In 2013 an activist investor criticized the board at ConMed for a “culture of nepotism, patronage, and dystopian corporate governance.” Director Stephen Mandia, who had served on the board for 12 years, departed shortly after. Two other directors stayed on the board but picked up additional board seats at other firms within the year. When Baker Hughes and Halliburton were both downgraded by equity analysts following an Obama administration oil drilling ban in 2010, several of their long-serving directors decamped to take up seats at other firms. What these examples suggest is that directors will leave firms that experience negative attention, often obtaining board seats elsewhere.
We conducted a study to understand how reputation motivates directors to leave their board appointments. Given the relatively low compensation tied to directorships, compared with other opportunities afforded executives (such as serving in a management role), as well as the fact that it appears to be incredibly difficult to “fire” a director, our findings suggest that directors primarily serve to build and service their individual reputations. Our results also indicate that directors are more likely to leave when criticism of the firm begins to endanger that reputation.
We investigated the consequences of a firm receiving negative attention by equity analysts and the news media. We examined the boards of all S&P 1500 firms from 2003 to 2014, and measured negative attention using equity analyst recommendations and an equity trading database that tracks media coverage. We found that directors are 15% more likely to leave boards (by avoiding reelection after the typical three-year board term) when those firms are downgraded by influential equity analysts, and they are 29% more likely to leave when they are criticized in the media. Additionally, directors who are top executives at other firms, serve on several boards, or have been on a board for a long time are more likely than other directors to leave the board when it is receiving negative attention. On the other hand, directors who serve as the chair of board, and may therefore be more engaged in the firm, are less likely to leave in response to negative attention.
We controlled for other factors that could motivate a director to leave. For example, we controlled for the possibility that negative firm performance was creating both the negative coverage and the director exit. But our results showed that negative media and analyst coverage was substantially unrelated to firm performance and that firm performance did not have an important impact on a director exit.
Of course, these findings do not directly prove that directors quit because of the negative attention or that they perceive negative attention as a threat to their reputation. But if directors were concerned about their reputations, we hypothesized that when their firm received negative attention, they would seek new board seats to insulate their reputations, even if they did not resign from their current seat. This is indeed what we found. Directors on the board of a firm that received bad press were more likely to be appointed to other public company boards following the negative attention, whether or not they left the original firm.
Most boards are now almost completely composed of “outside” directors — directors who are not executives at the firm — despite the fact that this may actually hamper firm performance. Outside directors are a relatively small group of people atop the world’s largest organizations (in 2014 there were fewer than 10,000 different outside directors in U.S.-listed companies), and they care deeply about their reputations. One director we talked to, who had served on the boards of multiple companies traded on the New York Stock Exchange, said:
Protecting one’s reputation for good business judgment and integrity is a common concern for directors. No director wants to be caught up in a publicized corporate debacle and become “untouchable” for future opportunities. I remember feeling relieved that I wasn’t on the Enron board when that company blew up. Same for the boards of General Motors, Wells Fargo, and some of the pharm firms that are enduring continual public flogging.
Because directors must protect their reputations, some appear to leave when negative media and analyst attention on the firm gets too intense. Understanding the strategies directors use to protect their reputation (resigning from boards, pursuing new boards, and so on) can help executives create policies to keep directors engaged in the unity and consensus building that strong corporate governance requires.
The results from our paper suggest two areas for further investigation. The first is to look at how to help directors protect their reputations so that they remain engaged in the board. Firms might want to identify alternative strategies and opportunities to help directors burnish their reputation without exiting the firm, perhaps by creating more nonexecutive chairs or lead independent director positions.
The second area is understanding how reputation influences the market for director talent. Executives hoping to protect the continuity of their board might take steps to praise individual directors and boost their reputations. They should also consider better documenting directors’ careers and participation. And firms might encourage popular media outlets for executives to popularize strong governance practices and capable directors. Directors whose reputations are bolstered by the media, independent of the firms where they serve, will find it easier to stay on a board when the firm is struggling.
Overall, these are important issues for companies and executives to consider if they are to retain the best talent and promote strong corporate governance.
