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Joirwai ol’ Finaw:ll Econmrw:i 40 (1996) 8 1 104

Factors affecting the number of outside directorshipsheld by CEOs

James R. Booth*, Daniel N. Deli

College oJ’ Business, Arizona Slate lJniver~*q, Tempt. AZ R5287-3906. USA

(Received April 1994; final version received May 1995)

Abstract

We invesligatc factors aflecting the rxmber of outside directorships held by CEOs.CEOs of firms with growth opportunities hold fewer Jutside directorships than CEOs offirms consisting primarily of assets-in-place. We find eviderxe consistent with CEOsholding more outsIde directorships zs they transfer decision rights io their eventualsuccessors. i5e also find that when empioyees (not necessari!y CEOs) of two different

firms sit on each other’s boards, CEOs hold more outsi de directorships, suggestingCEOparticipation bonds the reiationship between the two firms. We find little ev idencethat ou.side directorships represent unchxked perquisite consumption on the part ofCEOS.

Key MVXY/S: utside dmxtorships; Boards of directors; CEOsJEL dassjfication: G32; I.22

1.. Introduction

Recent stuJies of corporate boards focus on the benefits of ~ndepcndent

boards, but give little consideration to the supply of out.si.de directors. Fcr

example, Weisbach (1988) f,lds that outsider-dominated boards are more iikely

tc, remove poorly performing CEO s. Rosenstein and Wyatt (1990) find thatshareholder wealth increases with the addition of outsiders to the board. Byrd

*Corresponding aulhor.

We have b.m:f%ed from the comments of ClitTord Smith (the ediror). an antjnymous rcieree, and

seminar parlicipsnts at Arizona State University. Pan of this research was conducted :vhile James R.

Booth was a visiting scholar at the Federal Reserve Bank of San Francisco.

0304-405X!96jSlS.C0 l: 1996 Elsevie: Science S.A. All ri$lts reserwd

SSDI 03044O5X95OOS38 6



and tlickm:m (1902) ;md Brtcklcy, C’oles, and Terry (1994) find that marketrcsponsc to management-initi alud control actions is positively related to the

percentage of outsiders on the board.

A larsc traction of outsidc directors arc CEOs. In a survey of outsL.le directorsof I;‘rwlltrk~ flO firms LCWZ~TIUJMaclver ~1080) ind that 63?Gof outside boardrnen~lx.m arc C’EOs of’ other corporations. The popular press suggests thatself-scrvitq C’EX)sX..X~I out:;ide directorships as a form of perquisite consump-

tion, anti tltirt this is symptomatic of a ‘CEO d&se’ in corporate America (Byrne,

,Y~~:n(:nds,nd Silcr. 109 ). To date, no academic studies have considered whatfactors determine :he number of outside directorships held by CEOs.

We examine the factors that affect the numbz of outside directorshipsheld by CEOs. Specifically, wc cxaminc the extent to which the number

of outside directorships held by CEOs is driven either by agency costs 01~hc cl;amctet-istics of the CEOs’ firms. In a rciatcd study, Kaplan and Reishus

(I99Cr) find what the probability of a CEO taking on an outside directorship ispositively related to their fi rm’s performance Gilson (1990) documents a similarresult. ‘?I~csc indings support the theory that market forces discipline partici-pants in the market for outside directors (Fama, 19X0; Fama and Jensen,1983a.b). Since managers who ncglcct their firms arc unlikely to be asked toscrvc on other firms’ boards, Kaplan and Rcishus’s finding also casts doubton perc~uisiteconsumption as an explanation for C’EOs holding outside direc-torships.

While Kaplan and Rcishus focus on the demand for CEO o&de directors asa funct.ion of CEO firm performance. we concentrate on the supply of CEOdirectors as a function of the .I; turc of the CEO’s ov;n firm, CEO tenure,existing relationships with other lirms’ boards, and pcryuisite consumption.Smith ;irrd Watts (1992) assert that as ;I rcsotirce, CEOs who manage growthopgortunitizs arc scarcer and have hiphcr- marginal proclwts than at-t:execuliveswho managt existing axscts. This supgcsts that C’EOs who manage growthopportunities will hold fewer time-consuming outside directorships. Vancil( 19X”/) ~:?scrtsints <:‘E(b:;, ~~vcr ime, de!egatc authority to their eventual suc-

moors. ihrns reeing themselves to hold ;:?orc outside directorships. Allen ( 1974).gttd Schonrmdn, Ba:rerman, and Atkin (l98i) argue that firms imploire theirrclatiorships with other firms by exchanging directors. If CEO participation isimpi~-tant IO bondirlg, CEOs are iikci!; to hold more outside directorships asa function of cx;:ting rohltionships with other firms’ boar&. We documentevidence consis!cnt wrrh ali nl’ these theories.

Y/c finch hat the number of outside directorships held by CEOs is negativelyrelated to their firms’ growth opportunities. We also find that the number ofoutside directorships hclri is positively related to CEO tc‘nurc. in firms in which

lhc (‘EC3 :itrd hc>zrtl chairman positi~>ns :rc held by two difli:rent individuals(Lc., whcr~ r nt%w IEG is bcinp groomed to rcpiacc the chairman as the head ofthe firm), chairmen hold significantly more outside directorships than CEOs.



Fame and Jensen (1983a, b) suggest that firms must withstand the selection

process of the ecot~omic cnviromx~c’t~~.hey conclude that the form of organiza-tion that survives in an activity is the one that can deliver the product at thelowest price, whiie covering costs. Hence, competition and economic selectionproduct an cllicicnt. utilization of rcsourccs. In our setting, economic selectionsuggests that the firms observed in the market are those in which CEOs, as

a resource, are being used efficiently.If outside directorships represent value-increasing projects for the firm, it is

important to understand the sources of value. Development ofan explicit theorydescribing the nature of the benefits associated with holding outside director-

chips is beyond the scope of this paper, but recent work is suggestive. Bacon and.Brown (1974) propose several ways in which CEOs can become more elfectivemanagers within their own firm by serving as outside directors:

( I) Stunduds 0J‘ cotnpurisotr. CE/3s can confirm whether the policies andpractices of their own kirms are being followed by other firms and, if there arediscrepancies, determine why.

(2) E.~~OSMI’C to irrnorwirorr. If firms on whose boards CEOs serve are pursuing!XW approaches to some aspects of business, the CEOs can adapt theseapproacllcs to their own firms.

(3) Broudened insight, Serving on the boards of certain types of institutions(siich as banks. multinationals, or energy-czqloiting companies) is valuable;such directorships can provide the CEO with valuable information abouttrends in interest r&1+ international business. or major input factor prices.

(4) E.uposurc ii) rl$kwrl tndtw~;ement st~ks. Seeing how other CEOs run theirbusir~sses can help CEXis modify their own management styles.

