Outside director experience, compensation, and performance

Abstract

PurposeThe purpose of this paper is to explore how outside directors' experience and their compensation affect firm performance through the quality of their monitoring and advising, when traditional board structure devices do not seem to work well.Design/methodology/approachFirst, the authors use a two‐way fixed effects (FE) regression model to explore the effects of outside director experience and compensation on firm performance. Second, in order to address the potential endogeneity problem of outside director compensation, the authors adopt two‐stage least squares regression (2SLS).FindingsControlling for other potentially influential variables, it is found that outside director experience and outside director compensation have an economically positive impact on a firm's accounting and market performance. Even when taking into account the endogeneity problem of outside director compensation, outside director compensation and experience still have positive effects on firm performance, consistent with the authors' predictions.Practical implicationsIt is inferred that regulators are able to ask publicly owned firms to provide outside director's experience and compensation in detail. In addition, future research should investigate the social relationships between outside directors, which also affect the functions of monitoring and advising.Originality/valueFirst, this paper contributes to this area of the extant literature by simultaneously considering the direct impacts arising from the outside director's experience and compensation. Second, the paper highlights the importance of considering multiple dimensions of director's experience in assessing its effects on firm performance.