The effect of multiple directorships on a board of directors' corporate governance effectiveness

Abstract

Prior research has documented conflicting evidence on whether having corporate directors sitting on multiple boards is harmful or beneficial to a firm. According to the Busyness Hypothesis, sitting on multiple boards is detrimental due to the distractions and time constraints that result for the directors. Alternatively, the Experience Hypothesis suggests that directors gain valuable experience in varied industries and/or regulatory environments by serving on multiple boards, which results in increased governance effectiveness. We extend prior research by proposing that both a busyness effect and an experience effect may be present and act simultaneously, but that one of the effects will dominate for certain types of firms. We hypothesise that the busyness effect will prevail in smaller firms, while the experience effect will be dominant for larger firms. Using the number of reported material internal control weaknesses as a proxy for governance effectiveness, we provide empirical support for these hypothesised relationships.