Director Ownership and Corporate Performance
Sanjai Bhagat
University of Colorado, Boulder
Dennis C. Carey
SpencerStuart
Charles M. Elson
University of Maryland Law School
http://bus.colorado.edu/faculty/bhagat
“Media Clippings” “Barron’s”
Why might the CEO (and other senior managers)
act in the best interest of shareholders?
INTERNAL:
External Control Mechanisms
 Capital markets.
 Mergers, tender offers, proxy fights.
 Large shareholders will monitor.
 Institutional investors (shareholder
proposals).
 Managerial labor market.
 Product markets: Bankruptcy (not very efficient).
 Shareholder lawsuits.
Why might the CEO (and other senior managers)
act in the best interest of shareholders?
Internal Control Mechanisms
 Self-interest: Managers also own shares.
 Management compensation contracts.
 Board of directors
 Board members are elected by shareholders.


Independent board members will monitor.


Is the Board nominating committee unduly influenced by
the CEO?
Bhagat-Black (2000): Evidence not quite supportive.
Self-interest of board members: Board members
own shares.
Sample: 1724 publicly-listed U.S. companies
during 1992-1996.
Large firms: S&P 500
Annual sales (roughly) over $3 billion.
Small firms: S&P Small-Cap 600
Annual sales (roughly) under $0.4 billion.
.
Annual Retainer Paid to Corporate Directors in U.S. During 1992-1996
All Firms
Small
Large
30000
25000
Dollars
20000
15000
10000
5000
0
1
2
3
Year: 1=1992, 5=1996
4
5
.
Average Number of Shares Granted to A Corporate Director in U.S.
During 1992-1996
All Firms
Small
Large
300
Number of Shares Granted
250
200
150
100
50
0
1
2
3
Year: 1=1992, 5=1996
4
5
.
Average Number of Stock Options Granted to A Corporate Director in U.S.
During 1992-1996
All Firms
Small
Large
3500
Number of Stock Options Granted
3000
2500
2000
1500
1000
500
0
1
2
3
Year: 1=1992, 5=1996
4
5
.
Dollar Value (*$1000) (Including Options) of Shares Owned by the Median Director in Small,
Mid-Size, and Large US Companies in 1993
3500
3000
2500
2000
$1000
Median
Mean
1500
1000
500
0
Small
Mid-Size
Large
.
Dollar Value (*$1000) (Excluding Options) of Shares Owned by the Median Director in Small,
Mid-Size, and Large US Companies in 1993
3000
2500
$1000
2000
Median
Mean
1500
1000
500
0
Small
Mid-Size
Large
Share Ownership (Including Options) (as Percent of Shares Outstanding) of Median Director of
Small, Mid-Size, and Large US Companies in 1993
.
0.3
0.25
% Share Ownership
0.2
Median
0.15
Mean
0.1
0.05
0
Small
Mid-Size
Large
.
Share Ownership (Excluding Options) (as Percent of Shares Outstanding) of Median Director
in Small, Mid-Size, and Large US Companies in 1993
0.18
0.16
0.14
% Share Ownership
0.12
0.1
Median
Mean
0.08
0.06
0.04
0.02
0
Small
Mid-Size
Large
Table 4, Panel A
Larger companies are more likely to compensate
their directors with stock.
Table 4, Panel B
Smaller companies are more likely to
compensate their directors with stock option.
Companies with greater growth prospects are
more likely to compensate their directors with
stock option.
Table 4, Panel A
Director Stock Compensation Regressions
Dependent Variable is 1 if the company grants some shares to each director, 0 otherwise.
.
Current and Two
Previous Years Stock
Return
Year +1 Stock Return
Year +2 Stock Return
Company’s Growth
Opportunities
Company Size
F
Adjusted – R2
Sample size
1992
1993
1994
1995
1996
-5.42
(-1.20)
-2.49
(-.83)
-11.91
(-2.53)
-10.81
(-2.01)
-11.86
(-1.98)
-.66
(-.30)
-.49
(-.20)
174
(1.04)
.06
(9.89)
20.8
.077
1182
-1.77
(-.67)
1.41
(.80)
2
(-.13)
.06
(11.43)
27.2
.076
1595
.39
(.19)
1.00
(.36)
26
(.16)
.08
(12.24)
31.7
.103
1330
1.22
(.43)
-
-
156
(.85)
.08
(11.79)
35.2
.092
1353
-145
(-.75)
.09
(12.22)
50.9
.099
1359
-
Table 4, Panel B
Director Stock Option Compensation Regressions
Dependent Variable is 1 if the company grants some stock options to each director, 0 otherwise.
