Understanding the Motives for Director Selection

Director selection is crucial in corporate governance, but little is known about the relative importance of individual director attributes in the selection process. We examine the motives for director selection using the empirical setting of mergers, which offers a well-defined pool of candidates considered and a discrete shock to a board’s monitoring and advising needs. We find that boards increase director expertise tied to these changing needs, even in cases with powerful CEOs that could opportunistically weaken board monitoring. Individual candidates with expertise related to changing board needs are significantly more likely to be selected for the post-merger board. In contrast, directors are appointed from outside of the well-defined labor pool when they possess more related expertise than candidates from the merging firms. Our evidence suggests that directors are selected to meet changing monitoring and advising needs.