DO INVESTORS TAKE DIRECTORS' AGE, TENURE, AND THEIR HOMOGENEITY INTO ACCOUNT?

AuthorBerthelot, Sylvie

INTRODUCTION

Parallel to studies on directors' independence, the representation of women, and CEO/Chairman duality, this study is intended to examine whether investors take directors' age and tenure and age and tenure homogeneity into account. For some time now, directors' age and tenure have been a focus of attention since a majority of directors at firms with annual elections are elected with at least 90% of the vote. However, there are still many directors dissatisfied with their board's composition (Cloyd, 2013). According to a PWC study (2015) of 783 public company directors, nearly 40% of those directors interviewed felt that some member of their board should be replaced. The main reasons for this dissatisfaction range from diminished performance due to aging to unpreparedness for meetings and lack of expertise (PWC, 2015). Thus, the question of whether directors' age and the number of terms they serve should be capped appears to be a valid one.

It is from this perspective that this study examined whether investors take account of directors' age and tenure and the homogeneity of their age and tenure, using an empirical version of the Ohlson model (1995) and a sample of Canadian firms listed on the Toronto Stock Exchange (for fiscal years 2012 to 2015 inclusively). The findings tend to show that investors do not take age and age homogeneity into account. Conversely, they attach importance to tenure and tenure homogeneity. These results can contribute to discussions on regulating the information organisations are required to disclose about their directors' age, tenure and term of tenure. To our knowledge, few countries have set limits on the age or term of directors of listed firms, although debate on this issue has become increasingly common. In Canada, the Canadian Securities Administrators of seven provinces (out of 10) and two territories (out of three) require organisations that solicit a proxy from a security holder or the issuer for the purpose of electing directors to disclose in its documentation:

"...whether or not the issuer has adopted term limits for the directors on its board or other mechanisms of board renewal and, if so, include a description of those director term limits or other mechanisms of board renewal. If the issuer has not adopted director term limits or other mechanisms of board renewal, disclose why it has not done so (Regulation 58-101 Respecting disclosure of corporate governance practices)." Our study findings support this regulatory initiative requiring the board to disclose whether or not the firm has adopted term limits for directors. Moreover, they confirm that investors attach less value to firms whose directors' terms are shorter than average and firms where directors' tenure is more heterogeneous. In other words, they attach greater value to the shares of firms whose directors have longer than average terms of tenure. Organisations interested in increasing their market value should thus consider these results when nominating and electing their directors.

This article is broken down into four sections. The first presents the relevant literature, followed by sections on the research design and the study's sample and data collection. A third section discusses the study results, while the final section sums up the article, addresses the study's limitations and presents potential avenues for future research.

THEORETICAL BACKGROUND

Corporate governance issues came to light with the separation of ownership and control noted by Berle and Means in their studies in 1932 (Berle & Means, 1932). In fact, it was the growing size of organisations that triggered this separation. Because the thousands and even hundreds of thousands of investors who own shares in public companies cannot collectively make the day-to-day decisions needed to operate a business (Kim, Nofsinger, & Mohr, 2010), they hire managers. However, since managers and shareholders do not necessarily share the same goals, agency problems may arise.

For example, managers may seek self-serving gratification in the form of perks, power, and/or fame (Kim, Nofsinger, & Mohr, 2010). To prevent these potential abuses, relations between investors and managers are governed by contracts (Jensen & Meckling, 1976), which may however sometimes be flawed (Shleifer & Vishny, 1997). Since managers' actions cannot always be monitored, moral hazard problems may occur (Scott, 2015). As well, managers have more information about a firm's current realities and future prospects than investors, leading to a problem of adverse selection that may favour the former (Scott, 2015). Several studies have documented the prevalence of managerial behaviour that does not serve investors' interests (Shleifer & Vishny, 1997). Others have addressed mechanisms for mitigating agency problems, such as executive compensation contracts, legal rules, large investors, creditors, rating agencies, accountants and auditors. In fact, a major portion of corporate governance research targets these mechanisms.

Corporate boards of directors are another mechanism that can mitigate agency problems between investors and managers. Past studies attribute the following four roles to boards of directors: monitoring, service, strategy and resource provision (Daily, Dalton, & Cannella, 2003; Zahra & Pearce, 1989; Ong & Wan, 2008). The first entails directors monitoring managers as fiduciaries of stakeholders. In this role, their responsibilities include hiring and firing the CEO and other senior executives, determining executive pay, and otherwise overseeing managers to ensure they do not expropriate stockholders' interests (Johnson, Daily, & Ellstrand, 1996). The next two, service and strategy, are often combined. They include the advisory services that directors must provide to senior executives, as well as support for strategic planning and the implementation of corporate strategic plans (Johnson, Daily, & Ellstrand, 1996). Lastly, resource provision refers to the directors' ability to bring resources, such as legitimacy, experience, relationships with important stakeholders and access to capital, to the firm (Ong & Wan, 2008).

A number of studies have examined whether the characteristics of boards and/or directors affect boards' efficiency and firms' financial performance. Outside directors have been one of the characteristics most frequently studied. In theory, they are supposed to monitor managerial opportunism, while bringing a diversity of perspectives and expertise to support strategy formulation and implementation (Johnson, Daily, & Ellstrand, 1996). An outside director is also seen as a director who can bring resources to the firm (Johnson, Daily, & Ellstrand, 1996). However, meta-analyses seeking to establish a link between structural and compositional characteristics of boards, for instance, board size, CEO/Chairman duality, ratio of outside/inside directors and financial performance (Johnson, Daily, & Ellstrand, 1996; Dalton et al., 1999; Hermalin & Weisbach, 1991; Dalton & Dalton, 2011) have proven to be inconclusive (McNulty, 2014). According to McNulty (2014), these results confirm the need to study other variables and processes that could explain a board's performance and impact at the firm level (Daily, Dalton, & Cannella, 2003; Finkelstein, Hambrick, & Cannella, 2009; Pugliese et al., 2009).

Directors' age and tenure and age and tenure heterogeneity are other characteristics that can influence their performance even though previous studies have considered these attributes less important.

Average Age of Board Members

According to Nguyen, Hagendorff, and Eshraghi (2015), the age of the appointees could impact their decision-making capability, risk-taking behaviour, career concerns and economic incentives. These authors found that older appointees have more decision-making experience, less career uncertainty and fewer incentives to improve their job security. As a result, they are less likely to engage in excessively risky activities. Younger directors have more energy, drive and ideas, are quicker at learning new technologies and likely to favour innovative decisions (Nguyen, Hagendorff, & Eshraghi, 2015). A few studies have in fact found that the age of senior executives and board members seems to influence various firm variables. Wiersema and Bantel (1992), for example, found that members of the top management of firms most likely to change their corporate strategy have lower average and shorter organisational tenure. From this perspective, a younger board would likely more rapidly respond to change and develop better strategies, which should translate into greater future cash flows and higher share prices. However, Bantel and Jackson (1989) observed no relationship between the average age and age heterogeneity of top management and innovation.

Focusing more specifically on directors' age and using a broader measure of performance, Wang, Lu, and Lin (2012) found no correlation between directors' age and the performance of bank holding companies. Tompkins and Hendershott (2012) noted a highly positive and significant correlation between the average age of a board of directors and the...

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