Better directors or distracted directors? An international study of directors with multiple board appointments.

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.  Some studies contend that directors obtain valuable experience from their multiple board appointments as well as build professional networks that make them desirable board members. This reputation hypothesis suggests that multiple directorships are signals of quality and as such have a positive effect on firm value and performance. Others argue that multiple directorships increase the workload of directors and thus adversely influence the firm’s performance and value. This busyness hypothesis suggests that these directors become over-committed in time and thus are unable to provide the diligent monitoring required of their positions.

In a forthcoming article, Dr. Stella Liao and her coauthors find that the market reacts negatively to the announcement of an acquisition by a firm whose board is busy. The authors further discover that there is a level of busyness where the advantages due to reputation and experience shift and turn to disadvantages because of overcommitment.  They also show that the labor market does not reward directors with additional board seats for merger success. It does, however, penalize directors with seat loss for approving bad mergers. Thus, a bad merger is more adverse to a director’s ability to gain a new board seat than a good merger is beneficial. These results provide support for policy recommendations and practices that limit board appointments. The results also suggest that the knowledge and networking advantages of busy directors provide value to the firm only up to a point. Beyond that, the overcommitment and time demands on these busy directors erode their ability to contribute to firm value.

Ferris, S., Jayaraman, N., & Liao, M. (Forthcoming) " Labor Market Consequences for Busy Directors: Evidence from Merger and Acquisition Decisions."  Journal of Financial Research.