Planned Expenditure by WBS Elem

Planned Expenditures by WBS Element
Provide expense or cost breakdown for each WBS element by fiscal year and quarter using the expenditure categories below. Balance expenditures at the WBS level with funds available in Section B.
WBS Element Number Fiscal Year and Quarter Internal Staff Labor Services Develop-ment Tools Software Hardware Materials and Supplies Facilities Tele-communi-cations Training Total
1 2019 Q2 2000 2000
1.1 0
1.2 0
0
2 2019 Q2 5350 40730 46080
2.1 0
2.1.2 0
2.2 0
2.2.1 0
0
3 2019 Q2 352781 352781
3.1 0
3.2 0
3.3 0
0
4 2019 Q2 0
4.1 0
4.2 0
0
5 2019 Q2 4000 1000 5000
5.1 0
5.2 0
5.2.1
0
6 2019 Q2 0
6.1 0
6.2 2019 Q3 5000 5000
6.3 2019 Q3 0
0
7 2019 Q3 100 7850 7950
7.1 0
0
8 2019 Q2 0
0
9 2019 Q4 500 500
9.1 0
9.2 0
9.3 0
0
10 2020 Q1 200 150 350
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Porject Spend Plan
Project Spend Plan
IIn the columns below, document the spending plan by category for each quarter of the fiscal year. Derive these estimates, using the tables in Sections C and D, by summing the cost for all WBS elements that occur during a particular quarter of a fiscal year.
Budget Category FY2019_ QTR 1 FY2019_ QTR 2 FY2019_ QTR 3 FY2019_ QTR 4 FY2020_ QTR 1 FY200_ QTR 2 FY200_ QTR 3 FY200_ QTR 4 FY200_ QTR 1 FY200_ QTR 2 FY200_ QTR 3 FY200_ QTR 4 FY200_ QTR 1 FY200_ QTR 2 FY200_ QTR 3 FY200_ QTR 4
Internal Staff Labor 2000 100 200
Services 358131 5000
Development Tools
Software 4000
Hardware 40730 500
Materials and Supplies 7850
Facilities
Telecommunications 1000 150
Training
Contingency (Risk) 5000 5000
410861 17950 500 350
Total
Planned Expenditures
Planned Expenditures ($000)
200_-0_
FY 2019 FY 2020 FY 200_ FY 200_ Total
Internal Staff Labor 2100 200 2300
Services 363131 363131
Development Tools 0
Software 4000 4000
Hardware 41230 41230
Materials and Supplies 7850 7850
Facilities 0
Telecommunications 1000 150 1150
Training 0
Contingency (Risk) 10000 10000
Total 429311 350 0 0 429661
Funding Source
Funding Source ($000)
2019_20
FY 2019 FY 2020 FY 201_ FY 201_ Total Specific Fund Cite, Grant, or Budget Line number.
500000 10000 510000 Company’s PR fund
General Fund
20000 1000 21000 Company’s Special Projects account
Non-General Fund
10000 10000 20000 Sponsored Advertisements
Special Revenue
0
Other
0
Other
530000 21000 0 0 551000

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investment and a positive association with pay-performance sensitivity.

Electronic copy available at: http://ssrn.com/abstract=1699272

Co-opted Boards

Jeffrey L. Colesa, Naveen D. Danielb, Lalitha Naveenc

September 10, 2013

Forthcoming, Review of Financial Studies

Abstract We argue that not all independent directors are equally effective in monitoring top management. Specifically, directors who are appointed by the CEO are likely to have stronger allegiance to the CEO and will be weaker monitors. To examine this hypothesis, we propose and empirically deploy two new measures of board composition. Co-option is the fraction of the board comprised of directors appointed after the sitting CEO assumed office. Consistent with Co- option serving to measure board capture, as Co-option increases board monitoring intensity decreases: turnover-performance sensitivity diminishes; pay level increases but without a commensurate increase in pay-performance sensitivity; and investment in hard assets increases. Further analysis suggests that even independent directors who are co-opted are less effective monitors. Non-Co-opted Independence––the fraction of the board comprised of independent directors who were already on the board before the CEO assumed office––has more explanatory power for monitoring effectiveness than the traditional measure of board independence. JEL Classifications: G32; G34; K22 Keywords: Corporate governance; Board co-option; CEO entrenchment; Board composition; Board independence __________________________________________________ a W. P. Carey School of Business, Arizona State University, Tempe, AZ., 85287, USA, jeffrey.coles@asu.edu bLeBow College of Business, Drexel University, Philadelphia, PA., 19104, USA, nav@drexel.edu cFox School of Business, Temple University, Philadelphia, PA., 19122, USA, lnaveen@temple.edu The authors are grateful to an anonymous referee, Renee Adams, Christa Bouwman, Vidhi Chhaochharia, Rachel Diana, Dave Denis, Diane Denis, Ben Hermalin, Yan Li, Antonio Macias, David Maber, John McConnell, Darius Palia, Raghu Rau, David Reeb, Oleg Rytchkov, Partha Sengupta, Mike Weisbach (the editor), Jun Yang, and seminar participants at Case Western Reserve University, Lehigh University, Northeastern University, Purdue University, Rutgers University, the Securities and Exchanges Commission, Villanova University, the 2008 American Financial Association meeting, the 2008 Conference on Corporate Governance and Fraud Prevention at George Mason University, the 2008 Financial Management Association meeting, the 2008 Summer Research Conference at Indian School of Business, the 2010 Weinberg Center for Corporate Governance Conference at the University of Delaware, the 2011 SFS Finance Cavalcade, and the 2011 Finance Down Under Conference at the University of Melbourne for helpful comments.

Electronic copy available at: http://ssrn.com/abstract=1699272

1

1. Introduction

The board of directors of a corporation is meant to perform the critical functions of

monitoring and advising top management (Mace (1971)). Conventional wisdom holds that

monitoring by the board is more effective when the board consists of majority of independent

directors. The empirical evidence on the connection between board independence and firm

performance, however, is mixed and weak, as is the evidence on the relation between board

independence and other organizational and governance attributes, such as managerial

ownership.1

One potential reason for the paucity of consistent, significant results is that many

directors are co-opted and the board is captured. In practice, CEOs are likely to exert

considerable influence on the selection of all board members, including non-employee directors.

Carl Icahn, activist investor, asserts quite directly (Business Week Online, 11/18/2005) that

“…members of the boards are cronies appointed by the very CEOs they’re supposed to be

watching.” Likewise, Finkelstein and Hambrick (1989) allege that CEOs can co-opt the board

by appointing “sympathetic” new directors. Hwang and Kim (2009) suggest that CEOs favor

appointees who share similar views or social ties or because there is some other basis for

alignment with the CEO.

Reflecting similar concerns about board capture, subsequent to the Sarbanes Oxley Act of

2002 (SOX) NYSE and Nasdaq adopted listing requirements that substantially reduced the direct

influence of the CEO in the nominating process. Nonetheless, CEOs are likely to continue to be

able to exert some influence on the board nomination process. At the very least, they approve

the slate of directors, and this slate is almost always voted in by shareholders (Hermalin and 1 See Coles, Daniel, and Naveen (2008), Adams, Hermalin, and Weisbach (2010), and Coles, Lemmon, and Wang (2011), for example.

2

Weisbach (1998), Cai, Garner, and Walkling (2009)).2

In this paper, we propose and implement two new measures of board composition, which

we term Co-option and Non-Co-opted Independence. Co-option is meant to capture board

capture. Non-Co-opted Independence, on the other hand, is meant to refine the traditional

measure of board independence as a proxy for the monitoring effectiveness of the board.

We define Co-option as the ratio of the number of “co-opted” (or captured) directors,

meaning those appointed after the CEO assumes office, to board size. The idea is that such co-

opted directors, regardless of whether they are classified as independent using traditional

definitions, are more likely to assign their allegiance to the CEO because the CEO was involved

in their initial appointment. Our measure is meant to reflect the additional behavioral latitude

and managerial discretion afforded a CEO when that CEO has significant influence over some

directors on the board. A related interpretation of Co-option is that it captures the disutility to

the board from monitoring the CEO. Along these lines, Hermalin and Weisbach (1998), in their

model of CEO bargaining with the board, specify director utility as a function of, among other

things, a distaste for monitoring (κ in their model), which for a director is reflected in a “… lack

of independence, at least in terms of the way he or she behaves” (p. 101). Co-option can be

thought of as capturing director aversion to monitoring and lack of independence aggregated to

the board level. Intuitively, Co-option reflects what the CEO can get away with.

