Director Appointments—Is It “Who You Know”?

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2017-04-07

Posted by Ralph A. Walkling, Drexel University, on Friday, April 7, 2017
Editor's Note: Ralph A. Walkling is Christopher and Mary Stratakis Professor in Corporate Governance and Accountability and Founder of the Center of Corporate Governance at Drexel University Lebow College of Business. This post is based on a recent paper by Professor Walkling; Tu Nguyen, Assistant Professor of Finance at University of Waterloo; and Jie Cai, Associate Professor of Finance at Drexel University Lebow College of Business.

The best way to get on a board, is to be on a board. (Old adage)

A pillar of modern corporate governance for U.S. public firms is shareholder representation by the board of directors. Shareholders, however, are generally unable to nominate the directors who will represent them in the boardroom. Instead, the incumbent board nominates new directors, who are almost always subsequently elected. The characteristics of director additions are the foundation of a firm’s evolving governance structure, yet we know little about how boards select their new members. In contrast to most other markets where supply and demand meet in marketplaces, the director labor market typically operates in opacity. Companies never advertise vacancies and candidates do not submit their applications, while anecdotal evidence suggests that boards often recruit new members through personal connections.