Benefits of Focus vs. Heterogeneity: An Analysis of Corporate Boards

Abstract

We study the costs and benefits of dispersion in directors’ incentives and ability within corporate boards. Director incentive is measured by their ownership in the firm and number of outside directorships help by each director. Director ability is measured based on the experience of directors in other industries and the age of the companies in other directorship appointments of each director. Directors exhibit a considerable amount of heterogeneity in their ownership in the firm, number of outside board appointments, and the characteristics of the other companies in which directors hold appointments. Firm and industry characteristics appear to affect the preference towards more versus less board heterogeneity. Board heterogeneity has significant effects on firm value and key firm decisions that cannot be explained by board composition, size, and expertise levels. Heterogeneity in director industry expertise is associated with lower firm value, which underscores the importance of focus in director appointments. Heterogeneity in director ownership incentives similarly has a negative effect on firm value. Heterogeneous boards compensate the CEO with less incentive pay and higher total pay. We also find that board heterogeneity is associated with lower cash holdings, higher dividends, and higher leverage.