Do problem directors affect firm operating performance?

Abstract

Purpose – The purpose of this paper is to examine empirically the consequences of having problem directors on the board with respect to operating performance. Problem directors are directors who have a past history of managerial integrity weakness. Design/methodology/approach – This paper uses three measures of operating performance to investigate the impact of problem directors and applies regression analysis to data from S & P 500 companies from 2004 to 2009. Findings – The author found evidence for the problem that director affiliated firms have more board and independent members. The CEO dual firm has a comparatively higher number of problem directors on the board. Firm operating performance is reduced when a board is served by a problem director. The results are consistent for a number of sensitivity tests. Practical implications – Results provide evidence that firms have negative performance consequences when monitored by a director with a lack of managerial integrity. The practical implication of this study is that corporate boards should appoint directors who have a clean professional background so that more vigilant monitoring by directors can be ensured. Originality/value – This study goes beyond the traditional focus on corporate governance and firm performance. The author uses problem directors as an indicator of governance quality to measure firm performance. To the best of the author’s knowledge, this paper is the first to investigate the consequences of firms holding problem directors on the board. This issue has implications for investors, auditors, directors and regulators.

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