(51 A .S(lll rW q)‘ WLllf.Sd. 7 hc access to other CEOs prcvided by being an

outside director hely:s CEOs in running their own fi rms.These potential benefits are unlikely to be constant across firms. For cxamplc.

firrr!: consisting mainly of assets-in-place arc unlikely to benefit greatly fromhaving their CEO serve ;\s an outside director. Company and industry practicearc probably well developed. Firms with growth opportunities, on the otherhand, stand to gain the most by having thei. CEOs serve on other firms’ boards.

Whifc Bacon and Brown (1974) cite the potential benefits of having a CEOscrvc ;~san outsi& rlirccror, <,utsidc directorship!: tie involve costs. Smith and

W~rtts l992) m:lint;lin that the marginal product of investment decision-makers

is grcatcr than the marginal product of supervisors, and that good investmentdecisio;3~makers are scarcer than good supervisors. CEOs, however, are onlyproducing: [or their compani,::s while they arc working in their companies’ (i.e..



J.R. Booth, D.N. Deli/Journal of Financinl Economics 40 (1996) 8/- 104 85

shareholders’) interests. All else equal, activities drawing CEOs’ attentions away

from their duties within their fi rms are more costly for firms in which CEOs areinvestment decision-makers (i.e., firms made up largely of growth opportunities)

rather than managers of existing assets.”Both the benefits and the costs of outside directorships increase with growth

opportunities. The number. oi outside directorships held by a CEO will bea fu;lction of the relative costs and benefits to the firm. Whether costs or benefitsrise faster with growth opportunities is an empirical issue. Our conjecture is thatthe benefits of outside directorships are less sensitive to the nature of a firm’sinvestment opportunities than are the costs of outside directorships. -4s a result,we expect that the number of outside directorships held by CElOs will benegatively rclatcd to growth opportunities.

2.2. Variation across CEO career cycle

Vancii (1987) describes the succession among top corporate executives clsa ?-,-lay process’ in which a successor to the current CEO/chairman is selectedseveral years prior to the CEO/chai rman’s departure. In the typical model, theCEO/chairman gives up the position of CEO, but retains the board chairman-ship. The new CEO is eased into the position, and the chairman, over time,delegates increased authority to the new CEO. Eventually, the chairman givesup participation in the firm altogether and the chairmanship is given to theCEO.’ Vancil’s model suggests outside directorships held by the incumbentbecome less costly to the firm as more authority is delegated to the new CEO.Thus, for a given level of growth opportunities, we expect the number of outsidedirectorships held by an incumbent to increase with the amount of authority theincumbent delegates to the successor.

2.3. Relatiorzshipsbetween boards

Jensen and Mecki ing (1976) argue ti:at firms arc ’ . legal fictions which serve

as a nexus for a set of contracting relationships’. Contraciing relationshipsevolve to econo,nize on the cost of contracting be?,veen he interested parties.Firms may exchange directors (i.e., interlock corporate boards) to better bondz contracting relationship (Allen, 1974; Schoorman, Bazerman. and Atkin.1981). For example, a firm may interlock boards with a.major supplier. Access oproprietary infotmatio:? about the supplier can credibly bond supplier behavior.Likewise, presence on the buyer’s board assures the suppiier concerning the

._ .._. _ _ ...

‘Lursch and MacIver (1959) report that lack of time is the most highly c~tcd reason for reftisiig anoutside directorship.

3Brickley. Coles, and Jarrcll (i99.3) fired evidence cclnsistent with Vanci’!‘s model of CEO succession.



buyer’s actions. ‘l‘o the extent that relationships between corporate boardsrequire CEO participation, we expect to observe a positive relation between thenumber of board interlocks CEOs’ firms have and the number of outside

directorships the CEOs hold.

I-iermulin and Wcisbach ( 1988) suggest that outside directors serve as poten-tii>l sources of counsel, add experience and expertise to the board, and offerviewpoints that can differ from those within the firm. Mace (1986), Koenig.,Gogel, and Sonquist (1979), and Mariolis (1975) suggest that outside directorscan serve as sources of prestige and business contacts. Bacon and Brown (1974)

assert that monetary compensation plays little role in attracting highly paidCEOs to serve on the corporate boards of other fi rms. Consistent with Bacon

and Brown, Lorsch and Maciver (1989) find that compensation is the Icast-oftencited reason among outside directors for accepting an outside directorship.Lorsch and MacIver suggest that CEOs may serve as outside directors in orderto attract other CEOs to serve as outsiders on their boards. (One CEOinterviewed by Lorsch and Maclver stated: ‘ . . . 1 have to be willing to serve onother people’s boards. If I were to say no all the time to all of the requests thatI receive, then obviously the result would be the attitude: if he doesn’t want toplay ball with me, then i won’t play with him.‘) This view suggests he market foroutside directorships operates as an in-kind barter market.’ Serving as anoutside director allows the CEC’ ‘1 .purchase’ the services of other CEOs asoutside &rectors. Viewing the IN,*.’ ‘. 1, :’ qx!tside directors as an in-kind bartermarket suggests that the number OJ <jutside directorships held by a CEO ispositively related to the presence of unafiliatcd CEOs on the CEO’s OWP%a~;.

CEOs mallage Arm assets: or shareholders. To the extent CEOs’ interestsdilrer from shareholders’, their actions deviate from what shareholders consideroptimal (Jensen and Meckling, 1976). CEOs undertake outside directorshipsuntil the personal benefits from taking on another directorship equal thepersonal costs. Shareholders l ike to have the CEO take on outside directorshipsuntil the marginal benefits to the firm equal the marginal co& to the firm.

As noted by Bacon and Brown (1974) and Lorech an,1 Maclver (1989), CEOsare able to become more effective managers because of their experiences servingon other companies’ boards. The benefits of increased managerial ability also



J.R. Boo/h, D.N. Deli/Journal of Finnncial Economics 40 (1996) BI-- 104 87

accrue to the CEO in the form of enhanced human capital. To the degree CEOsoverinvest in this form of human capital, shareholder wealth is reduced.

Serving as an outside director is also prestigious (Mace, 1986). Some portion

of the CEO’s enhanced status in the business community is expected to accruedirectly to the CEO, not to the firm. If stature within the business community isimportant to CEOs, then we expert CEOs to accept more outside directorshipstha:, shareholders consider optimal.

While outside directorships have potential personal benefits, they also involvecosts. Serving as an outside director requires at least some effort on the part ofthe CEO, and the actual effort involved may be considerable.5 Also, if outsidedirectorships represent value-decreasing projects, CEOs bear the cost of reduc-ing the value of their s tock holdings. Additionally, becoming an outside director

exposes a CEO to shareholder lawsuits. The risk of litigation can representanother cost to becoming an outside director.6 Further, CEOs of firms with

greater outside participation on their boards are more likely to be discipl ined fornon-value-maximizing behavior (Weisbach, 1988). As these factors increase tt,i:cost of perquisite consumption, we expect the number of outside directorships

held by CEOs to decrease.

