Experienced Independent Directors
45 Pages Posted: 28 Mar 2013
Date Written: March 22, 2013
Serving as an independent director requires skills to effectively interact with management in a short period of time and obtain information necessary to perform the advising and monitoring duties. Inexperienced directors may have difficulty gaining efficiency until they learn by doing. Based on a sample of non-regulated S&P 1500 firms over the period 2000-2009, I find that independent directorship experience, measured by the fraction of independent directors among the board who have more than or equal to five years of independent directorship experience in any firm in the past, is a better measure of board quality than the board independence. Independent director experience increases firm value when a firm operates in a non-competitive industry, has suffered from bad performance, or the firm’s operation is complex, all of which suggest the need for board involvement is high. I find no evidence that board independence, the traditional measure of board quality, has such beneficial influence on firm performance after controlling for the independent directorship experience. Independent directorship experience also increases forced CEO turnover-performance sensitivity, muting the influence from board independence. My results are robust to the use of firm- and year-fixed effects, IV regression, alternative measures of independent director experience, and various board quality measures as control variables.
Keywords: independent director, board quality, director experience, board independence, corporate governance
JEL Classification: G32, G34
Suggested Citation: Suggested Citation