Are Busy Boards Effective Monitors?

We present evidence that busy outside directors are associated with weak corporate governance based on a sample of U.S. industrial firms from 1989 to 1995. When a majority of outside directors serve on three or more boards, firms exhibit lower market-to-book ratios as well as weaker operating profitability. Appointments of busy outside directors appear unrelated to company performance, but such directors are more likely to depart boards following poor firm performance. When a majority of outside directors are busy, the sensitivity of CEO turnover to performance is significantly lower than when a majority of outside directors are not busy. Investors applaud departures of busy outside directors, and this effect is more pronounced for firms where the departure results in the majority of the remaining outside directors being not busy. When directors become busy as a result of acquiring an additional board seat, firms where they serve as directors experience negative abnormal returns.

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