Co-option ranges from 0 to 1, with higher values indicating greater co-option and board

capture and greater insulation of the CEO from various efficiency pressures. In our sample,

mean Co-option is 0.47, indicating that on average nearly half of the directors on a board joined

the board after the CEO assumed office. 2 Of course, CEO influence on the nomination process is substantially lower in the relatively few instances where directors are put up for election by dissident shareholders in proxy fights.

3

We predict that a CEO who has co-opted a greater fraction of the board will be less likely

to be fired following poor performance, will receive higher pay, will have lower sensitivity of

pay to performance, and will be able to implement preferred or pet projects even if they are

suboptimal from a shareholder-value perspective. Our findings generally are consistent with

these hypotheses.

First, we find that the sensitivity of forced CEO turnover to firm performance decreases

with co-option. For example, our parameter estimates indicate that CEO-turnover-performance

sensitivity is attenuated by about two-thirds for a one-standard-deviation increase in Co-option.

Second, we find that CEO pay levels increase with board co-option. Of course, higher pay being

associated with higher co-option is not symptomatic of entrenchment if it is compensation for

higher risk borne by the CEO through higher pay-performance sensitivity. Additional evidence,

however, suggests that this is not the case: we find that the sensitivity of CEO pay to firm

performance is generally unrelated to board co-option and even is negatively related to co-option

in some specifications. Finally, we find that investment in tangible assets (the ratio of capital

expenditure to assets) increases with co-option. This is consistent with the idea that CEOs who

have co-opted the board can invest in ways they otherwise would not. For example, in the

absence of effective board monitoring, executives are likely to satisfy their preferences for scale

and span of control, preferences that arise in larger firms for reasons of higher compensation,

control over more resources, and enhanced stature in the industry and community (Jensen

(1986)). Overall, the evidence on turnover, pay, and investment is consistent with the idea that

co-option reduces the monitoring effectiveness of the board.

In all specifications we control for the proportion of independent directors on the board

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Are Busy Boards Effective Monitors?

THE JOURNAL OF FINANCE • VOL. LXI, NO. 2 • APRIL 2006

Are Busy Boards Effective Monitors?

ELIEZER M. FICH and ANIL SHIVDASANI∗

ABSTRACT

Firms with busy boards, those in which a majority of outside directors hold three or more directorships, are associated with weak corporate governance. These firms ex- hibit lower market-to-book ratios, weaker profitability, and lower sensitivity of CEO turnover to firm performance. Independent but busy boards display CEO turnover- performance sensitivities indistinguishable from those of inside-dominated boards. Departures of busy outside directors generate positive abnormal returns (ARs). When directors become busy as a result of acquiring an additional directorship, other com- panies in which they hold board seats experience negative ARs. Busy outside directors are more likely to depart boards following poor performance.

ON DECEMBER 28, 2000, THE WALL STREET JOURNAL reported that Elaine L. Chao would be a nominee for President-elect George W. Bush’s cabinet.1 Only a few days prior to Ms. Chao’s confirmation as labor secretary, another Journal article described a growing trend among firms to limit the number of board seats their directors sit on because serving on too many boards may be detrimental to the quality of corporate governance. Coincidentally, this article also featured Ms. Chao as one of the 10 busiest directors among large U.S. corporations.2 As expected, upon her cabinet confirmation, Ms. Chao resigned her directorships at C.R. Bard, Clorox, Columbia/HCA Healthcare, Dole Foods, Northwest Airlines, and Protective Life.

Ms. Chao’s cabinet appointment permits a case study analysis of the increas- ingly popular notion among shareholder activists, institutional investors, regu- lators, and many corporations that serving on several boards causes directors to be busy, rendering them ineffective monitors of corporate management. Using standard event study methodology, we find that Ms. Chao’s impending depar- ture from the six boards in which she served as an outside director was viewed enthusiastically by investors. Table I shows that the mean 2-day cumulative

∗Fich is with Drexel University and Shivdasani is with the University of North Carolina at Chapel Hill. The paper benefited from comments by participants at the 2005 American Finance Association meetings, the 2004 Financial Research Association conference, and by seminar partic- ipants at Drexel, INSEAD, Seton Hall, North Carolina State, University of North Carolina, and Universidade Catolica de Portugal. The authors thank Anup Agrawal, Stuart Gillan, Bill Greene, Naveen Khanna, Robert Stambaugh, David Yermack, and an anonymous referee for helpful sugges- tions. The authors acknowledge financial support from the Wachovia Center for Corporate Finance.

1 Cummings, Jeanne, and Greg Jaffe (2000), A floated name for cabinet lands with a thud, Wall Street Journal, Eastern Edition, December 28, A12.

2 Lublin, Joann S. (2001), Multiple seats of power—Companies are cracking down on number of directorships board members can hold, Wall Street Journal, January 23, B1.

689

690 The Journal of Finance

Table I Investor Reaction to Elaine Chao’s Cabinet Nomination

Two-day cumulative abnormal returns (CARs) for the firms in which Elaine L. Chao served as an outside director. CARs are computed for all firms around December 28, 2000 (day “0”), the day when the Wall Street Journal first announced that Elaine L. Chao would join President-elect George W. Bush’s cabinet. The sample includes the following firms: C.R. Bard, Clorox, Columbia/HCA Healthcare, Dole Food, Northwest Airlines, and Protective Life. Following her confirmation as secretary of labor, Ms. Chao resigned her directorships in these firms. We report t-statistics and Wilcoxon rank Z-statistics using a two-tailed test for significance.

Mean Positive: Median Returns Days N Return t-Statistic Negative Return Wilcoxon Z

Raw return (−1+0) 6 5.24% 1.99 6:0 4.49% 2.22 Cumulative abnormal (−1+0) 6 3.80% 2.22 6:0 3.05% 1.81

return (CAR)

abnormal return (CAR) is 3.8% (t-statistic = 2.2) and the median CAR is 3.05% (Wilcoxon Z = 1.8). All six firms in the study elicit positive investor reactions at announcement.3

While illustrative, this case study evidence is subject to a number of caveats. Investors might expect the six firms, whose boards Ms. Chao vacated, to benefit from her new political influence. Investors may also reassess the quality of the remaining board members due to a “halo effect” surrounding her nomination. Even if the stock price effect reflects the departure of a busy director, it is likely that the magnitude of this effect is exaggerated due to her status as one of America’s busiest directors. Nonetheless, the evidence is suggestive of a negative impact of busy directors on firm value. Whether this effect holds in a systematic fashion across a broad sample of firms is the focus of this paper.

There is a growing literature that shows that serving on multiple boards can be a source of both valuable experience and reputational benefits for outside di- rectors. Fama and Jensen (1983) note that reputational effects can be important incentives for outside directors. However, there is comparatively little evidence on the costs associated with serving on multiple boards, and the prior research on this topic is inconclusive. Beasley (1996) reports that the probability of com- mitting accounting fraud is positively related to the average number of direc- torships held by outside directors. Core, Holthausen, and Larcker (1999) report that busy directors set excessively high levels of CEO compensation, which in turn leads to poor firm performance. In contrast, Ferris, Jagannathan, and Pritchard (2003) find no relation between the average number of directorships held by outside directors and the firm’s market-to-book ratio.

We extend this literature along several dimensions. We show that inferences on whether multiple board seats held by directors affect firm performance are

3 We check for whether other news events might explain the observed abnormal returns. How- ever, a Lexis-Nexis search around the announcement date fails to uncover release of other signifi- cant corporate news.

Are Busy Boards Effective Monitors? 691

sensitive to how one identifies busy directors. Using measures of the frac- tion of outside directors that are busy, we find that busy boards display pat- terns associated with weaker corporate governance. Our findings differ from those reported by Ferris et al. (2003), who claim that busy boards are as ef- fective as nonbusy boards at monitoring. We argue that their methodolog- ical choices and econometric specification lead to low statistical power for detecting the relation that we document between performance and busy outside directors.

