The Determinants of Board Composition

TLDR

The study investigates how CEO succession and firm performance influence board composition. The authors analyze factors driving changes in corporate board composition. The results confirm that CEO succession and firm performance shape board changes, with firms adding inside directors before CEO retirement, inside directors leaving after a CEO change, and poor performance prompting inside directors to leave and outside directors to join.

Abstract

We identify factors that lead to changes among corporate directors. We hypothesize that the CEO succession process and firm performance will affect board composition. Our findings are consistent with both hypotheses. When their CEO nears retirement, firms tend to add inside directors (who may be possible candidates to be the next CEO) Just after a CEO change, inside directors with short tenures appear more likely to leave the board (they, perhaps, being the losing candidates). We also find that inside directors are more likely to leave the board and outside directors more likely to join after a firm performs poorly and when a firm leaves a product market.