Busy Directors: Strategic Interaction and Monitoring Synergies

“Busy” directors—individuals who serve on multiple boards—continue to be the subject of debate among practitioners and policymakers. Proxy advisory firms such as ISI and investor advocates such as the Council of Institutional Investors recommend limiting the number of boards a director can serve on simultaneously, out of a concern that multiple directorships engender overload and inattention and so contribute to poor corporate governance. Companies have listened. Between 2006 and 2016, the fraction of S&P500 companies that limit the number of other directorships their board members could hold increased from 27% to 74%.

In our paper “Busy Directors: Strategic Interaction and Monitoring Synergies”, we show that busy directors need not be harmful to shareholders. Whether or not they are harmful depends on whether the information or expertise acquired in monitoring one firm is transferable across firms (“monitoring synergies”) and how directors interact with each other (“strategic interaction”). Monitoring efforts can be strategic complements or strategic substitutes. With strategic substitutability, increased monitoring by one director reduces the other directors’ incentives to monitor. With strategic complementarity, directors benefit from each others’ efforts, so that more monitoring by one director increases the other directors’ incentives to monitor. 

We show that neither factor is necessary or sufficient on its own; instead, it is the interplay between monitoring synergies and strategic interaction which determines whether busy directors add or subtract value. For example, shareholders can even benefit when a shared director becomes busier at another firm. This occurs either when there are positive cross-firm monitoring synergies, making the shared director a more effective monitor at both firms; or when a reduction in monitoring by the shared director triggers overcompensating reactions by her fellow directors (“strategic substitutability”). Our model suggests that the role of busy directors is nuanced and that one-size-fits-all approaches to regulating director busyness run the risk of harming some firms.

We test the model by combining an empirical measure of the likely sign of monitoring synergies with a series of exogenous shocks to how busy a director with multiple board appointments is on one board and examine how this distraction spills over to the director’s other boards. Using data from a large sample of firms listed in the U.S., we find that shared directors, when becoming busier at one firm, reduce (increase) their monitoring at “spillover firms” when monitoring synergies are negative (positive). The other directors at the spillover firms respond by adjusting their own monitoring efforts. On average, the mode of interaction is best described by strategic complementarity, both when synergies are positive and when they are negative. The exception, in our data, occurs when a firm is in a crisis situation, in which case the efforts of the non-shocked directors and the shocked director move in opposite directions, consistent with strategic substitutability. In crisis situations, the utility cost to directors of a monitoring shortfall is likely particularly large, such that a reduction in one director’s monitoring effort raises the need for the other directors to optimally exert more effort to compensate

Using an event study of spillover firms’ abnormal returns to the announcement of a (meaningfully large) exogenous monitoring distraction at another firm, we confirm that the net effect of busyness on firm value depends on the interplay of monitoring synergies and strategic interaction.