Our base case results use the market-to-book ratio as a measure of firm performance. Given the long tradition of using the market-to-book ratio in this context, this specification enables us to directly compare our findings with prior studies. However, we are sensitive to the concern that market-to-book ratio models may be misspecified, since this measure has a number of alternative interpretations. As a proxy for a firm’s marginal Q ratio, market-to-book ratio also measures a firm’s incentive to invest. In addition, this ratio is also used as a systematic risk factor (Fama and French (1992)). To alleviate these concerns, we supplement our analysis with a number of additional tests that are relatively immune to the specification issues that arise in regressions using the market- to-book ratio.

Our results show that firms in which a majority of outside directors hold three or more board seats have significantly lower market-to-book ratios than firms in which a majority of outside directors hold fewer than three board seats; the magnitude of this effect is economically meaningful. The negative relation between market-to-book ratios and busy outside directors is robust to a wide range of sensitivity tests. We conduct tests to examine the poten- tial endogeneity of busy outside directors with respect to firm performance. Using data on director appointments and departures, we are unable to de- tect any pattern indicating that poor firm performance influences board com- position in a manner that causes a board’s outside directors to become more busy.

As an alternative to using market-to-book ratios, we examine the effect of busy boards on measures of accounting performance. Using panel data regres- sions, we also find that an inverse relation holds between several accounting- based measures of operating performance and a majority of busy outside directors on the board.

Additional evidence that boards dominated by busy outside directors con- tribute to weaker corporate governance comes from an analysis of forced CEO turnover in our sample. We show that boards in which the majority of out- side directors hold three or more directorships are less likely to remove a CEO for poor performance. Consistent with prior research, we find that outside- dominated boards are more likely to remove CEOs for poor performance than inside-dominated boards. However, our results suggest that a significant re- lation between turnover and performance holds only when a majority of out- side directors on the board are not regarded as busy. Our tests reveal that forced CEO turnover is insensitive to firm performance when the majority of outside directors are busy, even if the board is dominated by outside directors.

692 The Journal of Finance

Therefore, the extent to which outside directors are busy appears to be an impor- tant determinant of the effectiveness of outside-dominated boards in corporate governance.

Another piece of evidence comes from analysis of announcements of outside director departures in our broader sample. Similar to the case study evidence for Ms. Chao, abnormal returns (ARs) related to departure announcements of busy outside directors are significantly positive. Indeed, these returns are sig- nificantly higher than the ARs for departures of nonbusy outside directors. In addition, the results also indicate that departures of busy outside directors are viewed particularly favorably when a majority of the remaining outside direc- tors on the board is not busy. Finally, we examine how stock prices respond when an incumbent director acquires an additional board seat. We find that when directors become busy as a result of obtaining a new board seat, stock prices tend to drop for the firms in which they are incumbent directors. More- over, we also find that the decrease in stock price tends to be greater for firms in which the appointment causes the majority of the board’s outside directors to be reclassified as busy.

Collectively, our results indicate that when a majority of outside directors are busy, firm performance suffers. At the same time, substantial evidence from prior studies suggests that the number of board seats held by directors is related to their performance as monitors and is correlated to their reputational capital. Ferris et al. (2003) find that the first appointment of a busy director to a board is good news for shareholders, implying that the enhanced experience or reputation of such directors is beneficial. However, our results suggest that there is also a cost to holding numerous board seats. As the number of outside directors sitting on multiple boards increases, boards are inclined to become distracted and monitoring intensity is likely to suffer. Therefore, our results imply that it may not be optimal for firms to select directors primarily based on the number of other boards they sit on, since this may lead to an overcommitted board.

Our results should not be interpreted as endorsing the recent efforts of in- stitutional investors and corporate governance policy advocates in curbing the directorships held by outside directors for at least two reasons. First, there is substantial evidence that outside directorships tend to be correlated with a director’s reputational capital and that the market for outside directorships provides an important source of incentives for outside directors to serve as monitors. Therefore, attempts to limit the number of outside directorships may reduce the strength of the incentives for some outside directors to engage in effective corporate governance. Second, our results relate primarily to the costs faced by firms that appoint busy outside directors—we are silent on the bene- fits that appointing companies might obtain when their executives join other boards as outside directors. Recent work by Perry and Peyer (2005) shows that sending firms benefit when their executives receive additional directorships, if measures of agency costs in these firms are relatively low. While our paper points to the potential benefits of limiting the number of board seats held by outside directors, policy recommendations on this issue should also incorporate

Are Busy Boards Effective Monitors? 693

the expected costs of curtailed director incentives and those borne by sending firms.

Our paper proceeds as follows. Section I reviews the relevant literature and formulates our research questions. Section II describes our sample. Section III studies whether busy boards affect firm performance. Section IV details our empirical tests on appointments and departures of outside directors. Section V investigates whether busy boards play a role during events of CEO turnover. Section VI analyzes investor reactions related to the departure of busy outside directors and also provides evidence on the impact of additional board seats on firms in which the director serves as an incumbent outside director. Section VII concludes.

I. Prior Literature on Directorships

Fama (1980) and Fama and Jensen (1983) argue that the market for outside directorships serves as an important source of incentives for outside directors to develop reputations as monitoring specialists. Mace (1986) suggests that out- side directorships are perceived to be valuable because they provide executives with prestige, visibility, and commercial contacts.

Support for the reputational capital view of directorships comes from sev- eral studies which show that the number of boards that outside directors sit on is tied to the performance of the firms in which these directors are incum- bents, either as CEOs or as outside directors. This pattern is documented for financially distressed companies (Gilson (1990)), for firms that cut dividends (Kaplan and Reishus (1990)) and opt out of stringent state antitakeover provi- sions (Coles and Hoi (2003)), for companies that fire their CEOs (Farrell and Whidbee (2000)), for firms that are sold (Harford (2003)), for CEOs following retirement (Brickley, Linck, and Coles (1999)), as well as for broad samples of firms (Yermack (2004)). Accordingly, several studies use the number of board seats held by an outside director as a proxy for the director’s reputation in the external labor market (Shivdasani (1993), Vafeas (1999), Brown and Maloney (1999)).

While the number of directorships appears to be closely linked to di- rectors’ reputational capital, other studies suggest that too many director- ships may lower the effectiveness of outside directors as corporate monitors (see, e.g., Core et al. (1999), Shivdasani and Yermack (1999)). Core et al. (1999) find that busy outside directors provide CEOs with excessive compen- sation packages, which in turn leads to weaker firm performance. Consis- tent with such a view, the National Association of Corporate Directors and the Council for Institutional Investors have adopted resolutions calling for limits on the number of directorships held by directors of publicly traded companies.4

4 See the Report of the National Association of Corporate Directors Blue Ribbon Commission on Director Professionalism (1996), and the Core Policies, Positions and Explanatory Notes from the Council of Institutional Investors (1998).

694 The Journal of Finance

Ferris et al. (2003) test whether multiple board appointments by directors harm firm performance. They fail to detect any evidence of a systematic relation between the market-to-book ratio and the average number of board seats held by directors; they conclude that proposals calling for limits on multiple board appointments are misguided. However, several aspects of their research design prevent them from detecting the relation that we document between multiple directorships and firm performance.

First, market-to-book ratio can measure both the value added by manage- ment as well as the value of intangible assets such as future investment opportunities. Ferris et al. (2003) estimate cross-sectional regressions of the market-to-book ratio on director attributes but their regressions do not con- trol for growth opportunities, which confounds the interpretation of their results.

