Are Foreign Directors Valuable Advisors or Ineffective Monitors?

Abstract:     
During the period of 1998 to 2006, over 13% of large U.S. public corporations have independent directors domiciled in foreign countries. We find that firms appointing foreign independent directors (FIDs) experience significantly negative announcement-period abnormal stock returns and the presence of FIDs leads to significant lower firm performance and value. Further analyses reveal that FIDs are more likely to miss board meetings than U.S. based directors and firms with FIDs on board give their CEOs excessively high compensation and are more prone to commit financial misreporting that requires future restatement. Overall, our findings support the conjecture that FIDs’ geographic location creates significant logistical and informational problems hindering their ability to engage in the governance of firms, and as a result, they undermine board effectiveness and lead to more agency problems and poor firm performance. We find only limited evidence that firms benefit from the international perspective and expertise of FIDs.

Keywords: Corporate governance, boards of directors, foreign directors

JEL Classifications: G34

Working Paper Series