Are individual board members’ preferences or skills reflected in their firms’ corporate policies? We believe they are. Our results show that board of director effects are economically and statistically important determinants of a broad range of governance, disclosure, financial and strategic policy choices.
There are several possible explanations for this. Our data is most consistent with the idea that companies choose directors who work for other firms facing similar economic factors, and they naturally bring with them approaches to problem-solving approaches with which they are already familiar. We also find that the magnitude of a particular director’s influence decreases in proportion to the size of the new firm, the number of outside board appointments the director holds and the number of other outside directors on the board.
Corporate directors are not the sole influence on a company’s policies, of course. Recent research by Ulrike M. Malmendier (2001) examines whether CEO “overconfidence” affects corporate investment and financing choices. Marianne Bertrand and Antoinette Schoar (2001) also examine how a CEO’s education or age may influence policy choices. This type of analysis could be extended to our director setting.
A caveat to our analysis is that we may actually understate the impact or importance of directors for firms’ policies. It’s possible that firms choose directors with the unique skills needed to implement economically optimal policies. As a result, director effects may not provide incremental explanatory power over and above economic factors. However, the unique director is still vitally important in the implementation of these optimal policies.