Second, unlike Ferris et al. (2003) who estimate a cross-sectional model using 1995 data, we analyze panel data using fixed effects regressions. The fixed effects approach is robust to the presence of omitted firm-specific variables that would lead to biased estimates in an ordinary least squares (OLS) framework. Given the high correlation between the market-to-book ratio and corporate governance variables with numerous other company attributes, we view the fixed effects framework as offering significantly more reliable estimates than OLS regressions.5

A third distinction between our paper and Ferris et al.’s (2003) is in the iden- tification of busy boards. They employ four measures to capture busy boards— three of these focus on directorships held by both inside and outside directors, while only one relates specifically to outside directors. To measure busy out- side directors, they calculate the average number of board seats held by outside directors. Our variables, however, focus exclusively on whether outside direc- tors are busy under the premise that inside and gray directors sit on the board for reasons other than the monitoring of management. Further, as we describe below, there is wide dispersion in the number of board seats held by outside di- rectors, thereby making the average number of directorships a noisy measure of whether outside directors as a group are busy. We therefore employ an alter- native metric that treats boards as busy if a majority of the outside directors sit on three or more boards.

Our paper is complementary to recent work by Perry and Peyer (2005) who examine announcement effects of outside director appointments for sending firms. They find that when executives join other boards as outside directors, the announcement return for the sending firm is positive when the executive has high stock ownership or the firm has an independent board. They argue that when executives have strong incentives to enhance shareholder value, accumulation of board seats by these executives has a positive impact on firm value.

5 Ferris et al. (2003) also use the average return on assets (ROA) over 1993 to 1995 as a measure of performance. As with their market-to-book ratio regressions, the ROA specifications do not control for firm-specific effects.

Are Busy Boards Effective Monitors? 695

In sum, there is substantial evidence supporting the view that outside di- rectorships serve as a measure of a director’s reputational capital. However, there is disagreement on whether sitting on numerous boards detracts from the ability of outside directors to perform as effective monitors. Our tests are designed to address the question of whether directors that serve on nu- merous boards tend to contribute to weaker corporate governance at these firms.

II. Sample and Data

A. Sample Selection

Our sample consists of firms that appear in the 1992 Forbes 500 lists of largest corporations based on assets, sales, market capitalization, or net income during the 7-year period from 1989 to 1995. We impose three screening criteria. First, we require that each company in the sample has at least 2 consecutive years of financial data available from the Center for Research in Security Prices and from Compustat. Second, relevant Securities and Exchange Commission filings have to be available on the Edgar data retrieval system. Third, utility and financial companies are excluded from the sample since regulatory effects may lead to a more limited role for their boards of directors. These criteria yield a final sample of 3,366 observations for 508 industrial companies across the 7 years.

For each firm, we collect data on corporate governance variables from proxy statements filed for each company during the sample period. Each director is classified according to his/her principal occupation. Full-time employees of the firm are designated as insiders. Directors associated with the company, former employees, those with existing family or commercial ties with the firm other than their directorship, or those with interlocking directorships with the CEO are designated as “gray.” Directors that do not fit the description for inside or gray directors are classified as outside directors. We categorize boards as being interlocked if the CEO sits on the board of an outside director.

Descriptive statistics for key variables for the 508 companies are presented in Panel A of Table II. On average, outside directors hold 3.11 directorships (the median is 2.89). We count directorships held in all publicly traded firms but do not consider directorships held in nonpublic firms, not-for-profit and charitable organizations, trusts, and associations.

We consider outside directors busy if they serve on three or more boards. Al- though the three-directorship criterion is admittedly somewhat arbitrary, we choose this cutoff for several reasons. First, the mean and median number of directorships in the sample is close to three, resulting in a roughly even split between busy and nonbusy outside directors. Second, it reflects the recommen- dation by the Council for Institutional Investors that directors should sit on no more than two boards. Finally, our definition is consistent with prior work by Core et al. (1999) and Ferris et al. (2003) who also use the three-directorship benchmark for classifying executives as busy.

696 The Journal of Finance

Using this definition, 52% of the outside directors in the sample are classified as busy. Perry and Peyer (2005) report a comparable frequency of busy outside directors in their sample. To measure the prevalence of busy outside directors on the board, we construct a (0, 1) indicator that takes the value of one if 50% or

Table II Data Description

Panel A provides descriptive statistics for characteristics of our sample firms. The sample consists of 3,366 annual observations for 508 companies between 1989 and 1995. Companies are included in the sample if they are listed by Forbes magazine as one of the largest U.S. public corporations in its 1992 survey of the 500 largest U.S. public companies in any of the categories of market capital- ization, sales, net income, or assets. The sample excludes private, utility, and financial companies. The table presents the mean, median, and SD for each variable, as well as the Spearman sample correlation coefficient between all variables and a (0, 1) indicator that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships. ∗, ∗∗, and ∗∗∗ denote statistical significance at the 1%, 5%, and 10% levels, respectively. Panel B shows characteristics of 2,314 outside directors appointed to the boards of our sample firms from 1989 to 1995. Outside directors are those that are not current or former employees of the firm, are not relatives of the CEO, have no business deals with the firm other than their directorship, and do not have interlocking directorships with the CEO. We classify boards as being interlocked if the CEO sits on the board of an outside director. Data on director characteristics are obtained from annual proxy statements.

Panel A

Correlation with Variable Mean Median SD “Busy Board”

Board Characteristics Directorships per outside director 3.11 2.89 2.23 0.22∗ Percentage of inside directors 29.67 26.05 15.03 −0.07∗∗∗ Percentage of gray directors 15.02 9.21 13.32 −0.12∗∗∗ Percentage of outside directors 55.33 56.23 17.12 0.68∗ Percentage of directors who are 14.96 13.20 11.70 0.56∗

other firms’ CEOs Percentage of busy directors 52.26 – – – Percentage of busy boards 21.42 – – – Board size 11.88 12 2.95 0.15∗ Presence of interlocked board 0.36 0 0.72 0.48∗∗ Directors’ fees (1995 dollars) 35,904 27,601 13,562 0.29∗ Number of board meetings/year 7.56 7 2.56 0.31∗

Governance Structure CEO from founding family (0, 1) 0.26 0 0.39 −0.28∗∗∗ Non-CEO chairman of board (0, 1) 0.15 0 0.33 −0.08∗∗∗ CEO’s tenure as CEO 8.68 7.5 7.68 0.12∗∗ CEO’s age 58.06 56 7.04 0.00 Insider ownership (% common) 6.97 2.22 13.67 −0.21∗∗ Institutional ownership (% common) 49.13 33.33 13.92 −0.06∗

Firm Characteristics Total sales (1995 $MM) 9,016.01 3,444.72 21,100.23 0.31∗ EBIT/Total assets 0.191 0.150 0.128 0.10∗ Firm age (years since incorporation) 23.6 12 9.33 0.45∗

(continued )

Are Busy Boards Effective Monitors? 697

Table II—Continued

Panel B

Mean Median SD

Directorships per director 3.04 2.00 1.99 Percentage of appointees with three or more directorships 17.11 – – Age of the appointee 57 55 3.82 Equity ownership appointee (% of common) 0.03 0.07 0.15 Percentage of appointees that represent a board expansion 33.03 – – Percentage of appointees that replace an independent

director 52.23 – –

Percentage of appointees that replace an inside director 9.81 – – Percentage of appointees that replace a gray director 4.92 – – Percentage of appointees without prior board experience 13.56 – – Percentage of appointees who are commercial or

investment bankers 7.02 – –

Percentage of appointees who are current Forbes 500 executives

20.04 – –

Percentage of appointees who are current CEOs of other firms

42.05 – –

Percentage of appointees who are retired CEOs of other firms

18.12 – –

more of the board’s outside directors are busy. Throughout the paper, we refer to this variable as the “busy board” indicator. Panel A shows that 21% of the firms in the sample have busy boards.

A typical board has approximately 12 directors, 55.33% of whom are out- siders. The average board meets just under eight times a year. In Table II, we present the correlation of certain firm characteristics with the busy board indicator. This variable exhibits a positive correlation with the average director- ships held by outside directors, the presence of an interlocking board, director fees, the frequency of board meetings, firm age, operating profit margin, and total sales. We observe a negative correlation between busy board and the per- centage of inside and gray directors, ownership by insiders, and CEOs from founding families.

We track annual appointments of outside directors to the boards of the 508 firms during the 7-year period. Panel B of Table II presents key characteristics for the 2,314 individuals who are appointed as independent directors to the boards of these companies. A typical outsider is in her mid-50s and owns very little equity in the other boards on which she serves. Most of the appointees (52%) replace another independent director. These characteristics are compa- rable to those reported by Shivdasani and Yermack (1999) who study director appointments between 1994 and 1996. About 20% of all outside directors are current Forbes 500 executives, and almost 14% have no prior board experience. This last statistic is comparable to that reported by Ferris et al. (2003) who study director data for firms during the 1995 proxy season.

