Academics on Corporate Boards Increase Profits

by on March 25, 2013 at 7:22 am in Economics | Permalink

Francis, Hasan and Wu have produced a paper with important results!

Directors from academia served on the boards of more than one third of S&P 1,500 firms over the 1998-2006 period. This paper investigates the effects of academic directors on corporate governance and firm performance. We find that companies with directors from academia are associated with higher performance. In addition, we find that professors without administrative jobs drive the positive relation between academic directors and firm performance. We also show that professors’ educational backgrounds affect the identified relationship. For example, academic directors with business-related degrees have the most positive impacts on firm performance among all the academic fields considered in our regressions. Furthermore, we show that academic directors play an important governance role through their monitoring and advising functions. Specifically, we find that the presence of academic directors is associated with higher acquisition performance, higher number of patents, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are effective monitors and valuable advisors, and that firms benefit from academic directors.

CEO’s of large firms interested in increasing their profits should click here (and ignore the bit about lower CEO compensation).

Hat tip: Professor Bainbridge.

1 Orange14 March 25, 2013 at 8:30 am

It’s proxy season right now and I spend a fair amount of time going over all the statements I receive from companies in my portfolio. While I don’t have nearly as many holdings as covered in the survey (24), everyone of them have one academic on the BoD. I think this paper has found some random causation that really is not very important at all (e.g., how can the presence of a Board member impact a company’s patent portfolio????). Of far more concern to me is the presence of totally discredited Board members. To cite two examples: Johnson and Johnson has that wonderful former banker Chuck Prince (the man who ran Citi into the ground) up for election and Wells Fargo has Elaine Chao, former Busch cabinet member and wife of Senate minority leader Mitch McConnell (and nowhere in the biography sent to shareholders is this mentioned!!) who has been stoutly opposed to any regulation of derivatives; Wells Fargo also has a proposal to increase the number of shares by 150 million to cover payouts on their compensation proposal which would mean a dilution of 10% for existing shareholders (I wonder what their largest holder Warren Buffet things of this one!).

To Alex’s final point, I certainly would support his candidacy over Chao and Prince for those two companies. Unfortunately write in votes are not permitted. Too bad.

2 Ted Craig March 25, 2013 at 11:15 am

“former Busch cabinet member”

So, you’re opposed to her experience in the brewing industry?

Seriously, Elaine Chao is the former Labor secretary and she cleaned up the United Way after a major scandal. She has an MBA from Harvard. If you don’t think Chao is qualified to sit on a corporate board, I’d like to hear some legitimate objections other than ideological nonsense.

3 JJ March 25, 2013 at 8:50 am

This paper probably came attached to a resume and letters to the Fortune 500.

4 Blue March 25, 2013 at 9:06 am

This is actually not surprising. Studies have also shown that having women on boards increases firm profitability. It is to a degree about oversight, but more and more it is about treating a business like a business not a social club. If everyone on the board is not from the same background, schools, class, race, and gender, it cuts down on old-boy’s network hiring, and in general makes people think about finding the best people for the job. It can mean that no longer do you simply promote Jones because it is his turn.

Companies that base decisions on facts rather than gut feelings do better. When you no longer all have the same intuitions, because you all went to the same school and are from the same sex and gender, you start having to justify your decisions, and things that were always “done that way”, start to be questioned.

Though I am also not surprised that Boards with business academics do better, for all the anti-intellectual nonsense that is spouted about the value “practical experience”, people who spend 20 years looking at data from 1000s of organizations across many industries, versus the practical experience of a few organizations most board members bring to the table, will likely have insights unavailable to the average board member.

On the other hand, just having an outsider one would think should push boards, CEOs and executive teams, to justify their actions in terms someone who is not in the institutional bubble can accept. And frankly if you just need someone who can follow an argument and poke at it to see if it is wobbly, anybody who spends their life researching, thinking, and finally writing papers submitted to the often scathing review of their peers, is probably better practised at that skill than the man on the Clapham omnibus, reasonable as he is.

5 mw March 25, 2013 at 9:47 am

And what, perchance, might the effect be on their ability to continue to be good *academics*? (Of course if they’re “business academics” then I’m not sure what kind of baseline we’re talking about to begin with…)

6 John March 25, 2013 at 9:49 am

Talking their book 🙂

7 Daniel March 25, 2013 at 9:53 am

Not sure if everybody got it, but this paper is pointing a correlation, not a definitive causal relation. Identification problems abound. In addition, there might be few academics business-skilled enough to contribute to these companies; it’s not clear that other academics would have similar performance, so out-of-sample predictions are hard.

8 Jim March 25, 2013 at 1:00 pm

I have only done a quick browse, but what do you think of their difference in difference? They also have an IV using distance. Comments on how well these control the endogeneity?

If I read their tables correct, they find positive significant effects for those with business, tech or political science degrees. Thats a pretty big pool. Now, of course the pool not being used might not be as high of quality, but their sample includes only 1,379 unique academic directors for S&P 500, Midcap 400, and Smallcap 600, a pretty decent chunk of public firms. I think there is probably still some positive gains for expansion, meaning Alex might be in luck.

9 Moira March 25, 2013 at 11:08 am

Hmm, interesting coincidence.

All three authors* are currently affiliated with RPI, whose controversial president has earned over $1 million per year in outside fees for serving on corporate boards for a number of years, a practice which has come under criticism.

She also receives over $2 million in compensation from RPI.

*Although the paper lists only two of the three authors explicitly as affiliated with RPI (Francis and Wu), the third author appears on RPI’s website faculty listing and even served as acting dean of RPI’s business school a few years ago.

10 JWatts March 25, 2013 at 1:58 pm


11 Ted Craig March 25, 2013 at 11:08 am

I don’t know if this adds to the conversation, but I’ve always found academics to be among the best local elected officials, as well.

12 Alan March 25, 2013 at 3:12 pm

Most academics are lefties. What are the political affiliations of the academics in this study?

13 john March 25, 2013 at 4:29 pm

Board members don’t meet very often. Maybe once a month to once a quarter. They have very little knowledge or influence of the day to day running of the company. Sure, they are experienced smart guys and review the companies current business and financial plans to see if they pass the smell test. But, other then maybe firing the CEO, they don’t have much influence on the operations of a company.

Where board members really shine in contributing to a company is with their connections. For the most part, these are all succesful powerful guys in their own right. They know the important people in their fields. An excellent board would have (usually former) a New York banker, a D.C. politician, a Harvard academic, a Silicon Valley business man, etc. That way their combined rollodex can reach every important individual the company may have reason to talk to.

Do I have a point? I agree with the author, a well placed academic would be a valuable addition to a companies board. But, you don’t need two of them. You would be better off with someone that had a different rolodex.

14 John March 25, 2013 at 7:27 pm

There’s a lot to wonder about in that paper and I’d like to have access to the raw data prior to buying into the argument that strongly. In some cases I wonder why they are log(x) some variable without first establishing that’s the correct adjustment. Second, it’s not clear which direction the relationship really is — did the administrative academic come from the corporate world? The other item that didn’t jump out at me in my quick scan (which could be just because I missed) is results across the S&P divisions — do these results hold up if we just look at the S&P 500 or just at the S&P 600 — or just get an idea how the Board members are distributed across these indices. I also wonder about the use of Tobin’s Q — I’ve never really thought it was a very measurable concept — we know market value but replacement value is not something we know so what is the denominator?

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