Board characteristics and firm resilience: Evidence from disruptive events

• Published date: 01 January 2024
• Author: Ettore Croci,Gerard Hertig,Layla Khoja,Luh Luh Lan
• Date: 01 January 2024
• DOI: http://doi.org/10.1111/corg.12518

ORIGINAL ARTICLE

Board characteristics and firm resilience: Evidence from

disruptive events

Ettore Croci

1

| Gerard Hertig

2

| Layla Khoja

3

| Luh Luh Lan

4

1

Università Cattolica Milan, Milan, Italy

2

Singapore-ETH Centre, Singapore

3

Dar Al-Hekma University, Jeddah,

Saudi Arabia

4

National University of Singapore, Singapore

Correspondence

Ettore Croci, Università Cattolica Milan, Milan,

Italy.

Email: ettore.croci@unicatt.it

Funding information

This work is an outcome of the Future

Resilient Systems project at the Singapore-

ETH Centre (SEC) supported by the Prime

Minister's Office, National Research

Foundation Singapore, under its Campus for

Research Excellence and Technological

Enterprise (CREATE) program.

Abstract

Research Question/Issue: We study the contribution of board characteristics such as

independence, size, busyness, and CEO duality, to firm resilience at times of firm-

specific crises.

Research Findings/Insights: Based on manually collected US data, we document that

board-related variables affect the short-term market reactions around disruptive

events. Board independence exacerbates the negative share price effect, whereas

the converse is true for director busyness and board size. However, the negative

impact of board independence is attenuated in complex firms. We do not find that

CEO duality affects market reactions. By contrast, in the long run, we do not observe

stable and significant relationships between board-related variables and firm perfor-

mance with the exception of a negative impact of board independence.

Theoretical/Academic Implications: Our paper contributes to different strands of the

literature. First, it contributesto the literature on the effects of boardcharacteristics by

showing how they affect stock price reactions at the time of firm-specific crises. Sec-

ond, our results on board attributes provide a new take on the two monitoring and

advisory functions of the board. Third, we add to the literature that measures the value

of directors. More generally, the paper contributes to the literature on the role of cor-

porate governance, and in particularthe board of directors, in crisessituations.

Practitioner/Policy Implications: We show that three board-related attributes affect

market reactions at the time of a firm-specific shock. Board independence exacer-

bates the negative share price effect of disruptive events, whereas the reverse is true

for director busyness and board size. These reactions imply that, in times of crisis,

advice-oriented boards fare better than monitoring-oriented boards. More specifi-

cally, information flows less easily within independent boards. In addition, busy direc-

tors and large boards are more talented, respectively more effective in complex

situations. However, these results do not hold for industry-wide shocks.

KEYWORDS

corporate governance, board busyness, board independence, board of directors, board size,

disruptive events

Received: 14 February 2022 Revised: 7 February 2023 Accepted: 14 February 2023

DOI: 10.1111/corg.12518

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

2Corp Govern Int Rev. 2024;32:2–32.

wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Boards come under intense scrutiny in times of crisis

1

and act in a

more proactive and independent way (Hermalin & Weisbach, 1998).

While the role of boards and corporate governance in economy-wide

crises and shocks has been investigated in depth (e.g., Adams, 2012;

Baek et al., 2004; Johnson et al., 2000; Mitton, 2002), the academic

literature has paid less attention to its role in the wake of idiosyncratic

crises. This type of crises can be caused by disruptive events, that is,

situations where firms experience significant increase in the probabil-

ity of incurring losses due to impairments in procurement, production,

or distribution activities. We argue that the degree and effectiveness

of the board's interventions in these types of events are likely to

depend on its structure and composition (Baldenius et al., 2014). In

particular, traits like director busyness and independence, board size,

as well as CEO duality are associated with the ability of the board to

perform its functions. Since the job of the board of directors is to both

monitor management and provide high-level counsel (Jensen, 1993),

determining which board characteristics are optimal when firms face a

disruptive event should also shed light on the relative importance of

the board's advisory and monitoring functions, which compete for a

director's time and focus (Armstrong et al., 2010; Faleye et al., 2011,

2013; Masulis et al., 2012).