698 The Journal of Finance

B. Average Directorships versus Busy Boards

Understanding what constitutes a busy board is a central issue underlying our tests. We consider boards busy if 50% or more of the outside directors hold three or more board seats instead of using the average number of directorships by outside directors to identify busy boards. At issue is the extreme skewness in the distribution of board seats held by outside directors. An example is helpful in illustrating this measurement issue.

Panels A through D of Table III report board appointments held by outside directors at Host Marriott, Gannett Newspapers, The Clorox Company, and MGM Grand, Inc., as disclosed in their 1993 proxy statements. While the ratio of total directorships to outside directors for Host Marriott and Gannett News- papers is similar, 3.5 and 3.4, respectively, we determine that Host Marriott has a busy board, but not Gannett Newspapers. Conversely, a comparison of MGM Grand and Clorox demonstrates that a high average number of directorships does not necessarily indicate that a majority of outside directors are busy. The average ratio of directorships by outside directors is 3.66 for MGM Grand and only 2.66 for Clorox. However, 50% of the outside directors at Clorox are busy as compared to only 33% at MGM.

Panel E of Table III shows that a one-to-one correspondence between the average number of directorships and busy boards also fails to hold in the full sample. We divide the sample into four groups based on the percentage of out- side directors that are classified as busy. When more than 75% of the outside directors are busy, the average number of directorships per outside director is 3.35. However, when only 25–50% of the outside directors are busy, the average number of directorships held by outside directors is 3.41. Our measurement treats boards in the first group as busy, while Ferris et al. (2003) would treat firms in the second group as having busier boards. As we illustrate later, our measurement appears to highlight a stronger link between busy boards and firm performance than using the average number of board seats variable.

III. Busy Boards and Firm Performance

Our first set of tests involves panel data estimates relating the market-to- book ratio to busy boards and other corporate governance and financial at- tributes. These models assume that a high market-to-book ratio is indicative of good management and governance. However, alternative interpretations of a high market-to-book ratio are equally plausible. In particular, if financial or liquidity constraints cause some firms to underinvest, the potential value of unexploited investments may lead to a high marginal Tobin’s Q. If underin- vestment is pervasive, our formulation would erroneously treat a high market- to-book ratio as indicative of good governance. We address this issue by using a number of controls for investment opportunities. However, we recognize that all measures are subject to measurement error. Therefore, we also supplement the market-to-book ratio tests with similar models estimating operating perfor- mance. Since historical operating performance does not employ market prices,

Are Busy Boards Effective Monitors? 699

Table III Directorships by Outside Directors

Panels A through D report the total number of directorships held by outside directors, the mean directorships per outside director, and the percentage of outside directors holding three or more directorships for four companies in our data set during the 1993 proxy season. The total number of directorships simply counts the number of total boards of publicly traded firms on which the outside director serves. We do not count board service in private firms, charitable institutions, or not-for-profit organizations. The last row in each panel provides a (0, 1) variable for whether boards are busy. We code boards as busy, with a one, if 50% or more outside directors hold three or more total directorships. Panel E reports mean directorships per outside director and per board for our sample firms according to the percentage of outside directors holding three or more directorships. Directorships per outside director are estimated as the total directorships held by outside directors divided by the number of outside directors. Similarly, directorships per board are all directorships held by every director, regardless of his/her classification, divided by board size.

Director Main Occupation Total Directorships

Panel A: Host Marriott—Outside Directors 1993

R. T. Ammon Former Partner, Kohlberg Kravis Roberts & Co. 4 A. D. McLaughlin President, Federal City Council (former U.S.

secretary of labor) 8

H. L. Vincent, Jr. Retired Vice-Chairman, Booz-Allen & Hamilton 1 A. J. Young Vice Chairman, Law Companies Group, Inc. 1

Total directorships 14 Total directorships/outside directors 14/4 = 3.5 Percentage with three or more directorships 50% Is the board busy? (0 = No, 1 = Yes) Yes

Panel B: Gannett Newspapers—Outside Directors 1993

Rosalyn Carter Former First Lady of the United States of America 1 C. T. Rowan President, CTR Productions 2 D. D. Wharton CEO, Fund for Corporate Initiatives 3 A. F. Brimmer Retired officer, Federal Reserve Bank 9 M. A. Brokaw Owner, Penny Whistle Toys 2

Total directorships 17 Total directorships/outside directors 17/5 = 3.4 Percentage with three or more directorships 40% Is the board busy? (0 = No, 1 = Yes) No

Panel C: Clorox—Outside Directors 1993

D. Boggan Vice Chancellor, U.C. Berkeley 1 D. O. Morton Retired COO, Hewlett Packard 5 E. L. Scarff Former CEO, Arcata Corporation 1 L. R. Scott CEO, Carolina Freight 3 F. N. Shumway Retired Chairman, Allied Signal 4 J. A. Vohs Retired Chairman, Kaiser Health GP 2

Total directorships 16 Total directorships/outside directors 16/6 = 2.66 Percentage with three or more directorships 50% Is the board busy? (0 = No, 1 = Yes) Yes

(continued )

700 The Journal of Finance

Table III—Continued

Director Main Occupation Total Directorships

Panel D: MGM Grand—Outside Directors 1993

Willie D. Davis President, All-Pro Broadcasting 8 Lee A. Iacocca Chairman, Iacocca Capital GP (Retired CEO,

Chrysler) 1

E. Parry CEO, Valley Capital Corporation 2 Total directorships 11 Total directorships/outside directors 11/3 = 3.66 Percentage with three or more directorships 33.33% Is the board busy? (0 = No, 1 = Yes) No

Boards with Outside Directors Holding Three Are Outside Mean Directorships Mean Directorships or More Directorships Directors Busy? per Outside Director per Board

Panel E

x ≥ 75% Yes 3.35 1.85 50% ≤ x < 75% Yes 3.19 1.77 25% < x < 50% No 3.41 1.88 x ≤ 25% No 2.36 1.38

this measure is unlikely to reflect the value of future investment opportunities. In addition, we suspect that financial constraints are less likely to be predom- inant in our sample, which consists of the largest U.S. corporations during the time period studied.

A. Market-to-Book Ratio Tests

We estimate firm-fixed effects regressions using the market-to-book ratio as the dependent variable. We calculate the market-to-book ratio as the market value of the firm’s equity at the end of the year plus the difference between the book value of the firm’s assets and the book value of the firm’s equity at the end of the year, divided by the book value of the firm’s assets at the end of the year. This calculation closely follows that of Smith and Watts (1992). The regressions control for corporate governance and financial characteristics likely to affect firm performance. Gilson (1990) finds that during periods of financial distress, firms reduce board size, and Yermack (1996) documents a negative and significant association between company valuation and board size. We in- clude the log of board size in our tests. We control for firm size using the natural log of sales. Board composition is controlled for by scaling the number of out- side directors by board size. We include the percentage of the firm’s common shares beneficially owned by company insiders as an independent variable, be- cause several studies link share ownership with firm value. We also include the natural log of meetings and the number of board committees as independent

Are Busy Boards Effective Monitors? 701

variables (Vafeas (1999)). We control for both the presence of interlocking di- rectorships between outside directors and the CEO using an indicator variable, and for the number of outside directorships held by the CEO (Booth and Deli (1996)). Our regressions include the ratio of depreciation expenditures to sales as a measure of the firm’s investment opportunity set (tests using alternative measures are described later), and also control for firm age. Throughout, the fixed effects specification is employed to control for unobservable attributes, such as company’s history, culture, and product mix, that potentially affect firm performance.

The results of the multivariate models are reported in Table IV. Model (1) shows that the coefficient for the busy board indicator is negative and statisti- cally significant at the 1% level. In model (2), we use the percentage of outside directors that are busy and find a negative and significant coefficient on this variable as well. Therefore, both specifications indicate a negative and statis- tically significant relation between the presence of busy outside directors and the market-to-book ratio. Our estimates suggest that the impact of busy out- side directors on firm performance is economically nontrivial. The coefficient estimate in model (1) indicates that a busy board reduces the market-to-book ratio by about 0.04.

