Honey, CalPERS Shrunk the Board

Abstract

This paper attempts specifically to answer the question: whether there is any influence of shareholder activism on changes in board structure. I have used 8 years of directors data from 1988 through 1995 of the Forbes 500 corporations of 1987. I document that board sizes decreased during 1991-1995, that the inside directors decreased over time, and that the emergence of active institutional investors, at least CalPERS, seems to be associated with the increased tendency of firms to reduce their board sizes, primarily the number of inside directors. This conclusion is based on 4 documented facts: (1) In 8 of 61 cases in which at least 3 directors were removed, CalPERS seems to be associated with the increased tendency of firms to reduce their board sizes. (2) Based on the SUR estimates, changes from firms not targeted by CalPERS to firms targeted by CalPERS are associated with changes of board sizes from 1.25% to ?6.9% and changes from firms not targeted by CalPERS to firms targeted by CalPERS are associated with changes of insiders from 5.47% to ?6.14%. (3) The inside directors serve at the request of the CEOs and would never withdraw voluntarily unless they were leaving the companies or the CEOs asked them to withdraw. In the Forbes 500 corporations targeted by CalPERS, the fractions of replaced inside directors who remained as employees are larger than those of the Forbes 500 corporations not targeted by CalPERS (the fractions of replaced inside directors who remained as employees are 43% and 8%, respectively). (4) In the two constructed samples consisting of firms that might be free from being targeted by CalPERS, the variation in the board sizes does not follow the patterns suggested by CalPERS' corporate governance movements.