Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?

55 Pages Posted: 7 Mar 2012 Last revised: 25 Nov 2013

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Shawn Mobbs

University of Alabama - Culverhouse College of Commerce and Business Administration

Date Written: November 14, 2013

Abstract

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

Masulis, Ronald W. and Mobbs, Shawn, Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy? (November 14, 2013). Journal of Financial Economics (JFE), Forthcoming; AFA 2013 San Diego Meetings Paper; ECGI - Finance Working Paper No. 355/2013. Available at SSRN: https://ssrn.com/abstract=2017977 or http://dx.doi.org/10.2139/ssrn.2017977

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Shawn Mobbs (Contact Author)

University of Alabama - Culverhouse College of Commerce and Business Administration ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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