Searching for Directors

Abstract

Does it matter who identifies and proposes a new board member? We exploit a 2003 Securities
and Exchange Commission (SEC) disclosure rule to identify the source recommending new
independent directors (NID) appointed to corporate boards. We document that disclosure of the source of recommendation is missing for 74% of NID – suggesting a high degree of non-compliance. Among those with disclosed sources, 44% are recommended by search firms, 30% by current independent directors, and 20% by CEO and other executives – with the role of search firms increasing in recent years as the push for board diversity intensified. Next, we explore whether the "origin" of the NID is systematically associated with their characteristics and their subsequent progression on the board. We find that boards turn to search firms when they need to go beyond their immediate network and look for candidates with greater executive expertise, or to diversify the board along dimensions of gender and race. As for candidates recommended by the CEO, there is some support for the notion that CEOs try to bring on the board loyal directors. For example, CEO-recommended NID tend to receive higher shareholder voting dissent during their tenure (i.e., they take a more management-friendly stance).
Notably, three years after their appointment CEO-recommended NID tend to enjoy greater progress on the board and its committees (e.g., in terms of chair positions), relative to search firm-recommended NID. Our results are generally robust to the selection bias issue due to non-compliance. Overall, our evidence suggests that the "origin" matters, in that it affects the characteristics of NIDs appointed, as well as their subsequent behavior and their ability to gain influence on the board. We discuss implications for policy makers and investors.

Keywords: board of directors, director recruiting, director nomination, board diversity, search firms

JEL Classification: G34, G30, M40