gaining additional board seats. Our last hypothesis focuses on the extent to which busy directors affect firm value and whether their usefulness is conditional upon firm age.

We find that busy boards are a global phenomenon. Approximately 70% of our sample firms can be categorized as having busy boards. The incidence of busy boards is higher among firms in civil law countries than those headquartered in common law countries. We find that cultural factors help to explain the frequency with which board busyness is observed globally. Specifically, we find that cultures that are more tolerant of power inequalities and emphasize individual accomplishment have a higher incidence of busy boards. Firms headquartered in national cultures that focus more on masculinity and long-term orientation are associated with lower levels of busyness.

We also provide an analysis of what firm and personal factors account for individuals gaining multiple board seats. We find that the performance of the firms on whose boards an individual sits directly affects the number of directorships an individual holds. Further, we determine that directors serving on the boards of larger firms tend to hold more directorships. We discover that personal characteristics also matter, with status as a CEO or possession of an MBA helping an individual to gain additional board seats.

Our results also offer new insight into the ability of busy boards to provide value to their firms. We find that firms with busy boards exhibit lower market-to-book ratios and reduced profitability. Our empirical findings indicate that a one percentage increase in the number of busy independent directors on a board reduces the firm’s market-to-book ratio by 0.35, while its return on assets is about 34% lower.

When we stratify our firms by age, however, we find that the negative effect of board busyness on firm value reverses. Specifically, we determine that the benefits offered by busy directors are much more valuable to younger firms. This evidence is similar to that reported for U.S. IPO firms by Field, Lowry, Mkrtchyan (2013). We conclude that as firms mature, the demand for advising decreases while their demand for monitoring by directors increases. These results are consistent with the notion that busy directors most benefit young firms.

The complete paper is available for download here.

Note: This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. We thank seminar participants and discussants at the 2016 Financial Management Association and the 2017 Financial Management Association, Europe meetings.


1While we follow the current finance literature to construct our board busyness measurements, we acknowledge that board busyness in social networks has gained importance. Sociologists apply mathematical concepts to assess network structures (see Scott, 2000 for an overview). These methods facilitate the assessment of interpersonal relationships and their application to financial data. For example, Barnea and Guedj (2009) generate measures that account for a director’s importance in a social network and find that in firms with more connected directors, the CEO’s remuneration is higher while CEO turnover is less sensitive to firm performance. Subrahmanyam (2008) develops a model that links the optimal number of board memberships to social costs and benefits.(go back)


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One Comment

  1. Robert W. Norris II
    Posted Saturday, September 16, 2017 at 10:51 am | Permalink

    I wonder what David Rubenstein of the Carlyle Group has to say on this matter. Albeit, scratch Duke from the already extinguished list of Corporate involvement he is engaged in and has been for some time. Can you all reach out for a comment from him?

    -R.W.N II