We examine if the marginal impact of a busy outside director depends on whether or not a majority of the outside directors are busy. Model (3) includes an interaction term between the percentage of busy outside directors and the busy board indicator variable. The interaction term is negative and significant at the 6% level, indicating that when a majority of outside directors are busy, the market-to-book ratio has a stronger negative association with the percentage of busy outside directors. This suggests that reducing the fraction of busy directors for boards in which a majority of outside directors are busy is likely to yield more meaningful valuation improvements.

Coefficient estimates for the control variables are in line with those reported by other studies. We obtain an inverse and statistically significant association between board size and firm performance (Yermack (1996)). The number of busi- ness segments is negatively related to performance (Berger and Ofek (1995)), while ownership by officers and directors yields positive coefficients (Yermack (1996)). As in Fich and Shivdasani (2005), we find that firm size is positively associated with market-to-book ratio. Market-to-book ratios are also negatively related to firm age and the presence of an interlocking board, though the latter effect is significant at the 10% level in some specifications.

Using the fixed effects framework, we are able to replicate the cross-sectional results of Ferris et al. (2003) in our sample. Ferris et al. (2003) measure the de- gree to which directors are busy by using the average numbers of directorships per director and directorships per outside director. Models (4) and (5) show that neither of these two variables displays a significant association with the market-to-book ratio; similar to the results obtained by Ferris et al. (2003). The contrast between these results and those shown in models (1)–(3) suggest that inferences on the effects of busy boards are sensitive to how the presence of busy directors is measured.

702 The Journal of Finance

Table IV

Busy Outside Directors and Firm Performance This table presents fixed effects regressions of firm performance and busy outside directors. All regressions use market-to-book ratio as the dependent variable. We calculate the market-to-book ratio as the market value of the firm’s equity at the end of the year plus the difference between the book value of the firm’s assets and the book value of the firm’s equity at the end of the year, divided by the book value of the firm’s assets at the end of the year. This calculation closely follows that of Smith and Watts (1992). Regression (1) uses a (0, 1) dummy variable equal to one if 50% or more of the board’s outside directors individually hold three or more directorships as the key independent variable. Regression (2) uses the percentage of outside directors that hold three or more directorships (i.e., are busy) as the key independent variable. We classify boards as being interlocked if the CEO sits on the board of an outside director; all other variables are self-explanatory or are described in the main text. The sample is described in Panel A of Table II. We report White (1980) heteroskedasticity-robust p-values in parentheses below each coefficient estimate.

Variable (1) (2) (3) (4) (5)

Board Characteristics Average directorships by outside directors −0.077

(0.26) Average directorships by board −0.040

(0.60) Busy outside directors (0, 1) −0.042

(0.00) Percentage of busy outside directors −0.152 −0.083

(0.00) (0.00) Percentage of busy outside directors × Busy −0.071

outside directors (0, 1) (0.06)

Log of the directorships held by the CEO −0.166 −0.169 −0.160 −0.179 −0.177 (0.16) (0.13) (0.13) (0.09) (0.12)

Firm has an industry director 0.050 0.049 0.044 0.048 0.049 (0.28) (0.54) (0.60) (0.32) (0.23)

Directors’ ownership (% of common) 0.187 0.122 0.124 0.188 0.188 (0.09) (0.08) (0.07) (0.10) (0.08)

Board interlock (0, 1) −0.009 −0.008 −0.008 −0.014 −0.010 (0.07) (0.07) (0.08) (0.05) (0.05)

CEO ownership (% of common) 0.008 0.015 0.016 0.009 0.009 (0.12) (0.08) (0.09) (0.13) (0.13)

Log of board size −0.314 −0.290 −0.298 −0.303 −0.299 (0.01) (0.05) (0.05) (0.01) (0.05)

Log of board meetings −0.091 −0.119 −0.100 −0.093 −0.090 (0.26) (0.40) (0.27) (0.22) (0.29)

Board committees −0.016 −0.013 −0.009 −0.011 −0.015 (0.68) (0.58) (0.47) (0.56) (0.64)

Board composition (% outside directors) 0.165 0.147 0.149 0.161 0.161 (0.06) (0.24) (0.20) (0.06) (0.06)

Firm Characteristics Return on assets 2.002 2.044 2.029 1.996 2.004

(0.00) (0.01) (0.00) (0.00) (0.00) Firm size (log of total sales) 0.433 0.436 0.441 0.430 0.438

(0.00) (0.00) (0.00) (0.00) (0.00) Firm age −0.001 −0.001 −0.001 −0.001 −0.001

(0.01) (0.01) (0.01) (0.01) (0.01) Growth opportunities 0.077 0.093 0.080 0.100 0.079

(depreciation expense/sales) (0.24) (0.27) (0.25) (0.31) (0.26)

Number of business segments −0.049 −0.051 −0.048 −0.052 −0.049 (0.00) (0.00) (0.00) (0.00) (0.00)

Year (0, 1) indicators Yes Yes Yes Yes Yes Adjusted R2 37.53% 37.69% 38.11% 33.02% 34.18%

Are Busy Boards Effective Monitors? 703

B. Operating Performance Tests

The market-to-book ratio is also often used as a measure of growth opportu- nities. Despite our controls for investment opportunities in the regressions, and additional robustness tests described in Section IV, we are concerned about the possible impact that growth opportunities have on our coefficient estimates. To address this issue, we estimate the impact of busy boards on accounting measures of current performance, since these measures are less likely to be mechanically driven by growth opportunities. The fixed effects regressions in Table V replace the market-to-book ratio with three different measures of op- erating performance.

Models (1) and (2) of Table V use the ROA as the dependent variable.6 These regressions produce results that are consistent with those in Table IV. For example, in model (1), the coefficient for the busy board indicator variable is negative and statistically significant (−0.0024, p-value = 0.00). This estimate indicates that ROA is about 0.24 percentage points lower in firms with busy boards. Therefore, while the effect of a busy board on ROA is statistically sig- nificant, the economic magnitude of the relation is not particularly large.

We also measure firm performance using two additional financial ratios, namely, sales over assets (asset turnover ratio), and the return on sales, com- puted as operating income over net sales. We estimate fixed effects regressions using these ratios as dependent variables, and present them as models (3) and (4) of Table V. The busy board indicator yields a negative and significant coef- ficient of −0.033 with a p-value = 0.02 in the sales over assets regression, and a −0.0027 coefficient with a p-value = 0.00 in the return on sales regression. These results are consistent with our earlier findings and suggest that compa- nies with busy boards tend to display weaker operating profitability than firms in which boards are not busy.

C. Robustness Checks

C.1. Alternative Hypothesis

While the preceding results support the view that busy outside directors are associated with lower firm performance, the findings could be consistent with other explanations. Gilson (1990) reports that distressed firms revamp their boards by making them more independent and by appointing turnaround specialists. It is possible that busy outside directors tend to be appointed to boards of poorly performing companies if these directors are viewed as helpful in formulating turnaround strategies. To control for this potential endogeneity, we reestimate our regressions using 1- and 2-year lagged values of the busy board

6 We calculate ROA as operating income before depreciation (Compustat item 13) plus the de- crease in receivables (Compustat item 2), the decrease in inventory (Compustat item 3), the increase in current liabilities (Compustat item 72), and the decrease in other current assets (Compustat item 68). We scale this measure by the average of beginning- and ending-year book value of total assets (Compustat item 6).

