Board Seat Accumulation by Executives: A Shareholder's Perspective

Abstract

The National Association of Corporate Directors and the Council of Institutional Investors have issued guidelines suggesting restrictions on the number of outside directorships for corporate executives with full-time jobs. By examining stock returns for 349 publicly traded sender firms (executive's main employer) and receiver firms (where the executive is an outside director) at the announcement of new outside director nominations, we provide evidence that such guidelines may be misguided. We find negative announcement returns for the sender firms when the executive has low managerial ownership in the sender firm and when the board of the sender firm does not have a majority of independent directors. The announcement returns for these firms are even more negative when the executive already holds multiple directorships. In contrast, we find that when a sender firm has higher executive ownership or an independent board, the announcement return is positively related to the number of directorships held by the executive. When fewer agency problems exist in the sender firms, it appears that the additional directorships can benefit the sender and receiver firm through signaling of managerial quality, learning, or networking opportunities. Our results are robust to controls for the expected number of directorships and for diversified shareholders who hold a value-weighted portfolio of the sender and receiver firms. Our findings cast doubt on the merits of regulating the number of outside directorships that an executive can hold.