Are Busy Boards Detrimental?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday August 24, 2011 at 9:18 am
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Editor’s Note: The following post comes to us from Laura Casares Field, Michelle Lowry, and Anahit Mkrtchyan, all of the Department of Finance at Pennsylvania State University.

In our paper, Are Busy Boards Detrimental?, which was recently made publicly available on SSRN, we attempt to measure effects of busy directors serving on the boards of venture-backed IPO firms, and by so doing, address concerns that busy boards are detrimental and that multiple directorships should be limited. The issue of busy boards has received considerable attention in the academic literature and popular press. Yet, even though the academic literature has long recognized that venture capitalists are active on the boards of IPO firms in which they have invested, it is silent on the effects, or even the existence, of busy directors on IPO firms’ boards.

A recent Wall Street Journal article, “Start-Ups Grumble About Directors Too Busy To Help” (7/29/2010), discusses this very issue of the costs and benefits of busy directors among young firms. Focusing on the negative aspects of busy boards, the Wall Street Journal article articulates entrepreneurs’ concerns that venture capitalist directors are juggling too many companies and that the hands-on guidance they can provide to their portfolio companies becomes diluted. Consistent with evidence presented in this paper, however, a number of associated commentaries by executives of private companies with busy boards on the WSJ.com website emphasize that busy directors also provide substantial benefits to the companies on which they serve. The following quote from executive Marcie Black of BandGap, Inc. incorporates the sentiments of several executives’ posts: “The article focuses heavily on the amount of attention a board member offers, but it’s the quality of attention that matters. Many abilities of a mentor improve as they sit on more boards—experience, breadth of network, personal skills, and sense of perspective. No matter the issue that we’re confronting, Forest [board member at BandGap Inc. who also serves on 19 other Boards] has seen it before and usually more than once. The clarity I get from a 20 minute conversation is worth hours from a less experienced mentor.” The executive commentaries to the WSJ article are consistent with our evidence that busy directors can provide strong benefits to young firms’ boards.

Our evidence demonstrates that busy boards are common among venture-backed IPOs: 49% of them have busy boards. Yet, our results are not driven solely by directors affiliated with venture capital—in fact, 30% of all non-venture directors in our sample serve on three or more boards. The widespread use of busy boards among IPO firms suggests that these firms’ insiders, who bear the costs of suboptimal governance at the IPO, believe that the benefits of busy boards outweigh the costs for them. In support of this, we find that busy directors of IPO firms are more experienced, more qualified, more committed to their firms, and better networked, consistent with the notion that busy boards are beneficial. We find no evidence that busy boards impose costs on IPO firms. Within subsamples where we posit that benefits of busyness are highest, results suggest that busyness contributes positively to firm value.

We conclude that calls to limit multiple directorships could impose costs on IPO firms, making it difficult for them to find suitable board candidates, or forcing busy venture capitalist directors to leave IPO firms too early in the maturing process. To restrict the ability of directors to serve on multiple IPO boards could pose a negative externality on the governance of newly-public firms. Broad-brush recommendations to reduce directorships should not be pursued.

The full paper is available for download here.

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