704 The Journal of Finance

Table V

Fixed Effects Coefficient Estimates: Busy Outside Directors and Firm Profitability

In this table, the dependent variables are return on assets (ROA), sales over assets, and return on sales. We first sum operating income before depreciation (Compustat item 13) plus the decrease in receivables (Compustat item 2), the decrease in inventory (Compustat item 3), the increase in current liabilities (Compustat item 72), and the decrease in other current assets (Compustat item 68). We scale this measure by the average of beginning- and ending-year book value of total assets (Compustat item 6) to find ROA. Similarly, we divide this measure by the average of beginning- and ending-year sales to compute ROS. We use the log of total capital as a proxy for firm size. Regressions (1), (2), and (3) use a (0, 1) dummy variable that equals one if 50% or more of the board’s outside directors individually hold three or more directorships as the key independent variable. Regression (2) uses the percentage of outside directors that hold three or more directorships (i.e., are busy) as the key independent variable. All other variables are self-explanatory or are described in the main text. The sample consists of Forbes 500 firms from 1989 to 1995 described in Panel A of Table II. White (1980) heteroskedasticity-robust p-values appear in parentheses below each coefficient estimate.

Dependent Variable

(1) (2) (3) (4) Independent Variables ROA ROA Sales/Assets ROS

Board Characteristics Busy outside directors (0, 1) −0.00235 −0.033 −0.00272

(0.00) (0.02) (0.00) Percentage of busy outside directors −0.0163

(0.01) Log of the directorships held by the CEO −0.078 −0.071 −0.002 −0.041

(0.27) (0.20) (0.61) (0.33) Firm has an industry director 0.020 0.015 0.004 0.018

(0.31) (0.33) (0.40) (0.39) Directors’ ownership (% of common) 0.022 0.025 0.222 0.024

(0.17) (0.11) (0.09) (0.11) Board interlock (0, 1) −0.005 −0.005 −0.004 −0.005

(0.10) (0.13) (0.06) (0.08) CEO ownership (% of common) 0.003 0.003 0.141 0.005

(0.17) (0.29) (0.29) (0.13) Log of board size −0.041 −0.043 −0.139 −0.032

(0.01) (0.01) (0.04) (0.01) Log of board meetings −0.129 −0.134 −0.099 −0.138

(0.05) (0.06) (0.11) (0.02) Board committees −0.000 −0.000 −0.005 −0.000

(0.40) (0.42) (0.44) (0.39) Board composition (% outside directors) 0.002 0.002 0.003 0.007

(0.35) (0.38) (0.45) (0.11) Firm Characteristics

Return on sales (1) and (2), 1.841 1.967 3.671 4.698 Return on capital (3) and (4) (0.00) (0.00) (0.00) (0.00)

Firm size 0.048 0.047 0.166 0.094 (0.00) (0.00) (0.01) (0.03)

Firm age −0.0008 −0.0008 −0.0006 −0.0008 (0.03) (0.04) (0.14) (0.03)

Depreciation expense/sales 0.054 0.050 0.063 0.060 (0.06) (0.05) (0.07) (0.13)

Number of business segments −0.006 −0.006 −0.003 −0.008 (0.05) (0.04) (0.00) (0.03)

Year (0, 1) indicators Yes Yes Yes Yes Adjusted R2 26.36% 27.10% 13.90% 25.01%

Are Busy Boards Effective Monitors? 705

indicator and other corporate governance variables. These tests continue to yield an inverse and statistically significant association between firm perfor- mance and our busy board measures. We describe more detailed tests of this potential endogeneity in Section IV.

C.2. Size and Performance Proxies

We repeat the analyses presented in Table IV using different proxies for firm size, replacing the natural log of sales by both the natural log of capital and the natural log of assets.7 These tests also yield an inverse association between busy board and performance. Our result continues to be robust to different con- structions of the dependent variable. Instead of the Smith and Watts (1992) market-to-book ratio calculation, we use the Tobin’s Q calculation of Perfect and Wiles (1994), and the Q calculation of Shin and Stulz (2000). These dif- ferent constructions of the dependent variable do not qualitatively alter the results.

C.3. Characterizing Busy Outsiders

We use a less expansive definition of our key independent variable based on a slightly different procedure to identify busy outside directors. Core et al. (1999) differentiate between outside directors that are currently employed and those that are retired. In their taxonomy, retired outside directors are considered busy if they serve on six or more publicly traded boards. We fol- low their definition and deem employed outside directors busy when they hold three or more directorships and retired outside directors busy when they hold six or more directorships. A board is defined as busy when 50% or more of its outside directors are individually classified as busy. We construct a (0, 1) indicator under this criterion and perform regressions similar to those in Table IV. The coefficient estimate for a (0, 1) independent variable under this taxonomy is −0.0401 (p-value = 0.06). This estimate is slightly smaller in magnitude than that reported in Table IV, but generates qualitatively similar inferences.

C.4. Investment Opportunities

Notwithstanding the results in Table V, a concern with the regressions pre- sented in Table IV is whether we appropriately control for the role of the firm’s investment opportunity set. As an alternative to using depreciation to control for investment opportunities, we use the ratio of capital expenditures to sales and obtain results similar to those reported earlier. We recognize the possibility

7 Total capital adds the market value of the firm’s equity, book value, long-term debt, and an estimated market value of preferred stock. We calculate the market value of preferred stock by dividing preferred dividends over the prevailing yield on Moody’s index of high-grade industrial preferred stocks.

706 The Journal of Finance

that in the presence of financial constraints, growth opportunities may not be fully captured by capital expenditures. Therefore, we also use the ratio of re- search and development (R&D) to sales, the earnings-to-price ratio, and the variance of common stock returns as other control variables. The use of these different proxies for investment opportunities does not alter our results. Our proxies for busy outside directors continue to yield a negative and significant association with the market-to-book ratio in all specifications.

D. Summary

Results presented in this section indicate that firm performance, measured using both the market-to-book ratio as well as several measures of operating profitability, is inversely related to the presence of a majority of outside directors that serve on three or more boards. However, similar to Ferris et al. (2003), we are unable to uncover such a relation using the average number of board seats held by all directors or by outside directors.

Our estimates suggest that a change in the board’s status from busy to non- busy is associated with an increase in the market-to-book ratio of 0.04. To put this result in perspective, findings in Gompers, Ishii, and Metrick (2003) imply that during the 1990–1995 period, a one point increase in their compos- ite “Governance Index” reduces the market-to-book ratio by an average 3.37 percentage points. Yermack (1996) suggests that an increase in board size from eight to nine directors leads to a reduction in market-to-book ratio of 0.04 and Daines (2001) finds that incorporation in Delaware leads to a 0.06 increase in market-to-book ratio. Anderson and Reeb (2003) find market-to- book ratio is about 0.15 higher for family-run firms and Fich and Shivdasani (2006) find it is about 0.14 higher for firms with stock option plans for outside directors.

IV. Appointments and Departures of Busy Outside Directors

Results of Section III show a negative association between busy boards and firm performance. In this section, we turn to the potential endogeneity of busy outside directors with respect to performance. We explore whether firms tend to appoint busy directors when performance suffers and/or whether non- busy directors are more likely to depart the board when firms perform well. We therefore conduct tests on the number of board seats held by directors and on appointments of new outside directors. We also examine the deter- minants of outside director departures. Our primary focus in these tests is whether patterns in appointments and departures of outside directors explain the negative relation between firm performance and busy boards described in Section III.

There are several reasons why appointments of directors with multiple board seats might be linked to company performance. It is possible that poorly per- forming firms are more likely to seek out new outside directors that sit on sev- eral boards because such directors have valuable reputations and experience

Are Busy Boards Effective Monitors? 707

that can help reverse poor performance. An alternative possibility is that poorly performing firms may find it difficult to attract directors that have high repu- tations and significant opportunities to serve on other boards.8

Similarly, reputational concerns may also affect how firm performance influ- ences the departure of outside directors. Brown and Maloney (1999) suggest that directors with significant reputational capital might choose to protect it by leaving boards of companies that perform poorly. Alternatively, if poor firm performance causes CEOs to favor busy directors that might be weaker moni- tors, they may choose to reappoint outside directors with multiple board seats, while denying reappointment to those serving on few boards. To understand how firm performance affects changes in board composition, we study board appointments and departures within our sample.