Current and Two
Previous Years Stock
Return
Year +1 Stock Return
Year +2 Stock Return
Company’s Growth
Opportunities
Company Size
F
Adjusted – R2
Sample size
1992
1993
1994
1995
1996
8.89
(1.48)
-1.08
(-.26)
6.84
(1.15)
12.24
(1.85)
5.49
(.80)
5.33
(1.84)
14.3
(3.41)
382
(1.71)
-.04
(-5.90)
12.9
.048
1182
12.5
(3.47)
3.26
(1.36)
418
(2.05)
-.06
(-7.98)
17.9
.050
1595
2.86
(1.09)
-3.52
(-1.00)
635
(2.95)
-.07
(-8.13)
18.0
.060
1330
-3.73
(-1.06)
-
-
593
(2.63)
-.06
(-7.37)
18.8
.050
1353
729
(3.28)
-.06
(-7.09)
22.3
.045
1359
-
.
Table 7
Reasons for CEO turnover in 449 US companies
Deceased
1991
1992
1993
1994
1995
1996
1997
19911997
2
1
3
Retired
1
10
21
29
11
3
75
Older than
63
2
2
5
5
6
6
1
27
Corporate
Control
1
1
2
Resigned
3
9
8
9
4
33
No
Reason
Given
1
1
1
4
6
6
1
20
No
Information
1
1
2
# of
Turnovers
During
this Year
3
4
20
42
50
34
9
162
Table 8
Poorer performing companies are more likely to
experience discipline-related CEO turnover.
.
Table 8
Firm Performance and Reasons for CEO turnover in 449 US companies
Performance
Measure
3 year % growth in
EPS prior to
turnover
5 year % growth in
EPS prior to
turnover
1 year % stock
return prior to
turnover
3 year % stock
return prior to
turnover
5 year % stock
return prior to
turnover
Control
Group
Mean/Median
Older than 63
Retired
Mean/Median
Mean/Median
Resigned/No Reason
Given
Mean/Median
16.4/3.2
10.8/7.5
9.8/0.0
2.6/0.0
8.6/0.0
6.9/6.7
1.4/0.0
5.0/0.0
20.0/13.2
17.6/18.8
12.4/4.1
1.7/-3.6
16.7/13.6
17.8/13.6
12.9/11.9
1.5/5.9
12.5/11.2
17.9/17.7
10.9/11.4
5.4/4.4
.
Performance - Reasons for CEO Turnover
20
18
16
14
12
% 10
8
6
4
2
0
3 year % growth in 5 year % growth in
EPS prior to
EPS prior to
turnover
turnover
1 year % stock
return prior to
turnover
3 year % stock
return prior to
turnover
5 year % stock
return prior to
turnover
Performance Measure
Control Group
Retired
Resigned/No Reason Given
Table 9
Poorer performing companies are more likely to
experience discipline-related CEO turnover,
especially if the median director’s ownership of
(dollar value) stock and stock-option increases.
.
Table 9
Logit regressions relating CEO turnover to Dollar Value of Median Director’s Stock Holding, Percentage Holding of
Median Director, and Company Performance for 449 US Companies (t-statistics in parentheses)
Panel A: The dependent variable is 1 if the CEO resigned or if no reason was given for the CEO’s departure in the press
release, and 0 for the control firms (picked on basis of industry) that experienced no CEO turnover during 1991-1997.
Performance Measure (measured prior to turnover)
dependent Variables
3-year
5-year
1-year
3-year
5-Year
Growth in Growth in
Stock
Stock
Stock
EPS
EPS
Return
Return
return
ompany Performance times
-.001
-.001
-.001
-.003
-.003
g of Dollar Value of
(-1.94)
(-.95)
(-2.68)
(-3.71)
(-2.23)
edian Director’s Holdings
ompany Performance times
.012
-.014
.007
.022
-.030
rcentage Holding of
(.77)
(-.48)
(.66)
(1.43)
(-.50)
edian Director
ompany Size
-.116
-.114
-.086
-.110
-.100
(-1.33)
(-1.30)
(-.95)
(-1.10)
(-1.09)
ercept
-.22
-.23
-.38
-.03
-.08
(-.35)
(-.37)
(-.59)
(-.04)
(-.13)