Busy Directors and Shareholder Satisfaction

Wayne R. Guay is the Yageo Professor of Accounting and Kevin D. Chen is a doctoral candidate at The Wharton School of the University of Pennsylvania. This post is based on their recent paper.

The job of a corporate director has become increasingly time consuming. The Wall Street Journal recently reported that the director of a public firm spends an average of 248 hours a year on each board, up from 191 hours in 2005. In light of this growing time demand, corporate directors face increasing investor scrutiny regarding the number of boards on which a given director sits. Prior research has examined the firm-level performance implications of corporate boards that have a large proportion of “busy” directors. However, there are several difficulties in these studies. In particular, firm-level analysis masks important heterogeneity in the time constraints and the expertise benefits of busy directors. For example, sitting on three boards might be excessive for a director with a full-time job, but it might be reasonable, or even optimal, for an individual who is retired. Also, certain firms (e.g., less experienced firms) may benefit more from the expertise and advising of a busy director. Furthermore, there may be omitted firm-level characteristics that are driving both director busyness and firm performance, which suggests that an observed positive (negative) association between director busyness and good (poor) firm performance does not necessarily imply that busy directors are beneficial (detrimental) to shareholders.

In our paper, Busy Directors and Shareholder Satisfaction, we move away from firm-level tests of the performance of busy boards, and instead examine the relations between individual busy directors, their heterogeneous characteristics, and shareholder satisfaction. To measure shareholder satisfaction, we use shareholder voting outcomes in annual director elections. Our approach has several distinctive features that allow us to overcome the difficulties of prior studies. First, shareholder voting is measured at the director-level which allows us to incorporate individual director characteristics into our analysis. Second, we use “within-firm-year” and “within-director-year” research designs. The within-firm-year design uses variation in shareholder voting for directors at a given firm within a given year. This allows us to fully account for the confounding effects of firm characteristics that may be present in prior analyses. The within-director-year design uses variation in firm characteristics among the boards on which a director sits in a given year. This approach allows us to identify differences in shareholder satisfaction across different types of firms for the same director in a given year, and thus can help isolate the heterogeneity in the effect of busyness as a function of firm characteristics.

On average, shareholders perceive that the costs of busy directors exceed their benefits. The percentage of “For” votes that a busy director receives is, on average, about one percentage point lower than that of a non-busy director. This is 28% of the standard deviation of within-board shareholder voting across firms. Importantly, this drop in shareholder satisfaction for busy directors holds when controlling for various observable director characteristics, such as age, tenure, gender, retirement status and committee membership, and all observable and unobservable firm characteristics through the within-firm-year design. This distinguishes our finding from firm-level analysis of busy boards which do not fully control for individual director characteristics and unobservable firm characteristics. The result also holds when controlling for the influence of proxy advisory firm recommendations, indicating that shareholders appear to penalize busyness over and beyond ISS policy recommendations. Moreover, the effect of director busyness on shareholder satisfaction is stronger in the second half of our sample period, which is consistent with common perceptions that time demands for directors have increased in recent years.

We next examine the heterogeneity among individual busy directors and whether “busyness” is more or less acceptable to shareholders for certain types of directors. Clearly, one of the primary concerns with a busy director is the time constraints that multiple directorships can impose on the individual’s ability to diligently monitor and advise management. Across an array of proxies for director time constraints, we find strong evidence that busy directors with greater (lesser) external time demands receive lower (higher) shareholder satisfaction. Specifically, we find that busy directors who are retired from full-time employment receive greater shareholder satisfaction, while busy directors who are executives at another firm receive lower satisfaction. Busy directors also receive lower shareholder satisfaction when a greater proportion of their boards have the same fiscal-year-end (FYE) month. Boards with the same FYE month are likely to be busy at similar times during the year, which increases the time constraints of directors serving on those boards. Finally, directors receive lower satisfaction when they serve on a greater number of external board committees (e.g., audit, compensation, nominating).

Our final set of tests, using the within-director-year design, examines how the expertise benefit of busy directors varies as a function of a firm’s advising and monitoring needs. Adams et al. (2010) suggest that busy directors are of a “higher quality” than non-busy directors, which presumably comes from some combination of their greater skill, experience or wider network of contacts. These traits can improve the ability of a director to provide useful advice and/or monitor executive behavior (Coles et al., 2012). At the same time, busy directors may be “spread too thin” to effectively provide executives with detailed guidance or to engage in the due diligence necessary to effectively monitor management (Fich and Shivdasani, 2006). Consequently, the advising and monitoring effectiveness of busy directors is an empirical question, which may vary across firms depending on the demands for these roles from directors.

Using the within-director-year design, we are able to examine whether certain firms (e.g., less experienced firms) may benefit more from the expertise and advising of the same busy director. This design allows us to isolate the differences in shareholder satisfaction for busy directors that arise from firm advising and monitoring needs, rather than director characteristics. We find that shareholders are more supportive of busy directors at younger firms and firms with greater growth opportunities (firms predicted to demand more advising), and are less supportive at firms where CEOs hold less equity (firms predicted to demand more monitoring). These results suggest that effective advising, as compared to effective monitoring, may rely more on director ability, whereby the latter may suffer more from director time constraints.

Collectively, our results provide insight on the longstanding debate about busy directors’ performance and the tradeoffs between their potentially higher ability and tighter time constraints. Our results also suggest that shareholder voting is more nuanced than documented in prior studies (e.g., Cai et al., 2009). In particular, we find that shareholders are quite sophisticated with their director voting in that they appear to respond to director-specific variation in time constraints (e.g., number of additional boards, employment characteristics, overlapping fiscal-year ends for board responsibilities, committee responsibilities). Shareholders also seem to recognize that busy directors may be more beneficial when the firm has relatively high advising needs.

The complete paper is available for download here

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