The Market for Non‐Executive Directors: Does Acquisition Performance Influence Future Board Seats?
| DOI | http://doi.org/10.1111/1467-8551.12290 |
| Date | 01 April 2019 |
| Published date | 01 April 2019 |
British Journal of Management, Vol. 30, 415–436 (2019)
DOI: 10.1111/1467-8551.12290
The Market for Non-Executive Directors:
Does Acquisition Performance Influence
Future Board Seats?
Svetlana Mira ,1Marc Goergen 1,2 and Noel O’Sullivan 3
1Cardi Business School, Cardi University, Cardi CF10 3EU, UK, 2European Corporate Governance
Institute (ECGI), Brussels, Belgium, and 3School of Business and Economics, Loughborough University,
Loughborough LE11 3TU, UK
Corresponding author email: miras@cardi.ac.uk
This paper investigates whether non-executive directors associated with good (bad) board
decisions are subsequently rewarded(penalized) in the market for directors. This question
is addressed by assessing whether the post-acquisition performance of acquiring com-
panies influences the number of non-executive directorships that non-executives involved
in these acquisitions hold subsequent to the acquisition. We find that non-executives on
the boards of acquirers that increase (omit or cut) their dividend subsequently hold more
(fewer)non-executive directorships in listed companies. Our findings suggest that the non-
executivelabour market is ecient and rewards (penalizes) non-executives for good (bad)
acquisitions.
Introduction
In the UK, over the past 25 years the board
of directors has been emphasized as one of the
most important instruments of corporate gover-
nance. Central to this has been an emphasis on
We are grateful to Georey Wood, the Editor, Dou-
glas Cumming, the Associate Editor in charge of the pa-
per, as well as three anonymous referees for their con-
structive criticism of our paper. We would also like to
thank Jay Dahya and Jarrad Harford for commenting
on an earlier version of the paper. The paper also ben-
efitted from the input of conference participants at the
13th Workshop on Corporate Governance and Invest-
ment, Cardi University, 12–13 October 2012; the Asian
Conference on Corporate Governance and Business
Sustainability (ACCGBS), Assumption University, 7–9
October 2013; the 3rd International Conferenceon Trans-
forming Management System for Innovation, Develop-
ment, Nepalese Academy Management, 27–29 March
2015; and seminar participants at the Universities of
Edinburgh, Kent, Loughborough, Nottingham-Trent,
Oxford Brookes, Reading, Sheeld, St Gallen and
Surrey.
the monitoring potential of non-executive direc-
tors,with successive governance codes stressing the
need for significant non-executive participationon
boards.1Consequently, a majority of board po-
sitions in large UK companies are now held by
non-executive directors. The expectation is that
non-executives are able to actively monitor the be-
haviour of management, ensuring that corporate
decisions are made in the interests of shareholders.
In parallel, researchers have sought to in-
vestigate the governance role of boards, in
particular seeking to ascertain whether greater
non-executive presence on boards is associated
with improved shareholder wealth. However,
there exists little consistent evidence that greater
non-executive participation is associated with
enhanced performance.2The apparent absence of
a direct link between board composition and firm
1See Cadbury (1992), Combined Codes (1999, 2003, 2006,
2008) and UK Corporate GovernanceCodes (2010, 2012,
2014, 2016).
2Bhagat and Black (2002) and Hermalin and Weis-
bach (2003) review research examining the relationship
C2018 The Authors.British Journal of Management published by JohnWiley & Sons Ltd on behalf of British Academy
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416 S. Mira, M. Goergen and N. O’Sullivan
performance has encouraged researchersto pursue
other avenues to understand the value of board
governance. One such initiative has been research
seeking to understand the operation of the market
for directors. This research has its roots in the
work of Fama(1980) and Fama and Jensen (1983),
who argued that the labour market for directors
serves as an incentive mechanism for directors to
pursue shareholder wealth continuously in their
management and monitoring activities. A number
of US studies provide some support for the notion
that the market for directors seeks to dierentiate
on the basis of directors’ prior performance
(Brochet and Srinivasan, 2014; Fich and Shiv-
dasani, 2007; Fos and Tsoutsoura, 2014; Kaplan
and Reishus, 1990; Yermack, 2004). However,
Harford and Schonlau (2013) and Davido,
Lund and Schonlau (2014) find that director
performance does not appear to be an important
determinant of future board positions.
