Directors frequently hold multiple board seats, simultaneously lending their expertise to the boards of multiple firms. Director “busyness” is often thought to be detrimental to firm performance, as it leaves directors with insufficient time to devote to their duties at each firm. However, multiple directorships also foster valuable connections among firms that facilitate the flow of information and resources across boards.
There are challenges in trying to assess whether multiple directorships are beneficial or detrimental to firm performance. For example, directors with the highest ability tend to be sought after to serve on multiple boards. These directors may perform adequately despite their time constraints but would perform better if they held fewer board seats. Alternatively, firms may seek out busy directors, because they need the connections that these directors provide or because they desire a time-constrained director who will not be able to properly monitor CEO behavior. It is therefore difficult to measure whether multiple directorships are ultimately beneficial or detrimental to firms.
In an article forthcoming in The Accounting Review, we exploit a shock to multiple directorships in order to clarify how multiple directorships affect firm performance. In M&A, the target firm’s board is generally dissolved. Therefore, directors serving on the boards of target firms will lose one board seat and gain additional time to devote to remaining board seats. However, directors serving on the boards of well-connected target firms will likely lose access to the benefits of serving on these well-connected boards, i.e., the information and resources gained from serving on that board. This setting allows us to assess whether a reduction in busyness is beneficial to directors’ performance on remaining boards, or whether losing access to board connections is detrimental to their performance.
We examine the effects on director-interlocked firms, defined as firms on whose boards directors still serve after losing one board seat due to M&A. First, we find that operating performance improves, on average, at director-interlocked firms after the reduction in director busyness due to M&A. This means that, on average, most firms benefit when directors have more time to devote to their duties. Next, we look at how well-connected the target firm board was before the M&A. We find that firms with directors who lost access to the most well-connected target firm boards experience no effect or negative effects on their performance. Firms where directors lost access to the least well-connected target firm boards show the greatest improvements in performance. We conclude that a reduction in director busyness is usually beneficial to firm performance. However, when directors lose access to a very well-connected board, the negative effect of the loss of access to valuable board resources cancels out any benefits of reduced busyness.
We also look at the effects on two primary oversight roles of the board of directors: monitoring financial reporting quality and advising senior management on investing and strategy decisions. We find that measures of both monitoring and advising improve, on average, at director-interlocked firms after M&A. We find that advising is significantly affected by board connections: Boards with directors who lose access to the most board connections experience no effect or negative effects on their ability to advise management, while those with directors who lose access to the least board connections experience the most positive effect on their ability to advise. This relationship doesn’t hold for monitoring: Board connections do not appear to have significant effects on the board’s ability to monitor. We therefore conclude that connections across boards are especially important for advising over strategy, but monitoring over financial reporting quality is most strongly related to a director’s busyness.
Finally, we separately examine how executive directors (that is, directors who also serve as a CEO or CFO) are affected by a reduction in workload and connections. We find that director-interlocked firms with executive directors whose workload is reduced show less improvement in firm performance and monitoring financial reporting quality than do firms with non-executive directors who become less busy. We conclude that executive directors are less likely to allocate additional time to board duties when they experience a reduction in workload, possibly because they are more focused on their executive duties.
In summary, we exploit a shock to multiple directorships to show that a reduction in director busyness is usually beneficial to firm performance, as well as the director’s monitoring and advising. However, for directors losing access to the most well-connected boards concurrently with the reduction in busyness, the effects on firm performance and advising are null or even negative. We therefore show that in order to assess the costs and benefits of multiple directorships, researchers, practitioners, and policymakers must jointly consider the effects of board busyness and connections. These findings should be of interest to institutions, many of whom place recommended or required limitations on the number of board seats directors hold.
This post comes to us from Professor Anna Bergman Brown at the University of Connecticut, Jing Dai, a doctoral candidate at CUNY Baruch College, and Professor Emanuel Zur at the University of Maryland’s Robert H. Smith School of Business. It is based on their recent article, “Too Busy or Well-Connected? Evidence from a Shock to Multiple Directorships,” available here.