Abstract
Prior research provides two opposing theories as to whether having corporate directors that serve on multiple boards is beneficial or harmful to governance effectiveness. One line of prior research tests the ‘Busyness Hypothesis’, which states that as directors accept additional outside directorships, they become overcommitted or distracted, resulting in a decrease in governance effectiveness. Alternatively, the ‘Experience Hypothesis’ predicts that as directors accept additional directorships, they gain valuable experience which results in an increase in governance effectiveness. But past research has provided conflicting results regarding the above two hypotheses. In this article, we predict that both effects may occur simultaneously, but that governance effectiveness will be enhanced for directors who gain what we label ‘beneficial experience’ from outside board service. We maintain that directors may gain beneficial experience by serving on outside boards of companies that are comparatively larger. We further argue that this beneficial experience will be stronger for directors of small companies. Using a company’s reported internal control weaknesses as our proxy for corporate governance effectiveness, we find that governance effectiveness may be enhanced by encouraging directors to serve on outside boards of companies that are comparatively larger. In addition, we find that this increase in governance effectiveness is more pronounced for directors of small companies than for directors of large companies. Such information should be useful to board members, management, investors, or other stakeholders that have an interest in whether members of a board of directors should pursue additional outside board memberships.
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1PhD, CPA, is an associate professor of accounting at Abilene Christian University. He teaches cost accounting and has published articles in the Journal of Business Ethics, International Journal of Corporate Governance, Journal of Accounting and Public Policy, Journal of Information Systems, Internal Auditing, Journal of Applied Business Research, and Strategic Finance.
2PhD, CPA, is a professor of accounting at Abilene Christian University. He teaches advanced accounting and his publications include articles in the Journal of Business Ethics, Corporate Governance: An International Review, International Journal of Corporate Governance, Journal of Accounting Literature, Accounting Horizons, Financial Analysts Journal, and the Journal of Accounting, Ethics, and Public Policy.
3PhD, CPA, CFE, is a professor of accounting at Abilene Christian University. He teaches financial accounting and auditing and has published articles in the International Journal of Corporate Governance, Journal of Applied Business Research, Journal of Accounting and Finance Research, Journal of International Financial Management and Research, Journal of Corporate Accounting & Finance, Decision Sciences, and The Journal of the American Taxation Association.
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Clements, C., Neill, J. & Wertheim, P. The impact of company size and multiple directorships on corporate governance effectiveness. Int J Discl Gov 12, 354–371 (2015). https://doi.org/10.1057/jdg.2015.1
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DOI: https://doi.org/10.1057/jdg.2015.1