Do Director Elections Matter?
Researchers find a link between elections and CEO turnover-performance sensitivity
June 3, 2015
Does the timing of director elections impact a company’s performance? It does indeed according to a new paper by a team of academics that includes Kai Li from UBC’s Sauder School of Business. In “Do Director Elections Matter,” the authors collect samples of more than 30,000 directors nominated for election over a 10-year period. The research finds the closer a director is to her next election, the higher is CEO turnover-performance sensitivity.
The authors say the data suggests director elections have a significant effect on how boards make decisions about CEO turnover.
Each year closer to director elections is associated with a 23% increase in CEO turnover–performance sensitivity.
This measure is called “closeness-to-election” and the authors say it can be used by investors to gauge how a company might perform based on how close it is to electing new directors and the impact on CEO turnover.
As the authors note:
First, when we require directors to have a minimum tenure of three years, there is no material change in the results, suggesting that the timing of when directors join their boards is unlikely to drive the results. Second, we find similar results when we use director Closeness-to-election on other boards as a measure of proximity to elections. Third, when we restrict the analysis to firms with unitary boards, there is no material change in the results, suggesting that director self- selection into firms with staggered boards does not drive the results.
The results show that, with appropriate governance in place, CEO turnover-performance sensitivity is less impacted by closeness-to-election.
Bottom line: the link between director elections and CEO turnover is a key corporate governance issue with implications for a company’s performance. Investors should take note.