Outside Director Tenure Limit: Expertise-Enhancement versus Entrenchment

Outside Director Tenure Limit: The 2020 Korean Experiment

Authors: Minjae Kim, Sojung Kim, Woochan Kim

Abstract

This study investigates the impact of limiting outside directors' tenure on firms' market valuation and the voting behavior of these directors. We analyze the new rule implemented by the Korean government in 2020, which bars the reappointment of outside directors who have served more than six years at a particular firm and nine years within a specific business group. Our findings support the hypothesis that longer tenures entrench outside directors rather than enhance their experience. Firstly, the stock market reacts favorably to the announcement of the new rule for firms with long-tenured outside directors (LTODs) who are influenced by the tenure restriction. The effect is more pronounced in poorly governed firms. Secondly, outside directors dissent more frequently against management after the rule change. This occurs through the removal of LTODs who previously dissented less, the election of new outside directors who dissent more, and an increase in dissent rates among second-term outside directors.