Why Do Boards Let Their CEOs Take Outside Directorships? Entrenchment and Embeddedness

Abstract

We study the supply side of the market for CEOs as outside board members in the context of increasing legal and shareholder pressure on CEOs to refrain from accepting outside directorships. Consistent with potential benefits to their employing firms, CEOs have been increasingly more likely to accept directorships at vertically-related firms, especially when information and learning about upstream/downstream industries is expected to be particularly valuable. CEO director- ships at vertically-related firms have a significant positive effect on firm value and performance and help their firms handle industry shocks, especially in innovative industries where anticipating demand and supply conditions is crucially important. Consistent with agency/entrenchment costs, CEO outside directorships at unrelated firms are more likely for sending firms with weaker governance and have a significant negative effect on firm value. Taken together, our results suggest that external pressure has reduced the number of outside directorships that CEOs take and has improved their overall quality, although some evidence of agency problems remains.