Boardroom Brawls: An Empirical Analysis of Disputes Involving Directors

Abstract

We investigate the internal workings of US corporate governance with a hand-collected dataset of director resignations that are related to power struggles within the board. About two-thirds of the conflicts arise because of how board members interact in carrying out their duties, while most of the remaining cases involve disagreements between directors and top management over corporate strategy or financial policy. Conflicts are more likely to occur at companies where the CEO is the founder or is relatively new to the position. Tensions also increase when there are independent directors with large blockholdings. Stock prices decline sharply on average after a director turnover amid dispute, which may indicate that investors expect the firm to continue to have poor operating performance. The aftermath of such a resignation often includes shareholder class-action lawsuits, proxy contests, asset divestitures, and stock market delistings. Our results highlight the importance of a well-functioning board for reducing agency problems and maximizing shareholder value.