Searching For Directors

Abstract

Does it matter who identifies and proposes a new board member? We exploit a 2003 Securities and Exchange Commission (SEC) disclosure rule to identify the source recommending new independent directors (NID) appointed to corporate boards. We document that disclosure of the source of recommendation is missing for 75% of NID – suggesting a high degree of non-compliance. Among those with disclosed sources, 44% are recommended by search firms, 30% by current independent directors, and 20% by CEO and other executives – with the role of search firms increasing in recent years as the push for board diversity intensified. Next, we explore whether and how the "origin" of the NID affects their characteristics, the market reaction to their appointment, and subsequent progression on the board and in the director labor market. We find that boards turn to search firms when they need to go beyond their immediate network and look for candidates with greater executive expertise, or to diversify the board along dimensions of gender and race. As for candidates recommended by the CEO, there is some support for the notion that CEOs try to bring on the board loyal directors. For example, CEO-recommended NID tend to receive higher shareholder voting dissent during their tenure (i.e., they take a more management-friendly stance). Notably, three years after their appointment CEOrecommended NID tend to enjoy greater progress on the board and its committees (e.g., in terms of chair positions), relative to search firm-recommended NID. Overall, our evidence suggests that the "origin" matters, in that it affects the characteristics of NIDs appointed and their ability to gain influence on the board.