Preoccupied Independent Directors

Preoccupied Independent Directors

August 21 2017

Busy independent directors are not constantly “busy” and “independent” all the time and in all firms they serve for. To reflect this, we identify the actual time periods that a firm’s independent directors are preoccupied by serious external circumstances. These external circumstances include severe health issues, national awards (for outside activities) and major distractions from more important positions at unaffiliated firms where the director concurrently serves, such as major illness or turnover of the CEO or other director on the same committee, firm underperformance, financial misconduct investigations, financial distress and large acquisitions and divestitures. On average 22% of independent directors are identified to be preoccupied each year. Using difference-in-difference and matching and after controlling for number of directorships, we find that these directors have lower meeting attendance and more frequently relinquish less prestigious directorships, conditional on poor firm performance. Firms with a higher proportion of preoccupied independent directors tend to have lower firm value and worse M&A performance. These firm-level negative effects are stronger when the preoccupied independent directors have important monitoring responsibilities.