The relationship between director tenure and director quality
- 4 Downloads
This study seeks to determine whether corporate directors become less effective over time and whether term limits should be placed on their service as corporate board members. Using a sample of over 29,000 firm-year observations, we find a significant positive association between director tenure and director quality at low and intermediate levels of director tenure and a significant negative association at higher levels of director tenure. We also find that the negative effects of having long-tenured directors vary across companies based on certain firm-specific characteristics. We extend prior research in several ways. First, we employ a unique measure of director quality that we calculate by adopting the ranking methodology of the Google PageRank algorithm. Second, in our analysis, we separate directors’ total tenure on corporate boards into what we call “inside tenure” and “outside tenure.” A third contribution is that we demonstrate that the curvilinear relationship between director tenure and director quality differs depending on certain firm-specific characteristics. Our results imply that term limits need to be considered since director quality tends to decrease in the latter years of a director’s service. However, our results demonstrate that not all firms experience the negative effects of director entrenchment equally. Therefore, it would not be appropriate, based on our results, to recommend a specific maximum number of years of service that would apply for all corporate directors.
KeywordsCorporate governance Director tenure Board composition Director evaluation
- Beasley, M.S. 1996. An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review 71(4): 443–465.Google Scholar
- Borus, A. 2013. More on CII’s new policies on universal proxy and board tenure. Council of Institutional Investors. www.cii.org/article_content.asp?article=208. Accessed 12 Jan 2017.
- Coca-Cola Company. 2015. Corporate governance guidelines. http://www.coca-colacompany.com/investors/corporate-governance-guidelines. Accessed 12 Jan 2017.
- Cooper, D., and S.M. Thatcher. 2010. Identification in organizations: The role of self-concept orientations and identification motives. Academy of Management Review 35(4): 516–538.Google Scholar
- Council of Institutional Investors. 2016. Corporate governance policies. http://cii.membershipsoftware.org/files/policies/09_30_16_corp_gov_policies.pdf. Accessed 12 Jan 2017.
- Fiegener, M., J. Nielsen, and J.R. Sisson. 1996. Tenure characteristics of outside directors and financial performance: Results from the banking industry. American Business Review 14(1): 89–96.Google Scholar
- General Electric Company. 2016. Governance principles. https://www.ge.com/sites/default/files/GE_governance_principles_2016_2.pdf. Accessed 12 Jan 2017.
- General Motors. 2016. Corporate governance guidelines. http://www.gm.com/content/dam/gm/en_us/english/Group4/InvestorsPDFDocuments/Corporate_Governance_Guidelines.pdf. Accessed 12 Jan 2017.
- Heidrick and Struggles. 2007. 10th annual corporate board effectiveness study. Los Angeles: Heidrick & Struggles and USC/Center for Effective Organizations.Google Scholar
- Huang, S. 2013. Zombie boards: Board tenure and firm performance. Working paper, INSEAD Business School. http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2302917. Accessed 12 Jan 2017.
- Institutional Shareholder Services. 2015. ISS governance QuickScore 3.0. https://www.issgovernance.com/file/products/qs-technical-document-20151030.pdf. Accessed 12 Jan 2017.
- Katz, D. A., and L. A. McIntosh. 2014. Renewed focus on corporate director tenure. New York Law Journal. http://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.23346.14.pdf. Accessed on 12 Jan 2017.
- Libit, W.M., and T.E. Freier. 2016. Advancing board refreshment through the director succession planning process. Chapman Insights: Corporate Governance Quarterly Update 2: 1–6.Google Scholar
- Musteen, M., D.K. Datta, and B. Kemmerer. 2010. Corporate reputation: Do board characteristics matter? British Journal of Management 21(2): 498–510.Google Scholar
- National Association of Corporate Directors. 2011. Key agreed principles to strengthen corporate governance for U.S. publicly traded companies. https://www.nacdonline.org/Resources/Article.cfm?ItemNumber=2686. Accessed 12 Jan 2017.
- PNB General Insurers Co. 2014. Corporate governance manual. http://www.pnbgen.com/images/stories/docs/0%20-%20Corporate%20Governance%20Manual.pdf. Accessed 12 Jan 2017.
- Scotiabank. 2016. Corporate governance policies. http://www.scotiabank.com/ca/common/pdf/about_scotia/Corporate_Governance_Policies.pdf. Accessed 12 Jan 2017.
- Turner, J.C. 1982. Towards a cognitive redefinition of the social group. In Social identity and intergroup relations, ed. H. Tajfel, 15–40. Cambridge: Cambridge University Press.Google Scholar
- Zahra, S., and W.W. Stanton. 1988. The implications of board of directors’ composition for corporate strategy and performance. International Journal of Management 5: 229–236.Google Scholar