2.6. Control Fariables

Control variables include fi rm size, the CEO’s positions on their own boardsand the size of their boards, and the effect of regulation.

2.6.1. Firm sizeFirm size proxies for the contracting environment of the firm. For example.

larger firms have more external contracting relationships than smaller firms.Firms with a greater number of external contracting relationships have moreopportunity for gain from well -bonded relationships. Better bonding of COL-tracting relationships predicts a positive relation between firm size and the

sBacon and Brown note that: ‘The conscientious performance of the rcspor~sihili ties and duties <if

this off~cc requires a not inconsiderable investment of time and cncrgy. ‘The outside director must nor

only attend board meetings, some of which may be held at considerable distance from his regulnl

place of business. but must also prepare for them and, sometimes, do follow-up v;ork. If he is

a member of one c: more board commit tees, his commi tmsnt is correspondingly enlarged. Finaily

he may be called upon IO engage in additional discussion and consultation with the chief executive.

other members of management, and his fellow directc\rc ’

‘Citing a survey A’ 501 outside directors of Fortune SCKI irms, Dauur ( lY93) reports :hat 509b of tnc

outside directors had been sued in connection with their board service. Bhagat. Brickl ey, and Colts

(1987). however, argue that indemnitication by the company and directors’ and o%cers’ liability

insurance clim inatcs a largc portion of the risk to the outside directors. Consistent with Bhagat.

Brickley. and Co1c.s. Lorsch and MacIver (1989) find that personal liability is the least cited reason

for refusing an outside directorship.



number of outside directorships held by CEOs. Further, the sheer size of the firmprotects management from the disciplining force of the market. Perquisiteconsumption in the form of outside directorships becomes cheaper as firm size

incrc;i.;es, and in large f irms it leads to an increase in the number of outsidedirectorships ticld by CEOs.

CEOs’ positions on their own boards can be important in determining thenumber of outside directorships they hold. Ail else equal, CEOs who are alsochairmen may be able to better bond relationships with external contractingparties. It is also possible that CEOs’ positions as chairmen afford them thepower necessary (i.e., reduces their personal cost) to take on outside director-

ships as pcrquisitc consumption. Better bonding of external contracting rcla-tions and the potential for increased perquisite consumption predict that CEOswho are also their own firms’ chairmen hold more outside directorships thanCEOs who arc not chairmen.

The size of CEOs’ own boards, like firm size, reflects the complexity andextent of their f irms’ contracting environments. Firms use their own board seatsto bond closer contracting relationships with outside parties. Better bonding of

external contracting relationships suggests a positive relation between own-board size and the number of outside directorships held by the CEO. Further,l3unn ( 1987) and Yermack (1994) argue that smaller boards are better able tomt~nitor the pcrformancc of corporate executives. Large boards become un-

wieldy and arc unable to act in a cohesive fashion. ‘The personal cost ofopportunistic behavior falls with larger board-. As the price of consumingoutside directorships falls, CEOs accept more outside directorships.

‘I’hc predicted relation between growth opportunities and the number ofoutside directorships held by CEOs holds in markets in which selection pro-duces the efficient ahocation of resources. liegulation could ha*je a significanteffect on the number of outside directorships held 5y CEOs for two reasons.First, if the regulatory process insulates the firm from the selection process of themarketplace, then the number of outside directorships held by the CEO may beunrelated to firm investment opportunities. Second, the regulatory process itselfmay constrain CEO actions. C’onstraints could prevent the CEO from taking onoutsicic directorships as a fLiTlCtiCPl1 of firm investment opportunities. Insulation-,

from the forct:$ of ~hc markctpiacc and constraints imposed by ihc regulatoryprocess itself suggest the number of outside directorships held by the CEO ofa regu!,tted firm is unrelated to firm investmpr.: oppor!.unities.



89.R. Boorh, D.N. Deli/Journal of Financial Economics 40 (1996) 8/- 104

3. Data md empirical results

In this section, we first describe the data and then perform tests of the Factors

hypothesized to affect the number of outside directorships held by CEOs.

3.1. Data description

Our sample is drawn from CEOs and CEO/chairmen of S&P 500 firmsduring the 1990 proxy season. We use a data from the Investor ResponsibilityResearch Center (IRRC). The IRRC data tells us the number of outside director-ships held by CEOs, whether a CEO is also chairman of the board, composition(outsider or insider) of each <_‘EO’sown board, the SIC code for classifying

regulated versus unregulated firms, the stock ownership of CEOs, the percent-age of common stock held by all officers and directors, and whether an indepen-dent blockho!der sits on a CEO’s own board of directors. Tenure dais conicfrom the Forhvs annual compensation survey. For firms not in the Forbes

survey, we use the Disclosure Q-files. Ti~c market value of firm equity andvariables derived from accounting numbers are constructed from Compztatdata for fiscal year 1989. The foilowirlg variable definitions are used:

Dirs

Mktbk

Chair

NumDir

interlock

Burter

Our

cot?ztnotz

= number of out1 ;de directorships held by a CEO,= ratio of tt-_pmarket value of firm equity plus the book value of

pr&rreJ jl j,.,. ]SLUShe book value of debt to the total value ofassets,

= natural log of the sum of the market value of the firm equity plusihe book value of preferred stock,

= binary variable taking a value of one if a CEO is alsd chairmzn of

the board, zero otherwise,= number of directors on the CEO’s own board,= number of board interlocks the firm has with other fi rms (an

interlock is considered to exist when employees of two different

firms sit on each other’s boards),Z-Z umber of unafiliated CEOs on the CEO’s own board.= percentage of nonCE0 outsiders on the CEO’s own board.’= percentage of common stock owned by a CEO,

‘Outsiders arc defined ‘1s board members whose oni) affiliation with the compurty i> ;u a dircctur.

Empioyees, former employees. relatives, blockholdors. persons who derive personal hcnefi~ [e.g..

consulting fees and personal loans). and members of 5rms with contracting rcla~ions with Ihe firm

(e.g.. commercial bankers. lawyers. investment bankers. etc.) are not classified as o:ltside director+..

irnaffiliatrd CEOs are excluded from our measure of the pcrccniagc of outsiders on the boxd

became He include them as a separate variable measuring firm dcm,~nd for unafliliatcd CEOs.



Dir,

Mkrhk

Firm value

(miilion3!

