Renée B. Adams is Professor of Finance at the University of Oxford’s Saïd Business School; Ali C. Akyol is Senior Lecturer at the University of Melbourne; and Patrick Verwijmeren is Professor of Corporate Finance at the Erasmus School of Economics and the University of Melbourne. This post is based on a recent paper by Professor Adams, Dr. Akyol, and Professor Verwijmeren.
Boards of directors are multi-dimensional and the optimal board combines monitoring and advisory roles to varying degrees. We examine how individual director skills map into these roles. Do directors specialize as “advisors” or “monitors,” or, like boards, do they combine roles? And how do directors’ skills aggregate to the board level—are individual skills independent of each other or do they complement/substitute each other? The answers to these questions are important for understanding what boards do, why they are structured the way they are, and how they can be improved.
In our paper, we answer these questions by exploiting an amendment to Regulation S-K in 2009, which requires public U.S. firms to describe their reasons for nominating directors. According to this rule, firms have to disclose the skills they believe each director brings to the table. A particular strength of these data is that the descriptions represent the firm’s perspective rather than a perspective chosen by researchers. The data allow us to document the skills that directors have and allow us to test how these skills cluster at the board level. We then examine whether some boards have skill sets that lead them to systematically outperform other boards.