As described in Section II, our sample firms appointed 2,314 outside direc- tors during 1989 to 1995. We track each of these outside directors until the year 2000 to determine which of these directors remained on the board and which subsequently departed the board. For each outside director appointed, we review both the annual report and the firm’s proxy statements to establish whether the appointed director remained on the board. We search the Wall Street Journal Index and Lexis/Nexis when we are able to identify a departure, and read newspaper stories and company press releases in order to ascertain the reason for the departure. We identify a total of 1,676 director departures among our sample. Of these, we are able to identify 360 voluntary departures. We classify a departure as voluntary if the reason given for the director’s depar- ture is either to pursue other interests or to take a position elsewhere. We also record 490 departures related to board term limits, normal retirements, health problems, or death. In 826 instances, we are unable to precisely establish the reason for the departure. Of the 2,314 appointees, 638 continued serving as directors until the end of year 2000.

We conduct four tests using this sample of outside director appointments and departures. First, we estimate a maximum likelihood model of the number of board seats held by appointees. Second, we examine the factors that affect the likelihood that a busy director is appointed to the board. Third, we estimate a hazard model to understand the determinants of outside director departures. Our fourth test examines the probability that a busy director departs the board. In all tests, our primary focus is to understand whether firm performance has a significant impact on the types of outside directors that join and leave the board.

A. Multivariate Analysis of the Determinants of Directorships

We estimate a Poisson maximum likelihood regression to investigate the determinants of directorships for the 2,314 appointees. The dependent vari- able is the count of the directorships held by each outside director. We include

8 This potential endogeneity, however, works against uncovering the negative relation that we document between firm performance and busy outside directors.

708 The Journal of Finance

the industry-adjusted stock return over the prior year as a measure of the appointing firm’s performance as an independent variable. The regression in- cludes appointee-specific characteristics such as age, gender, and educational and professional qualifications. We also include firm-specific attributes relat- ing to the companies in which the individual serves as a director. Unless the appointee is the CEO of another firm, we compute the average stock ownership by the outside director for all of the boards on which he/she serves, as well as the average industry-adjusted ROA, the market-adjusted stock return, and the average size (natural log of sales) of these firms. If the appointee is a CEO in another firm, we record the stock ownership, industry-adjusted ROA, the market-adjusted stock return, and the size of the firm in which he/she serves as CEO.

The results of the Poisson model are reported in the first column of Table VI.9 We find that the performance of the appointing firm is unrelated to the count of directorships held by outside director appointees. In contrast, the average performance of the firms on whose boards the directors sit is positively associated with their directorship count. The coefficients on both the average directorship industry-adjusted ROA and the market-adjusted stock return are positive, with p-values of 0.03 and 0.07, respectively.

We also observe that being a current or retired CEO of another firm pos- itively affects the number of directorships held as does being a director at larger companies. Similar results are documented in Fich (2005) and Ferris et al. (2003) and suggest that the increased visibility from sitting on boards of large companies may help some directors obtain more directorships. Finally, we find a lower count of directorships when directors have gray status at other boards, suggesting that firms avoid appointing board members that face poten- tial conflicts of interest at other companies. Alternatively, extensive business dealings with a firm may leave gray directors with little time to serve on other boards.

Overall, the results of the Poisson model indicate that the accumulation of directorships is positively related to the performance of the firms in which the individual is an outside director, but we do not find evidence that poor performance increases the frequency of appointments of outside directors that serve on several boards.

9 The Poisson model specifies that if λ is defined by log (λ) = Xβ, where X is a vector of indepen- dent variables and β is a parameter vector, then the probability of n outside directors obtaining a directorship in a given year is given by: λn e−λ/λ! The log-likelihood function of this specification is maximized over β to produce maximum likelihood estimates and is given as,

L(β) = N∑

i=1

T∑ t=1

{ C1 − e(Xitβ) + nitXitβ

} ,

where C1 is a constant that does not change the maximization process, N is the number of firms, T is the number of time periods per firm, and nit is the number of outside directors obtaining a directorship in firm i in year t.

Are Busy Boards Effective Monitors? 709

B. Appointments of Busy Outside Directors To study appointments of busy outside directors, we estimate a logit model

using the 2,314 appointees, where the dependent variable is set equal to one if the director holds three or more total directorships (i.e., is busy), and is set

Table VI Determinants of Directorships and Appointments

of Busy Outside Directors Model (1) presents Poisson maximum likelihood estimates for the determinants of the number of directorships held by outside directors. The dependent variable counts the number of directorships held by the outside director. Model (2) presents logit estimates for busy directors. The dependent variable takes the value of one if the outside director holds three or more total directorships and the value of zero otherwise. The sample consists of 2,314 outside directors appointed to the boards of our 508 sample firms from 1989 to 1995. Unless the director is a CEO of another firm, we compute the average ownership of the outside director on all of the boards he serves, as well as the average industry-adjusted ROA and the size of these firms. If the appointee is a CEO in another firm, we simply record his ownership, the industry-adjusted ROA, and the size of the firm in which he is the CEO. We use the natural log of sales to proxy for firm size in model (1) and the natural log of the market value of assets in model (2). All industry adjustments are done by subtracting the median of the variable matching by the company’s two-digit SIC code. We report p-values under parentheses.

Variable (1) Poisson (2) Logit

Constant −0.197 −2.818 (0.42) (0.00)

Appointing Firm’s Performance Industry-adjusted stock return (Rt − Rind)t−1 0.108 0.152

(0.36) (0.34) Sales growth [log(Salest/Salest−1)] −0.405 −0.121

(0.49) (0.53) Appointee’s Characteristics

Age −0.057 −0.166 (0.01) (0.28)

Gender (Female = 1, Male = 0) 0.409 0.108 (0.20) (0.12)

Average directorship ownership (% of common stock) 0.006 −0.105 (0.59) (0.01)

Average directorship industry-adjusted ROA 0.190 0.377 (0.03) (0.00)

Average directorship change in the stock return (Rt − Rmkt) 0.095 0.120 (0.07) (0.01)

Average directorship firm size 0.167 0.219 (0.00) (0.01)

CEO in another firm 0.202 0.883 (0.00) (0.00)

Retired CEO in another firm 0.288 1.659 (0.00) (0.00)

Gray director in another firm −0.040 −0.199 (0.05) (0.01)

Law degree −0.240 0.310 (0.50) (0.11)

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in seven hours

Watch the videos ‘Travel Can Change You’ and answer the following questions thoughtfully and thoroughly. Your answers should be in BOLD RED. You will then upload this document in Canvas. You can earn up to 10 bonus points for this activity.

From the quotes provided at the beginning of the presentation, in what ways can travel change people? What opportunities does it provide?

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Why was this trip to Uganda important to Claire? In your perspective, what were the most important lessons she took away from this travel experience?

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What is a ‘mzungu’ from a Ugandan perspective? What are some of the derivations of its meaning (for better or for worse)? Google it!

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TIA means ‘This Is Africa’ and it was a mantra used by many fellow travelers during her trip to Uganda. Why was it used? How might using this phrase be unintentionally limiting or negative? Google it!

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From your perspectives what were some important (sometimes painful) key lessons that Claire learned from the El Salvador trip? What specific problems arose from being a ‘guest’ of a prominent family vs. a ‘customer and partner’ of a government or nongovernmental agency on this service trip? How could you apply some of her tough lessons to your own studies or travels?

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From your perspective what are some key lessons about tourism and sustainability that Claire learned from the St. Lucia trip? How could you apply them to your own studies or travels?

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What are [human] ‘zoo pictures’ and how might that practice impact local culture?

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What are some key lessons/insights Claire learn from the trip to France, in contrast to other destinations?

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What are some key lessons Claire learned about sustainable tourism from the Costa Rica trip? How could you apply them to your own studies or travels?

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Explain what the Costa Rican term ‘Pura Vida’ is about. How could you apply this to your life and/or travels?

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What key lesson did Claire learn in Fiji and Australia from your perspective? How could you apply these to your future career or travels?

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What is the history and usage of the word ‘Bula’ in Fiji?

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Which tourism stakeholders have the least say (as demonstrated in Australia)?

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What key lesson did Claire learn in Botswana from your perspective? How could you apply these to your future career or travels?

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What is tourism’s greatest transformative potential from an interpersonal/intercultural perspective? Explain.

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Have you had a travel experience (near or far) that revealed a new understanding or promoted personal growth in you? Tell me about it! If you have not, find an article, story, or blog about a person’s travel transformation and briefly describe it here, including a link to where you found it.

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