Common

owned by

CE O

Common

owned byboard

Size of own

board

Bur/cr

out

CEO Years

1 x7 2.0 1.56

I.23 O.Y7 f1.X-l

4939.01 25X.3.3 749 1 Y9

0.013 0.003 0.033

12.62 12.0 3.67

1.55 I .o 1.47 I OS!

0.465 0.467 0.157 0.833

8.4 6.0 1.80 51.0

0.2SX

08.30

33 0

o.osn 0.01o

! 4.0 i 0.n

2.0 0.0

0.57') 0.357

11.0 2.0

iklf

n.n

4.0

Dirs is the number of outside directorships held by a CEO. Firm value is the market value ol’rqui~!

plus the book value of preferred stock. M/irhk is the ratio of the marker value of firm equity plus the

book value of preferred stock plus the book value of debt to the total value of assets. Barrcv i s !he

number of unaffiliated CEOs on the CEO’s own board. 0~ is the percenf’lpr of unafiliarcdnonCEOs on a CEO’s own board. CE0Year.s is the number of years the CEO has held the CEO

position.

with the mean of 0.59 regor:cd i n Yermack (1994). Byrd and Hickman and

Brickley, Coles, and Terry examine market response o endogenous managerialcontrol actions (tender offer bids and the adoption of poison pills) as a functionof the percentage of outsiders on the board. Without relying on a specificendogenous managerial control action. Yermack examines how firm perfor-

mance relates to board size or a sample of firms from the Forbes 800 list of the

largest U.S. corporations. Thus, sample selection bias potentially explains theobserved difference in the percentageof outsiders on the board for our study andthose of Byrd and Hickman and Brickley, Coles, and Terry.

The average enure of CEOs is 8.4 years.Though not reported in Table 1. 19%of the sampl e firms have board i nterlocks with at least one other firm. Further,356 of the 440 (81%) CEOs in the sample alsb hold the position of Chairman ofthe Board. Using the 1989 Forbes compensation su.rvey, Brickley, Coles, andJarrell (1993) also find that 81% of their sampl e firms have unitary leadership.

Table 2 reports prel iminary evidence on how the number of outside director-

ships held by CEOs relates to various factors. Separate quartile subsamples arecreated, based on each factor. Th e mean and median numbers of outsidedirectorships he!:! by CEOs are then compalb--d across quartile subsamples.



We predict rhat the number of outside directorships held by CEOs wi’rf bencgativci!; related to growth opportunities. In pane! A of Table 2, the median

number of outside direciorships held by CEOs decreases with Mktbk quartit::

ranking. The Kruskal- Wallis test for equaiity ofccntral iocation across quartilesubsamples is highly significant (p-value = 0.000). The Spenrnnan rank correla-tion indicates that the nllmbcr of outside directorships held is negatively relat.edto the market-to-book r;?tio (p-value = 0.002). Thus. Table 2 provides prelimi-nary evidence that CEOs of firms with more growth opportunities hold feweroutside directorships.

We predict that the number of outside directorships will be positively related tothe amount of board interlocking a firm does with other corporations. The number

of interlocks does not vary enough to allow for meaningful quartile rankings.

Therefore, for the purposes of Table 2 oniy, Inierlo& is defined as a dichotomousvariable taking on the value of one of the firm has any interlocks with other firmsand zero otherwise. In panel B, CEOs of firms with board interlocks hold moreo&de directorships than CEOs of firms without interlocking directorates.

Outside directorships have a positive relation to the number of unaffiliatedCEOs on a CEO’s own board. The mean and median numbers of outside

Table 2

IJnivariate analysis of the factors affecting the number of outside directorships held by CEOs

Mlithk

six

NumDir

Barter

out

Common

BO DCom

CEO Years

PUWI A: Mean (median) number of outside directorships held as a funcbon of

the quartile ranking of each variable (I = smallest)

1 2

1.87 2.35

1.2.0) (2.0)

1.53 1 I9

( 1 O) 11.0)1.43 1.73

(1.0) (2.0)

1.35 1.91

(1.0) (2.0)

1.72 1.83

(1.0) (2.0)

2.03 1.85

(2.0) (2.0)

2.31 2.05

(2.0) 0.0)

1.47 1.52

(1.0) (1.0)

3

1.85

(2.0)

1.91

(2.0)2.25

(2.0)

2 16

(2.0)

1.97

(2.0)

2.01

(2.0)

1.73

(1.0)

2.61

(2.0)

3

1.41

(1.0)

2.32

(2.0)2.10

(2.0)

2.12

(2.0)

1.94

(2.0)

1.59

(1.0)

1.49

(1.0)

1.83

(2.0)

Kiuska! -

Wallis

(p-value)

21.23

mw

24.70

w-K@)19.20

(0.ooo1

22.61

wm

3.22

(0.359)

7.71

(0.052)

21.16

mm )

36.43

mw

Spearman

correlation

(p-value)

- 0.145

(0.002)

0.230

(O.ow0.215

(0.ooo)

0.200

mw

0.08 I

(0.091)

- 0.112

(0.019)

- 0.231

ww

0.158

(0.001)



93

Variahlc -= i

1.21 2.01 4.?6

(I.01 (‘.OI (0 OOQ!

1.64 2.84 6.02

(I.01 (3.01 (0.000)

1.80 2.16 I .9h

(7.0) (LO! (0.0.5 I )

i 2% 2.00 0.91

ILO) (7.0) (0.364!

The sample consists of individuals who are either CEOs or Ct;i, Lhairme:~ n = 440) n 1990.Mkrhkis the ratio of the market value of firm equity plus the book value of preferred stock plus the bookvalue of debt to the total value of asset>.Sirr is the natural log of the sum of the market value ofequity and the book value of preferred stock. NumDir is the natural log of i he size of the CEO’s ov:nboard. Common s rhe percentage of common stock owned by the CEO. BODCm is the percentageofcommon stock owned by the officers and directors of thr firm. Barrer is th? number of unaffiliatedCEOs on the CEO’s own board. Out is the percentage of unaffiliated nonCE0 outsiders on a CEO’sown board. CEUYrurs is the number of years the CEO has held the CEO position. Chuir is

a dichotomous variable taking a value of I if the CEO is also chairman of the board. 0 otherwise.Interlock is a dichotomous variable taking on the value of 1 if the firm has a board interlock withanother firm, 0 otherwise. Reg is a dichotomous variable taking a value of 1 if the firm is eithera bank (SIC = 601 or a utility (SIC 40-49).. 0 otherwise. Block is a dichotomous variable takinga value of 1 if an andependent blockholder sits on the board of directors. 0 otherwise.

‘Four separate subsamples are created based on the quartile values of a given variabie. Mean andmedian numbers oi outside directorships held by CEOs within each subsample are then computed.For example, four subsamplesare created based on the values ofMk/hk. with subsamplc I consistingof those observations in the smailest quartile of Mkfhk and subsample 4 consisting of thoseobservations in the largest quartile of Mkthk. Mean and median numbers of outside d; .ectorshipsheld by CEOs within each of the Mkrhk subsamples are then computed so that they may bc

compared.

