The Role of Prestige and Networks in Outside Director Appointments

43 Pages Posted: 19 Sep 2006

See all articles by Tom Kirchmaier

Tom Kirchmaier

London School of Economics - Centre for Economic Performance; Copenhagen Business School

Michael Gabor Kollo

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: August 20, 2007

Abstract

We study the role of prestige and social networks in the selection of outside directors, and the subsequent effect on firm value. Both prestige and social networks may act as barriers to good corporate governance, as merit based candidates might be disadvantaged when compared to candidates with a similar social background to the incumbent board. We use the distinctive British tradition of awarding Lords and Sirs titles to distinguished individuals as a proxy for prestige of outside directors, and by combining these with a uniquely detailed database of UK directors, their identities and social networks, we find evidence of self-selection amongst outside directors that hold the same title. Contrary to popular suspicion, appointments of prestigious outside directors have no effect on firm value, with the exception of appointments to very large boards, where prestige of outside directors helps to break group think. We find that titled directors are more likely to hold more directorships, and retire later from their positions. In addition to prestige, a director's professional qualifications and higher education are positively related to the number of directorships they hold. We find no evidence that a shared social network or prestige of outside directors is contrary to shareholder interests.

Keywords: Outside Director Characteristics, Board Appointment, Corporate Governance

JEL Classification: G34

Suggested Citation

Kirchmaier, Tom and Kollo, Michael Gabor, The Role of Prestige and Networks in Outside Director Appointments (August 20, 2007). Available at SSRN: https://ssrn.com/abstract=930914 or http://dx.doi.org/10.2139/ssrn.930914

Tom Kirchmaier (Contact Author)

London School of Economics - Centre for Economic Performance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 207 955 6854 (Phone)

HOME PAGE: http://https://sites.google.com/site/tomkirchmaier/home

Copenhagen Business School ( email )

Porcelænshaven 24A, 3rd floor
Copenhagen
Denmark

Michael Gabor Kollo

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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