48 Pages Posted: 5 Apr 2017 Last revised: 11 Oct 2017
Date Written: August 1, 2016
When members of a board of directors are distracted by outside obligations, they may be less effective in their advisory and monitoring roles. We consider time-varying attention shocks to independent directors who are primarily employed at outside firms. Using newly constructed data that links directors to their employers, we identify periods when poor performance at a director’s employing firm may distract her from board service. We find that firms with distracted directors have lower performance and value, higher CEO compensation, reduced CEO turnover-performance sensitivity, lower earnings quality, and lower M&A performance. These effects are driven by distracted directors who sit on relevant committees, and are stronger for small boards, where each individual director may be more important. Taken together, our evidence suggests that independent executive directors play an important governance role, but their effectiveness suffers when they are distracted by events at their employing firm. This complements prior research on the adverse effects of director distraction — largely focused on directors who sit on multiple boards — which offers mixed evidence, presumably because these “busy” board members may also be particularly effective ones.
JEL Classification: G34, G32, M12, M41
Suggested Citation: Suggested Citation
Stein, Luke C.D. and Zhao, Hong, Distracted Directors: Evidence From Directors’ Outside Employment (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2946579
By Alex Edmans