Outside Director Tenure Length: Expertise-Enhancement versus Entrenchment

This study examines the effect of outside director tenure length on firms’ market valuation and the voting behavior of outside directors. We make use of the new rule adopted by the Korean government in 2020 that prohibits outside directors from serving more than six (nine) years in a given firm (business group). We find evidence consistent with the hypothesis that longer tenure entrenches the outside directors than helping them acquire more experience. First, the stock market reacts positively to the announcement of the new rule in firms with outside directors subject to the new tenure limit rule – long-tenured outside directors (LTODs). The effect is greater in poorly-governed firms. Second, outside directors dissent more frequently against management after the rule change. This takes place through the removal LTODs that used to dissent less, the election of new outside directors that dissent more, and the increase in the dissent rates of second-term outside directors who can no longer be re-elected because of the rule change.