Does superior firm performance lead to higher quality outside directorships?

Young, S E and Gupta, A and Otley, D T (2008) Does superior firm performance lead to higher quality outside directorships? Accounting, Auditing and Accountability Journal, 21 (7). pp. 907-932. ISSN 0951-3574

Abstract

Purpose – Holding the number of outside directorships constant, this paper aims to test whether executive directors from superior performing firms are subsequently rewarded with better quality outside directorships. Design/methodology/approach – The quality of new outside directorship appointments is modelled using a two-step Heckman selection procedure to control for the probability of acquiring a new outside board seat. Outside directorship quality is estimated using an index formed from series of observable firm-specific characteristics proxying for the following three latent aspects of quality: prestige, reputational risk and monetary rewards. The index aggregates across these three dimensions to produce an overall quality score, with higher scores signifying higher quality directorships. Findings – Tests based on a sample of UK executive directors who subsequently acquire at least one new outside board seat show that the quality of newly acquired outside directorships is positively related to past and contemporaneous performance at the executive's own firm. Recent past performance appears to be a more important determinant of the quality of outside directorships than long-run performance reputations. However, effects are largely confined to executives that either switch between boards or enter the outside directorship market for the first time. Research limitations/implications – Findings support the view that the market for outside directorships operates (at least in part) as a meritocracy by rewarding executives from superior performing firms with better quality outside board appointments. Originality/value – Prior work on the market for outside directorships focuses on explaining cross-sectional variation in the number of outside board seats held. The paper is the first to measure and model directorship quality.