Award-winning CEOs as Outside Directors

Book excerpt: As its core contribution this thesis provides first insights into the role of CEO award winners as outside directors. We use CEO awards to identify a subset of high-profile CEOs and study their roles on external boards. Exploiting this new approach, we first show that investors recognize and value director reputation. Using a large sample of outside director appointments, we find evidence of a reputation premium. Further, the event study results suggest a significant bias in the selection and composition of boards. We show that highly reputable directors join the boards of firms that have produced significant abnormal returns in the three years prior to the appointment. Next, this thesis provides evidence that the dynamics and consequences of director reputation are observable at the firm level. We find a statistically and economically important contemporaneous association between director reputation and firm value. However, while director reputation is reflected in firm valuation, we show that it is in no way related to a firm's day-to-day operations. Further, we find evidence suggestive of a link between director reputation and corporate governance. Finally, the thesis evaluates whether and how firms can benefit from individual outside directors. Our results clearly show that the appointment of highly skilled (and/or highly reputable) outside directors does not guarantee the future success of a firm. Rather the results indicate that after years of strong performance, firm performance reverts to the mean. Similar results emerge from a study on M&A outcomes. Looking at short- and long-term M&A performance, we find no evidence suggesting that firms with high-profile outside directors make better acquisitions. Rather, the results further support the conclusion that the role of outside directors is less important than often assumed.