2

Directors' busyness is generally deemed detrimental to firm value

as it hampers monitoring (Core et al., 1999; Devos et al., 2009; Falato

et al., 2014; Fich & Shivdasani, 2006; Hallock, 1997). Nevertheless,

there is evidence that busy directors may be valuable if they make up

for this negative effect with better advising (Field et al., 2013) and/or

they sit on boards of firms linked by positive monitoring synergies

(Ljungqvist & Raff, 2018). The positive effect may occur due to busy

directors being the most talented ones (Adams et al., 2010). Also, busy

directors could intensify their monitoring at the time of the disruption.

Consistent with this view, Ljungqvist and Raff (2018) document that

directors, including busy ones, increase their efforts in firms hit by a

negative shock. This may especially occur in times of significant crisis,

to avoid personal costs should the firm become financially distressed

or go bankrupt (Dou, 2017; Fich & Shivdasani, 2007). Thus, a disrup-

tion may lead to a positive reassessment of the contribution of busy

directors due to the incremental effort compared to the one antici-

pated in normal times.

While there is evidence that independent directors are better mon-

itors, an increase in monitoring activity often results in management

providing less information to directors, which in turn leads to a

decrease in advisory activity (Adams & Ferreira, 2007;

Holmstrom, 2005; Song & Thakor, 2006). This is particularly relevant

when access to information is costly and there are greater advising

needs (Duchin et al., 2010; Faleye et al., 2011)—prototypically in dis-

ruptive events situations. Thus, a disruptive event may determine a

negative value effect of board independence compared to its value in

normal times.

Small boards are also deemed more effective in monitoring man-

agement because of reduced coordination costs and less free riding

(Jenter et al., 2019; Yermack, 1996). However, the optimal size of the

board increases with the complexity of the firm, due to larger boards'

superior advisory capability (Coles et al., 2008). If disruptive events

increase, even temporarily, the complexity of the firm, then firms with

larger boards should perform better. This improved performance is

due to the revaluation of this board characteristic compared to the

pre-disruption stock price.

Finally, CEO duality is generally discouraged by regulations and

corporate governance principles as it is deemed to reduce the ability

of the board to monitor management (Fama & Jensen, 1983). How-

ever, separating the roles of CEO and chair may hurt the board's

advising function, impairing decision-making, and delaying prompt

responses in times of crisis (Brickley et al., 1997). Hence, we expect

CEO duality to help firms to limit event disruption if the advisory

function is more valuable in crisis situations than in normal times.

We identify disruptive events by searching the 10-K form of US

firms listed in the Compustat Execucomp database from 2000 to

2016. The events mentioned in the 10-K forms allow us to identify

those incidents that are material for the affected firms, representing

shocks on the firm value. In fact, consistent with this view, Griffin

et al. (2022) show that firms do not tend to overdisclose sources of

risk and are more likely to do that when the disruption affects their

operations. Thus, we expect that “our”events have attracted the

attention of the firm's directors. After carefully screening a list of

potential material events generated by a keyword search based on a

webscraping algorithm, we obtain a sample of 379 observations.

Unsurprisingly, we find that these events destroy value on average,

with a stock price loss of 0.87% in the event window (2, +2) sur-

rounding the announcement date; this corresponds to a decrease of

about $25 million in equity market capitalization for our average firm

(about $2883 million). However, we are not interested in stock price

reaction per se (as it can also be affected by the firm's efforts to mini-

mize said reaction as well as the existence of insurance contracts to

cover for the losses), but in how it correlates with board attributes.

Although we do not examine shocks on the board structure, given

that firms have little room to substantially alter board characteristics

in the immediate aftermath of the disruptive event, its impact on the

stock price can be interpreted as a market reassessment of the board's

expected contribution to the firm's recovery (see also Hail

et al., 2021). In fact, since the board characteristics are known to the

market, pre-disruption stock market prices already incorporate their

anticipated contribution to firm value. However, the shock can trigger

a revaluation of these contributions due to the new prevailing condi-

tions in which the firm operates. Thus, we exploit these stock price

reactions to determine the respective change in the value of the

board's characteristics in times of firm-specific crisis. To this end, we

regress the cumulative abnormal returns (CARs) around the date of

the disruptive event on board-related variables and a series of firm-

level controls.

We document a positive impact of both board busyness and size

on the stock price reaction around the day of the disruptive event.

The finding on board busyness supports the view that disrupted firms

can benefit from the talents of busy directors; moreover, the positive

impact of board size is in line with Coles et al.'s (2008) findings that

CROCI ET AL.3