Do Outside Directors Face Labor Market Consequences? A Natural Experiment from the Financial Crisis

Abstract

The exogenous shock of the financial crisis made shareholders and regulators particularly attuned to financial firm performance. We thus use the financial crisis as a natural experiment to study labor market consequences for outside directors at banks and other financial companies. Examining 6,507 director years at bank and financial companies over the period from 2006 to 2010 we find that outside director turnover at financial firms is negatively correlated to lagged variables for stock returns. However, the increased chance of being replaced for poor performance is only 0.99% for a one standard deviation change in performance compared to 0.59% at non-financial firms, in either case an arguably trivial amount. We also find limited evidence of salience with respect to the financial crisis. We draw on these empirical findings to assess current board-centered responses to the financial crisis and their failings.

Keywords: board of directors, financial institutions, financial crisis, labor market for directors, board turnover, corporate governance, outside directors