Analyzing Ineffective Corporate Governance: Director Busyness and Board Committee Memberships

Abstract

The benefits and costs of directors holding multiple board seats continue to be debated in the literature. We contribute to the debate by examining whether holding multiple outside board seats compromises directors' ability to effectively perform their monitoring duties. Analyzing over 40,000 observations of individual director data across more than 1,400 firms, we report that, by and large, individuals holding more outside directorships serve on fewer board committees. The relation, however, appears to be non-linear and U-shaped indicating some support for both the busyness and the reputation hypotheses. In addition, we find that holding more outside board seats decreases the likelihood of a board member being on a greater number of work-heavy and specialized committees such as compensation and audit committees. The findings substantiate evidence (Akhigbe and Martin 2006) on value relevance of board committee structures. Additional analysis of committee memberships suggests that women and ethnic minorities are placed on more board committees. In addition, directors on smaller and independent boards serve on more committees. Finally, it appears that the Sarbanes-Oxley Act had material impact on the association between the number of multiple board seats and the committee memberships.