“Two separate subsamples are created based on the values of a given variable. Mean and mediannumbers of outside directorships held by CEOs within each subsample are then computed. Forexample, two subsamplesarc created based on the value of Chcrir. with one subsample consking ofobservations where the CEOs are not chairmen of their own boards and the other consisting ofobservations where CEOs are chairmen of their own boards. Mean and median numbers of outsidedirectorships he!d by CEOs within each of the two subsampiesarc computed so that they may becompared between the two subsamples.



directorships held both increase in dx quartile ranking of Barer. The

Kruskal-Waliis test sie~istic and the Spearman correiatio:l are both highly

significant (p-value = 0.000 for both). CEOs who have more independent CEOs

on their own boards are iikely to hold more outside directorships themselves.The personal cost of perquisite consumption is hypothesized as playing a rcle

in determining the number of outside directorships held by CEOs. The meanand median number of outside directorships held increases in the quartileranking of the percentage of outsiders on the CEO’s own board. ThsKruskal-Wallis statistic, however, is insignificant. The Spearman correlationbetween the number of outside directorships held by CEOs and the percentageof outsiders on their own boards is only margmaily significant (p-value = 0.091).

The mean and the median number of outside directorshrps held by CEOs

decrzises across increasing quartile rankings of common stock owned by theCEO and the percentage of stock owned by the board of directors. TheSpearman correlations of Conzmon and EODConz with the number of outsidedirectorships held by CEOs are both negative and highly signifYcant (p-values of0.019 and 0.000, respectively). In panel B, the number of outside directorshipsheld is unrelated to the presence of an outside blocl.holder.

The number of outside directorships held by CEOs also tends to increase withCEOYeurs quartile rankings. The Kruskal-Wallis statistic is highly significant(p-value = 0.000) as is the Spearman correlation of 0.158 (p-value = 0.001). AsCEOs near the end of their careers, they delegate more authority to theirsuccessors, hereby reducing the cost to the firm of the CEO taking on outsidedirectorships.

While suggestive, the univariate results reported in Table 2 are potentiallymisleading. The factors examined are unlikely to be independent of one another.Further analysis reveals that many of the factors are, indeed, highly correlatedwith one another. Smith and Watts (1992) suggest that efficiency links corporatefinancial policies with investment opportunities. For example, firms with moregrowth opportunities make greater use of incentive compensation than docompanies with fewer growth opportunities. It is also possible that optimal

ownership structure is related to investment opportunities. Because of thispotentially important link between investment opportunities and ownershipstructure, it is important to control for the firm’s investment opportunity setwhile examining the relation between CEO and board equity ownership (as wellas other factors) and the number of outside directorships held by CEOs.

3.3. Regression analysis

Because the number of outside directorships held by a CEO, Dim, is drawn

from a censored distribution (i.e., it is impossible to hold a negative number ofoutside directorships), Tobit models are specified in all of the regression analysis(Greene, 1990). The first column of Table 3 reports Tobit regression tests of the



3.3.1. Vmiatioi2 lzcsoss J%?rl @I”

Smith and Watts (1992) assume that the *value of the marginal. product ofinvestment decision-makers is greater than the va!ue of the marginal product ofasset supervisors. Their analysis leads to the prediction that CEOs of firms with

more growth opportun!ties will hold fewer outside directorships than CEOs offirms with fewer growth opportunities because, all else equal, outside director-ships held by CEOs are more costly to those firms with more growth opportuni-ties. The first column of Table 3 reports results for the sample of CEOs andCEO/chairmen. Growth opportunities are negative and significani (5%) in

relation to the number of outside directorships held by CEOs. Outside director-ships held by CEOs are more costly for firms with growth opportunities thanthey are for firms consisting mainly of assets-in-place.

As a test of the robustness of the findings to our measure of growth opportuni-ties. we substituted the earnings-price ratio and scaled research and develop-ment expenditure into the regressions in place of the market- to-book ratio.The earnings-price ratio had a positive. though statistically insignificant(p-value = 0.685) relation to the number of outside director ships heid. Researchand development expenditures had a statistically significant (p-value = 0.01 f )

negative relation to the number of outside directorships held by CSOs.

3.3.2. Variation across CEO career qckeVancil(l987) describes a method of CEO succession n which decision rights

are transferred from incumbent CEOs to their successors. n the typical paltern.

Table 3Tobit estimates of the determinants of the number of clxtside directorships held by CEOs (r -skkticsin parentheses)

Variable”CEOs and CEOs andCEO/chairmen chairmen

CEOs andchairmen NonCEOs

Intercept - 0.353

i - 0.62)

Mktbk - 0.209

( -. 2.30)

Size 0.165

(2.45)’

Chair 0.383

(2.11)NumDir 0.012

(0.53)

- 0.303( - 0.37)

- 0.381( - 2.53)

0.289(2.35)C

- 0.028( - 0.57)

- 0.613( - 0.74)

- 0.362( - 0.91)

0.300(2.47)

- 0.027( - 0.56)

- 0.377f - 1.25)

- 0.053( - 1.!4)

0.124(3.57)”

- 0.018

( - 1.69)



Table 3 (contir?ucd)

CFOS and CEO, ancl CEOs andVariabk’ f EO ‘chairmn &airmz n cll~~ii?n~!, PiOIlCEOS

Illf dfJc-k Oh06 Il.24 ‘,I,.-*- 1 0.240(5.5X)“ ! I .c19) ( 1.06) (3.52)d

&i-f et 0.040 o.i:! 0.038 3.OO6

(0.71) (0.?91 (0.36) (0.24)

0L:l 0.719 0.528 0.389 0.761

(1.43) (0.66) (0.49) (2.93)d

Cftl7W?f~lI - 4.359 - 0.51? - 0.897 - 0.446

( - 1.75) ( - 0.27) I - 0.47) ( - 0.24)

BODCom 0.433 - 0.849 .- 0.710 - 0.188

(0.62) ( .- 0.88, ( - 0.75) ( -. 0.48)Bhk 0.256 0.420 0.396 0.343

(0.87) (0.94) (0.90) (1.91)

CEO Years 0.019

(2.09)’

lChc,irwm n-454 1.262

( 1.90) (2.93)

lCh~irmon *Mkrhk - 0.6iir( - 2.24).-.__~-- - -.-.--

p-value of likelihood

ratio test’ 0.000 0.0: 3 0.004 0.000I1 440 160 160 904__-__.

The sample is drawn from S&P 500 firms for the 1990 proxy season. A Tobit model is estimatedbecause he dependent variable, Dim. is drawn from a censored distribution (Greene, 1990).

