August 4, 2011
Know Your Market: A Director's Guide to Getting Along
1. You can oversee the complete failure of your company and emerge essentially unscathed. From Steven Davidoff:
Do the former directors of the institutions that collapsed during the financial crisis have anything to worry about? If the experience of Enron is any example, the answer is a resounding no…. [W]hile some Enron executives paid a price for the scandal, it is a different story with Enron’s former directors — the people charged with overseeing the company. A search of their current whereabouts shows that they have recovered nicely from the scandal…. The experiences of the Enron directors over the last decade would appear to offer great hope to the directors of Bear Stearns and Lehman Brothers. Indeed, many of these directors remain not only as directors of public companies from before the financial crisis, but they have joined new boards…. In all, 6 of the 12 Bear directors at the time of the investment bank’s collapse are still directors of public companies. None of the Bear directors have appeared to have career difficulties…. It is the same for Lehman Brothers, …. So the Bear and Lehman directors are returning to public company service even quicker than the Enron directors. In part this reflects the old boy network on Wall Street, which keeps people in the same positions because of friendships…. The trend also underscores the decline in the importance of reputation on Wall Street — even since the time of Enron. Prior bad conduct simply is often not viewed as a problem.
2. But don't bite the hand that feeds you. From Mary-Hunter McDonnell and Brayden King:
Corporate governance scholars across disciplines continue to disagree about whether the market for independent directors rewards directors who align themselves with corporate shareholders or corporate managers. In this paper, we empirically test this question by employing a unique database that tracks the careers of a cohort of independent directors in order to see how the market reacts when they oust an underperforming CEO. Using a longitudinal empirical model, we find evidence that directors who oust a corporate CEO suffer multi-faceted adverse consequences in the market for corporate directors. They are likely to win seats within fewer boards and the boards that do recruit them are likely to be significantly smaller and less reputable than those that recruit their peers. Thus, even in this era of investor capitalism and the rising ubiquity of formally independent directors, our findings suggest that symbols of elite affiliations and pro-managerialist selection criteria continue to undergird the market for corporate directors, especially among America’s larger and more reputable organizations.