Boards in Practice : Director Location, Qualifications, and Credible Contracting

Using data on the qualifications and residential locations of directors, we study boards “in practice.” We find that directors' qualifications and distance from headquarters are related to factors such as the proximity of headquarters to a large city, firm size, CEO power, and the board's need for tacit information. Directors' proximity to headquarters reflects a trade-off between better acquisition of tacit information and greater management influence. The stock market responds positively to the appointment of proximate directors, but only when CEO tenure is short. The market reaction to forced CEO turnover is negative for boards with proximate directors and long-tenured CEOs. Neither the appointment of a remote director nor the dismissal of a CEO by a remote board leads to abnormal market reactions on average. These appointment and turnover results suggest that distant directors act as “market proxies,” while proximate directors add a credible “two-sided” element to governance. We also observe that when a CEO is highly “legitimate,” such as in a family firm, she faces less stringent incentives from incentive pay and a reduced threat of dismissal. In sum, our empirical findings support Williamson's (2008) arguments that stress the importance of understanding credible contracting between boards and management and that raise concerns about public policy aimed at achieving “boards in principle.”