“Mktbk is the ratio of the market value of firm equity plus the book value of preferred stock plus thebook va!ue of debt to the total value ofassets.Size is the natural log of the sum of the market value ofequity and the book value of preferred stock. Chair is a dichotomous variable taking a value of I ifthe CEO is also chairman of the board, 0 otherwise. NrrmDir is the number of directors on the CEO’sown board. Interlock is the number of board interlocks the firm has with other firms. For the firstthree columns of Table 3, Barter is the number of unaffiliated CEOs on the CEO’s own board. Forthe fourth column of Table 3, Barter is defined as the number of unaffiliated nonCE0 officers ona nonCEOs board. Our is the percentage of unaffili ated nonCE0 outsiders on a CEO’s own board.Common s the percentage of common stock owned by the CEO. BODCom is the percentage ofcommon stock owned by the officers and directors of the firm. Block is a dichotomous variabletaking a value of 1 if an independent blockholder sits on the board of directors, 0 otherwise.CEOYears s the number of years the executive has been n office. IChoirm.ns a dichotomous variabletaking a value of 1 if an individual is chairman of the board only, 0 otherwise.

bThe est statistic is calculated 3s - 2[lnL(w) - InL(S1)] where L(W) s the likelihood function underthe null hypothesis that all coefficients are 0 and L(Q) is the likelihood function evaluated using theestimated coefficients.The test statistic is distributed chi-square with k degreesof f reedom, where k isthe number of independent variables (excluding the intercept).

‘Statistically significant at the 0.05 level.dStatistically significant at the 0.01 level.



the CEoi’chairman gists up the CEO p~sit~~~, bit relains the board chairman-ship; he subsequ22ll y pa5ses he chairmanship as wefi. Vancil’s model ;ugg::r;ts

a tenure or position component to the margina”l produca of CEGs. For exampie.

CEOs approaching the ends of their careers pass decision rights to [heireventual successors.As decision rights are transfcrr& i: becomes less costiy tothe firm for the CEO to accept outside directorships. .4s the cor~panq-‘scost ofthe CEO taking outside directorsAps declines, we expect to observe rhe CEOtaking on more outside directorships. Thus. we expect to observe a positiverelation between CEO tenure ar.,f the number of outside directorships the CEOholds.’ Similarly, Vancil’s model predicrs that chairmen of firms, in com;,::niesin which the CEO and chairman positions are separated, hold more outside

directorships than the CEOs under them.

The first column of Table 3 reports that the number of outside directorshipsheld by a CEO is positively reMed (5% level) to CEO tenwrc. As CEOs passdecision rights to their eventual successors, he cost to the ilrm of the CEOstaking on outside directorships declines. The lower cost of the CEGs taking onoutside directorships allows the CEOs to hold more outside directorships.

AS zr alterrxtive test of Vancil’s model, we substituted time-to-retirement (65minus CEO’s current age) for CEO tenure in the regression analysis. Consistentwith Vancil’s model, time-to-retirement is negatively related (.10/o evel) to thenumber of outside directorships CEOs hold. As CEOs approach retirement theyhold more outside directorships.

Vancil’s model of CEO succession is further supported by the regressionsreported in the second and third columns of Table 3. We perform iheseregressions on a sample consisting of CEOs and chairmen: the combinedposition of CEO/chairmen is not included in the sample. In firms where thechairman and CEO are two different people, chairmen hold significantly moreoutside directorships than CEOs. Additionally, while the number of outsidedirectorships held by CEOs is insensitive to their firms’ growth opportunities.how many more outside directorships the chairman holds relative to the CEO is

negatively related to the firm’s growth opportunities (5% !eve!). Additional

outside directorships held by the chairman are still more cos!ly for companieswith more growth opportunities than for those with fewer growth opportunities.

SDechow and Sloan (1991) argue that CEOs engage in mere opportunistic behavior as theyapproach the end of their careers. f CEO opportunism increaseswith tenure, and outside director-

ships represent perquisite consumption, then outside directorships could be positiveiy related totenure via opportunism rather than lower costs. Murphy and Zimmerman (1993) examine CEO

discretion with respect to certain financial variables around CE O departures. After controlling forfirm performance, they find no evidence of CEO discretion related to the normal successionprocess.If CEOs actions concerning outside directorships arc consistent with their actions related todiscretion over financial variables, then we expect opportunism to play no role in determining therelation between outside directorships and tenure.



We hyporhesizc that CEOs hold out&c directorship5 as a f~~ctior! of

inicrlocking corporate boards with other firms. !II the firs: colurrm of Table 3,

the number of board interlocks a firm has with others is positiT:e!y relaied (1%level) to the number of outside directorships held by CEGEs. he positive relationis consistent with CEO participation bonding the relationship between the two

firms.

3.3.4. The market jbr outsia~ dit-ectom

While the positive relation between Irrterloc*k and the number of outsidedirectorships held by CEOs is consistent with CEOs bonding relationshipsbetween firms, i t is also consistent with firms securing outside directors by

having their CEOs sit on each other boards. In other words, the significantrelation between Interlock and the number of outside direccnrships held byCEOs may reflect bilateral tr,tdes in the market for outside directors. Ourempirical test with Interlock cannot dist inguish between the two hypotheses.With this in mind, we examine the data for evidence of multilateral tradesamong firms. Such evidence would lend further support tcJ the hypothesis thatfirms trade in an in-kind market for outside directors.

If an in-kind market for outside directors exists, and if multilateral transac-tions occur in that market, then we expect the number of outside directorshipsheld by CEOs to be positively related to the presence of unaffiliated CEOs oneach CEO’s own board. For CEOs, the relation reported in Table 3 between thenumber of outside directorships held and the number of unaffiliated CEOs onthe CEO’s own board is positive, but statistical ly insignificant. When we

redefine Barter as the number of unaffiliated CEOs and other corporate officerson a CEO’s own board, the relation remains insignificant. Thus, we fail tosupport the hypothesis that CEOs transact multilaterally in an in-kind bartermarket for outside directors.

While there is no evidence that CEOs engage in multilateral transactions ina market for outside directors, other firm executives may be able to do so. It may

be prohibitively expensive for one CEO to sit on another’s board. Lower-levelexecutives (e.g., vice presidents, division presidents, etc.) can participate in themarket for outside directors at a Lowe cost to the firm. The fourth column ofTable 3 provides evidence on the hypothesis that the number of outside director-ships held by nonCEOs is related to own firm demand for outsiders on thenonCEO’s board. For this regression we define Barter as the number of unaf-fil iated nonCE0 officers who sit on the nonCEO’s board. The number ofoutside directorships held by nonCEOs is insignificantly related to the numberof nonCE0 outsiders on the board of directors. (The relationship is also

insignificant when we redefine Barter as the number of unaffiliated CEOs andnonCE0 officers on the nonCEO’s own board.) Thus, Table 3 fails to support anin-kind market for outside directors in which CEOs and nonCEOs engage in



.I.!?. 9001!1. D. 5’. ikli ‘~hlrrilal c/‘Fimilil.iai Ec~:sv;nlic.~ Zi? f ! W3; :%! /J/.2 Q9

nw’i: i!atePaf ?rades. it is a.1~ interesting :o no:e th.11 the r:!:mber of oursrdedirectorships held by i;onCEOs i:; insensitive to their firms’ growh opportrini-ties. This finding is consistenr wi th the va!w of the firm being more cios~;l~ ;<d

to the actions of the CEO. rather than tF,e actions of the CEO’S suborJi:i rites.

