Distracted Directors: Does Board Busyness Hurt Shareholder Value?

June 14, 2013 Leave a comment

Distracted Directors: Does Board Busyness Hurt Shareholder Value?

Antonio Falato Federal Reserve Board

Dalida Kadyrzhanova University of Maryland

Ugur Lel Virginia Polytechnic Institute & State University – Department of Finance, Insurance, and Business Law

May 31, 2013

Abstract: 
This paper examines the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. We use the deaths of directors and CEOs as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The sudden loss of such key co-employees is an ‘attention shock’ because it increases the board committee workload for some independent directors at the interlocked firm – the ‘treatment group,’ but not others – the ‘control group.’ In a hand-collected sample of 2,551 (592) firms that share a non-deceased independent director with 633 (189) firms subject to director (CEO) deaths, difference-in-difference estimates reveal that investors react negatively to these attention shocks. There is a significant negative stock market reaction of -0.79% (-0.95%) for director-interlocked firms in the treatment group, but no reaction for those in the control group. The treatment effect is significantly magnified by interlocking directors’ busyness (e.g., board size and number of outside directorships), the importance of their roles in the firm (e.g., type of committee membership), and their degree of actual independence (e.g., entrenchment). Overall, these results provide direct evidence that director attention shocks are interpreted as negative events for firms and that independent directors’ busyness entails costs for shareholders.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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