The Role of Prestige and Networks in Outside Director Appointments
43 Pages Posted: 19 Sep 2006
Date Written: August 20, 2007
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
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