How Corporate Directors Are Punished For Dissent

Posted on 02/09/2010

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An insightful new piece of research from Cassandra D. Marshall at Kelley School of Business, Indiana University entitled Are Dissenting Directors Rewarded? shows that corporate directors that resign from their post in protest pay a penalty in the job market over the following five years and that that the average director [who resigns in dissent] loses 85% of their current board seats in leaving the firm because of the disagreement. This means they are not able to recoup the loss of the seat they give up in dissent by obtaining additional directorships at other firms.”

From the perspective of corporate governance, the resignation of a director in dissent should act as a signal of significant problems at the firm in question, and indeed Marshall finds that “dispute firms have significantly lower operating performance during the fiscal year end just prior to the dispute” and that the most common reasons for directors resigning in dissent are: “agency problems or corporate wrongdoing (34% of cases); differences in opinion about corporate strategy or the future direction of the company (30% of cases); a dysfunctional or inefficient board (24% of cases); and other/miscellaneous reasons (12% of cases).”

As an equity investor, this research is a concern to me as I would hope that non-executive directors who take a stand against poor corporate governance and sub-standard management performance would be rewarded for their actions in the job market and so more of them would be incentivised to take such steps. The publication of this research may in itself lead company directors to take more conservative actions in order to minimise the career risk that such dissent creates.

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