This study examines whetherthe holding of non-
executive directorships by non-executives subse-
quent to their company making an acquisition is
sensitive to their company’s post-acquisition per-
formance. Focusing on the holding of director-
ships subsequent to acquisition is useful for two
reasons. First, acquisitions are one of the most im-
portant strategic decisions made by boards and
consequently represent a useful environment in
which to ascertain the quality of non-executive
decision-making and monitoring (Masulis, Wang
and Xie, 2007).3Second, existing research high-
lights significant variation in the performance
of acquiring companies, with a large proportion
experiencing weak post-acquisition performance
(Agrawal and Jae, 2000; Harford, Humphery-
Jenner and Powell, 2012). Therefore, froma share-
holder perspective, it is possible to assess the
wealth created (or destroyed) by an acquisition.
Consequently,our study undertakes a direct test of
whether the quality of non-executive monitoring
of director decision-making surrounding a specific
corporate event,with a likely substantial impact on
between outside directors and firm performance, while
Dalton and Dalton (2005) and Adams, Hermalin and
Weisbach (2010) are broader reviews of the governance
role of boards.
3While typically top executivesand external advisors play
a key role in an acquisition decision, the UK governance
environment holds the whole board accountable and re-
cent governance developmentsfocus much of that respon-
sibility on the non-executive board members.
the firm and its shareholders, has an impact on the
subsequent holding of non-executive directorships
by the non-executives involved.
This study focuses on the UK, as we believe
it has a number of distinguishing features that
make it an ideal laboratory to test the eective-
ness of non-executive monitoring and whether this
impacts on subsequent holding of non-executive
directorships. First, our study coincides with a
period of major reform in the structure of UK
boards, with a pronounced increase in the role
and responsibilities of non-executive directors
(Cadbury, 1992; Combined Codes, 1999, 2003,
2006, 2008; UK Corporate Governance Codes,
2010, 2012, 2014, 2016). Of particular relevance
to our study is the emergence over this period
of a clear distinction between the executive role
of management and the monitoring role of non-
executives and, hence, a greater emphasis on non-
executive responsibility to ensure that shareholder
interests are pursued continuously in corporate
decision-making.4
Second, in the UK, CEO–chair duality, thatis a
single individual assuming the roles of both CEO
and chair of the board, has been discouraged by
successive corporate governance codes, as well as
by institutional investors. As a result, we observe
duality in only 15% of our sample, compared with
64% in the US sample used by Duru, Wang and
Zhao (2013), while Chhaochharia and Grindstein
(2007) report CEO–chair duality in 75% of S&P
500 firms in 2003. While it might be relatively easy
to adjust for duality if a minority of observations
are exhibiting it, making such an adjustment for
a sample dominated by duality, such as in the US
case, seems less straightforward.
Third, unlike the position in the USA, where
companies frequently use staggered boards to pre-
vent director change, in the UK there are no re-
strictions to hiring and firing directors. This is im-
portant for studying the market for directors, as
4As highlighted by Dahya, McConnell and Travlos
(2002), in comparison with the USA, historically UK
boards were dominated by executive directors. Forexam-
ple, in 1988 only 21 of the FTSE 500 firms had a major-
ity of non-executive directors, compared with 387 of the
Fortune 500 firms. Further, the median UK board com-
prised only 27% non-executives compared with 81% for
the median US board. The current study reports a mean
proportion of non-executivesin acquiring fir ms of 44% in
1994, rising to over 68% by the end of our sample period
in 2010.
C2018 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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