Target Director Turnover in Acquisitions: A Conceptual Framework

• Author: Yong Li,Ruth V. Aguilera
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00705.x
• Published date: 01 November 2008
• Date: 01 November 2008

Target Director Turnover in Acquisitions:

A Conceptual Framework

Yong Li* and Ruth V. Aguilera**

ABSTRACT

Manuscript Type: Conceptual

Research Question/Issue: Post-acquisition director turnover is a complex and multi-faceted phenomenon that needs to be

examined beyond the agency lens. In this article, we examine the likelihood of non-executive director turnover in target

f‌irms following an acquisition.

Research Findings/Result: Acquisitions present an interesting case where conf‌lict of interests may arise between share-

holders and directors. This study proposes that the likelihood of target non-executive director turnover depends on the

factors thatdetermine the performance of directors in their monitoring, advisory and social roles pre-acquisition and during

the acquisition process.

Theoretical Implications: While there are multiple studies examining the likelihood of turnover of executive directors

(TMTs) following an acquisition, there is no systematic conceptual research explaining the likelihood of turnover of

non-executive directors. We draw on three theoretical perspectives–agency theory, resource-based view and the social

capital perspective to comprehensively investigate target non-executive director turnover post-acquisition. We further

clarify the boundaries of these theoretical arguments concerning their implications for target non-executive director

turnover.

Practical Implications: One of the most important tasks for the newly formed f‌irm post-acquisition is to build the new

leadership team, including a new board.In view of the important roles directors take on in modern corporations, it is critical

to understand how the new board should be constituted and what members of the target f‌irm are more likely to join that

new board.

Keywords: Board Leadership, Corporate Governance, Mergers & Acquisitions, Corporate Control Market, Evaluation of

Directors, Individual Director Issues

INTRODUCTION

When acquisition1occurs, corporate governance under-

goes substantial changes. The completion of an acqui-

sition will be followed by the constitution of a new board of

directors that will be part of the new leadership team for the

newly formed f‌irm. While some directors from the target

f‌irm will remain as part of the new leadership team, others

will leave – most often involuntarily.For example, in the deal

between British Petroleum PLC and Amoco Corp in 1998,

eight out of the 13 Amoco board directors remained as part

of the board of the newly formed f‌irm, BPAmoco, in 1999. In

contrast, in the deal between Daimler-Benz and Chrysler,

only four out of the original 12 Chrysler board directors

joined the board of the newlyformed f‌irm, DaimlerChrysler.

In view of such heterogeneity in director turnover, this

study seeks to conceptually understand which directors

from the target f‌irm are more likely to stay with the newly

formed f‌irm and which directors are more likely to leave

post-acquisition. By post-acquisition, we mean immediately

after the newly merged company announces the new board.

This study focuses specif‌ically on the turnover of non-

executive directors in the target f‌irm immediately following

the acquisition. The corporate governance literature differ-

entiates between two types of directors–executives and non-

executives. Executive directors are those individuals who sit

on the board and also have executive positions in the f‌irm.

Non-executive directors sit on the board, but do not get

involved in the f‌irm’s daily operations. Extant studies

have offered insights into the likelihood and rate of top

*School of Management,State University of New York at Buffalo, 326 Jacobs Manage-

ment Center, Amherst, NY 14260. Tel: 716-645-2522; Fax: 716-645 5078; E-mail:

YL67@buffalo.edu

**Departmentof Business Administration, College of Business, University of Illinois at

Urbana-Champaign,1206 S. Sixth Street, Champaign, IL 61820. Tel: 217-333-7090; Fax:

217-244-7969; E-mail: ruth-agu@uiuc.edu

492 CORPORATE GOVERNANCE

Volume 16 Number 6 November 2008 © 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00705.x