MFDF - Mutual Fund Directors Forum - Multiple Board Appointments Linked to Reduced Firm Profitability; Boards Adopt Buddy System for Newer Directors test

Member Login

Request an account

Sample Banner 2

Multiple Board Appointments Linked to Reduced Firm Profitability; Boards Adopt Buddy System for Newer Directors

An academic study that examined the effect of busy corporate directors and boards on the value of a set of international firms from 1999-2012 concludes that firms with busy directors who sit on multiple boards exhibit lower market-to-book ratios and reduced profitability. The authors estimate that a one percentage increase in busy independent directors on a board reduces the market-to-book ratio by 0.34, while the return on assets is about 34% lower. The study found that “busy directors allow for greater access to resources through their superior human and social capital accounts, offer improved perceptions of corporate legitimacy, and provide effective advising and oversight.” However, overtasked directors may have a negative effect on firm value because their busyness can preclude them from generating the shareholder value that would be captured in higher market-to-book ratios. The authors note that the corporate world appears to view busy directors as ineffective because of their inability to provide adequate oversight. Corporate activists and governance experts have also contended that holding numerous board appointments reduces the monitoring and attention that a director can provide to any one firm.  The study suggests that busy directors provide the greatest value to newly listing or very young firms that have less corporate knowledge in key areas like the management of investor and analyst relations.

Meanwhile, some corporate boards are integrating newer directors into the fold by pairing them up with seasoned board members. According to a Wall Street Journal report, such pairings can help newcomers figure out a boardroom’s cultural norms and power dynamics. The Wall Street Journal report cited a 2016 survey which found that 33 of 296 U.S. companies with orientation programs for directors choose an experienced board member to guide their latest member.

  • All
  • Accounting and Audit
  • Advisory Contracts
  • Board Governance
  • Board Governance: Board Leadership
  • Board Governance: Compensation
  • Board Governance: Oversight of CCO
  • Board Governance: D&O Insurance
  • Board Governance: Self-Evaluation
  • Closed-end Funds
  • ETFs
  • Other Oversight
  • Other Oversight: Alternative Investments and Derivatives
  • Other Oversight: Custody
  • Other Oversight: Fixed Income funds
  • Other Oversight: Distribution
  • Other Oversight: Portfolio Trading
  • Other Oversight: Proxy Voting
  • Other Oversight: Securities Lending
  • Legislative News
  • Money Market Funds
  • Reference
  • Regulatory News
  • Risk
  • Shareholder Disclosure
  • Valuation
  • Webinars
  • Aaron New Tag