Thread by @lukestein

🚨Accepted today!🚨
“Independent executive directors: How distraction affects their advisory and monitoring roles” (with Hong Zhao, my former student now at NEOMA) at the Journal of Corporate Finance

1/6 Short thread, aimed not just at corp fin folks👇🏻
lukestein.com/research/stein…

2/6 If you rely on an agent to help monitor your interests (and maybe advise you, too), you probably want an expert. But the best experts usually have competing commitments.

(You probably don’t want your “worst” colleagues on the University Senate, but do you want your “best”?)

3/6 Shareholders often hire corporate executives to sit on boards of directors. For example, Apple CEO Tim Cook is on the board of Nike.

We ask: When things get bad at the employer (Apple), does the director (Cook) do a worse job monitoring/advising at the the firm (Nike)?

4/6 We find that directors are worse monitors/advisors when distracted by events at their employer.
They miss more meetings, and the firms have
-Worse performance
-Lower value
-Higher CEO pay
-Lower CEO turnover-performance sensitivity
-More accounting problems, and
-Do worse M&A

5/5 It looks like independent executive directors are *doing something good,* because when they get distracted, bad things happen. And they *do* get distracted.

(Causal inference is hard. We do our best with panel-based and matching/diff-in-diff strategies. Read the paper.)

6/6 We don’t attempt cost/benefit of different kinds of directors. (Others have.) But given distraction, maybe executives don’t belong on small boards (or small committees)? Maybe boards/comtes should be “diversified” so not too many members get distracted at the same time?
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