3.3.5. Perquisite cotm4n~pfiim

As noted earlier, the univariate tests on the personal cw: ~Ad-ks XC ikei;,10 be biased because they fail to cor!trol for ,variation in &.-I. invcstmx-~topportunities. The multivariate framework aliows us to control for 3;ariario:> l,growth opportunities across firms. The first regression of Table 3 reports thatvariables that proxy for the CEO’s personal cost of taking nor:-value-maximi;?”ing actions {i.e., Out, Common, BODCorn, and Rkk) are urmlatcd to the nunlbrr

of outside directorships the CEO chooses to hold. Table 3 I’ails to support thehypothesis that outside directorships represent unchecked perquisite consump-tion by CEOs.

3.3.6. RegulationRegulation plays a potentially important role in the findings of Tabie 3.

Regulation may not force resources to be allocated efficiently. Also, the rcguia-tory process itself may constrain CEOs to accept a number of outside director-ships unrelated to any of the factors we have hypothesized here. Including

regulated firms in the sample could add noise to our tests.That possibility is examined in Table 4 in which we use alternative dunmy

variable specifications to determine the effect of regulation on the number of

Table 4Tobit estimates of the determinants of the number of outside directorships held by CEOr ii-tlatisticsin parentheses)

CEOs and CEOs andCEOs and CEOs and CEOkhairmtn of CEO.chairmcn of

Variable” CEO,khairmcn CEO. chairmen reguia:ed firmsh unreeula:ed firms

____-~~-_-~--.------. .~. -~.-..~.Intercept - 0.327 - 0.275 1.317 - 0.537

i - 0.58) ( - 0.49) (0.76) ( - 0.91)

Mkrhk - 0.197 - 0.292 0.483 - 0.24 1(, - 2.1214 ( - 2.39)d (1.27) ( - 2.S6jd

Six? 0.159 0.135 0.042 0. I43

(2.35)d ( 1.99!d (0.20) ( 1.95)

Chair 0.394 0.382 - 0.143 0.509

(2.16)” (2.loy ( - 0.34) (2.541d

NunrDir 0.011 0.02 I 0.56 0.008

(0.47) (0.86) (0.97) (0.29)

Interlock 0.811 0.859 0.594 0.939

(5.61) (5.92)’ (1.6,) (6.02)’



Table 4 (ccntinued)

nut

BODCrm

Ulil

p-value of likelihoodratio test’

iI

CEO!i ~?lK! CEQS 3qd

CEOs and CEQs andCEO/chairmen of CE3:‘chairmen of

10.037IO 67)

0.607

(1.38)

-- 3.4fO( - 1.77)

0.448(0.64)

0.259

(03X)0.019

Q.09rd

0.105(0.5X)

0.64l1.13)

0.6’38

i f 39)

- 4.035( - 1.62)

0.4%(0.66)

0.363

(0.90)0.020

(2.15)d

- 0.597

( - 1.73)

0.297(1.50)

rcpulated lirm?

-- 0.044( -- 0.33)

0.899i - 0.69)

IO.433(0.67)

- 1.493( - 0.67)

0.774

(0.X0)- 0.030

( - 0.X5)

unregulated firms

0.093(i .33)

1.173(2.18)”

.- 4.390( -- 1.79)

0.670(0.92)

0.232

(0.78)0.019

(2.05)d

0.000 0.000 0.690 0.000440 440 88 352

The sample is dratrn from S&P 500 firms for the 1990 proxy season A Tobit model is estimatedbecause he dcpcndcnt variable. Dirs. is drawn from a censored distribution (Greene, 1990).

“Mkthk is the ratio of the market va!u, of firm equity plus the book value of preferred stock plus thebook value of debt to the total value of assets. iz e is the natural log of the sum of the market valueof equity and the book value of preferred stock. Chair is a dichotomous variable taking a value of I ifthe CEO is also chairman of the board, 0 otherwise.NumDir is the number of directors on the CEO’sown board. Infer/d is the number of board interlocks the firm has with other fi rms. Barter is thenumber of unaffili ated CEOs on the CEO ‘. own board. Out is the percentageof unaffiliated nonCE0outsiders on a CEO’s own board. Cnrnmon s the percentage of c ommon stock owned by the CEO.BODCom is the percentageof common stock owned by the officers and directors of the Frm. Block isa dichotomous variable taking a value of 1 fan independent blockholder sits on the board ofdirectors,0 otherwise. CEOYears is the number of years the executive has been in office. Req is a dichotomousvariable taking a value of 1 if the firm is either a bank (SIC = 60) or a util ity (SIC = 40-49).0 otherwise.Burn’, is a dichotomous variable taking a value of 1 f the firm is a bank, 0 otherwise. Uiil isa dichotomous variable taking a value of 1 if the firm is a utility, 0 otherwise.

‘The sample of regulated firms consists or all firms that are either banks or utilities.

‘The test statistic is calculated as - 2[lnL(uJ) - lnL(Q)] where L(W) s the likel ihood function underthe null hypothesis that all coeffici ents are 0 and t(Q) is the likeli hood function evaluated using theestimated coefficients.The test statistic is distributed chi-square with k degreesof f reedom, where k is

the number of independent variables (excluding the intercept).“Statistically significant at the 0.05 level.

‘Statistically significant at the 0.01 level.



outside directorships held by GE&. ‘The regufation dummy variables are

statistically insignificant. [Note that ir: rhe second rsgression of Table 4, wfli!e

neither the bank nor the uiility dummy variables 2~0 r.t c ,dgnifkan!iy difkerl t from

zero, they are significantly different from one arrother. (WaEd tes!; distribueedchi-squared with one degree of freedom = 3.71, p-value - 0.017.) ‘This findingsuggests ths? there are diRering regu!atory processes n tIx banking and r:tiiiayindustries, and that the regulatory processes thernsell.zs lead to CEOs in theutility industry holding significantly mar!:: outside directorships than CEOs inthe banking industry.]

