Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?
55 Pages Posted: 7 Mar 2012 Last revised: 25 Nov 2013
Date Written: November 14, 2013
We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship’s relative prestige. When directors experience an exogenous increase in a directorship’s relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced CEO departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.
Keywords: director incentives, busy directors, labor markets, firm reputation, firm performance
JEL Classification: G30, G32, G34, D23
Suggested Citation: Suggested Citation