As a further test of the efLzcrof regulation on ?he number of outside direct<);-

ships held by CEOs, we test the initial regression specification of Table 3 on boi hthe subsample of regulated firms (5.2% and 14.8% cf the sample firms are ku;ks

and utilities, respectively) and the subsample of unregtilstcd firms.For the sample of regulated firms, each of the variables is insignificantlyrelated to the number of outside directorships held by CEA9 In industriesinvolving constraining regulatory processes and limited comDetiti ve forces, thenumber of outside directorships held by CEOs is independent of the factorstnat typically influence the number of outside directorships held by CEOs.These results suggest that it is appropriate to remove regulated firms from the

sample.The last column of Table 4 tests unregulated firms. The results confirm the

earlier results from Table 3, but at higher levels of significance. Growth oppor-

tunities remain negatively related to the number of outside directors held byCEOs. For firms in unregulated industries, CEOs of firms with mure growthopportunities hold fewer outside directorships. itmdock has a highly significantpositive relation to the number of outside directorships held. CEO participation

bonds relationships between boards. Of the personal cost variables, only Out isstatistically significant. The number of outside directorships held by CEOs ispositively related (5% level) to the presence of outsiders on the CEO’s ownboard. When we hypothtsize CEOs as bearing greater costs of perquisiteconsumption, they hold more outside directorships.” Even after removing

regulated firms from the sample, there is no evidence that outside directorshipsrepresent perquisite coilsumption for CEOs.

9We also estimate the regression specification of column 3 on the ,vhole sampte, but include aninteractive term between Reg and each of the regrescion variables. The coefficient on the intcractivcterm for MktBk was significantly positive (5%. levelj. indicating that the number of outsidedirectorships is less sensitive to firm growth opportunities for regulated firms than it is forunregulated firms. All of the other interactive terms were statistically insignificant.

“As a further test, we &compose our measure of outsiders on the board into outsiders who areprofessional directors (see Brickley, Coles. and Terry, 1994) and all other outside directors. Thecoefficient on professional directors is significantly positive (p-value-O.OO3)hile the coefficient onall other outside directors is positive, but statistically insignificant (p-value = 0.261).



Boards ol‘ directors ;ind CEiIs have dr-awrt coaderable aiieniion in [he

popular press. Much discussion has focusd 03 CEOs nho engagc in oppsrtun-istic behavior and boards of directors that do little about it. The academicliterature suggests !~at outside directors help aflevi8te problems associated Gthpoorly performing CEOc. but the litel,.L,t,qt 1 n hils to address how outside direc-

tors are supplied. We investigate f:+ctors that inf luence the number cf outsidedirzrtorships held by CEOs.

Our empirical results are consistent with the view that the number of outsidedirectorships held by CEOs is driven by the nature of t!Gr firms. For firmswhose va!ue k made up largely of gro\*ith opportunities - whcrr the marginal

product of the CEO is relativeiy high -.-we find that CEOs hok fewer outsidedirectorships. Drawing the attention of CEOs away from their I rms is parti-cularly costly for firms that have more growth opportunities.

By examining the number of outside directorships held as a function ot CEOcareer cycle, we find additional support for the hypothesis that the number ofoutside directorships held by CEOs is linked to the CEO’s marginal product.Consistent with the transfer of decision rights from incumbent to successor, wefind that CEOs who have held their positions longer, and board chairmen infirms in which the CEO position and the board chairmanships are held bydifferent individuals. hold more outside directorships.

We also find evidence consistent with CEOs holding outside directorships asa means of bonding relationships between firms. When employees of two firmssit on each other’s boards, CEOs hold more outside dn-ectorships. This result isalso consistent. however, with firms engaging in bilateral trades in an in-kindmarket for outside directors. ‘To provide further evidence on this alternativehypothesis, we examine the relation between the number of outside director-ships a CEO holds and the number of independent CEOs on CEOs’ ownboards. We find no relation between the two. Whi le we cannot completelydiscount the argument that board interlocks represent bilateral trades in an

in-kind market for outside directors, the lack of evidcncc of multilateral tradeslends support to the hypothesis that CEO participation in board interlocks is forbonding purposes, rather than representing trade in an in-kind market foroutside directors.

We find little evidence consistent with the number of outside directorshipsbeing affected by perquisite Consumption CTT he part of CEOs. Univaria.tcanalysis suggests that the number of outside directorships held by CEOsdecreaseswith both the stock ownership by CEOs and the board of directezrs. na multivariate framework, however, in which we control for firm investment

opportunities, we find no evidence that CEOs undertake outside directorshipsas a form of perquisite consumption. On the contrary, the number of outsidedirectorships held by CEOs is positively related to the percentage of outsiders



Our byork represents a first en;plctration in~c: the dete;-;.rG~~~r~~xf cross-SW.!ional var;ation ir! the number of oatside directorships ?.e!d 5~. CEOs. Priorwork in finance has onlg looked at the composition of {or per!?qs moreaccurately, margilial changes in) boards of 31rectors v.it.hwi; ccGder-1~~~ i?,.:supply of outside directors. We ;3rovide cvidericc on hot+ ;Zv rmumbx ~6 ok!r:.id2directorships held by CEUs is determined. Thcrr remains much I’iiturc \$,o.lrb:;be done. however. For example, what d&ermines the nature of tht firms OY

whose boards CEOs senz? Do CEOs provide c. pct-ke to ihr.l:,c firi??‘.?rlr

CEOs bond contracting relationships betwecr~ their fi rms aud ih~ 1;~: (.;u

whose boards they sit ? What are the exact contractual prnt+s~r~ [rl :;I><;between firms and CEOc with regard to the number of outside direc!orshi::sCEOs may hold’? How is CEO compensation related to the number or tjpi: ofcl;;slcle dircstorshipc CEOs hold? Do CEO persona!1 characrerisrics (e.g.. Foil?-

der versus nonfounder. technical versus nontechnical background. etc.1zffrcc; : wnumber of outside directorships ihey hold? More generail;. future resci::climight address how individual characteristics of CEOs. CEOS’ frmt;. asd liarseeking outside directors affect the :vill ingness of CEOs to scr~‘c as outG<c‘directors and their attractiveness as outside directors 10 firms wzking ,!~i‘fiservices.

References



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capital structure, Journal or Financial Economics 3, 305-360.Kaplan. Steven N. and David Reishus, 1990, Outside directorships and corporate performance,

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turnover, Journal of Accounting and Economics 16, 2733315.Rosenstein, Stuart and Jeffrey G. Wyatt. 1990. Outside directors. board independence. and share-

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A strategy for reducing environmental uncertainty, Academy of Management Review 6.243-251.

Smith, Clifford and Ross Watts, 1992, Tire investment opportunity set and corporate financing,dividend, and compensation policies, Journal of Financial Economics 32, 2633292.

Vancil. R., 1987, Passing the baton: Managing the process of CEO succession Harvard BusinessSchool Press, Boston, MA).

Weisbach, Michael S.! 1988, Outside directorships and CEO turnover. Journal of Financial Econ-omics 20, 43 -460.

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pdf-jfe 96 40 1-5 factors affecting the number of outside directorships held by ceos

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