When a corporation is looking for a new member of the Board of Directors, someone who will excel in the job, are there any guiding principles to help make a strong choice?

Perhaps, says Professor Anna Bergman Brown, whose research on the subject, titled “Too Busy or Well-Connected? Evidence from a Shock to Multiple Directorships,” will be published in March 2019 in The Accounting Review.

The key is to find a director who isn’t overburdened with responsibilities, yet is well-connected enough to have a strong industry perspective.

“This is one of the big questions that lingers about establishing the most successful Board of Directors, and it’s an issue that can have a powerful impact,” Brown said. “Not only is this information potentially helpful for corporations, it can be assessed by regulators who are faced with questions like, ‘Is it unproductive for a director to serve on more than, say, three boards?'”

Balancing Commitment and Connections

Brown, an assistant professor in accounting, worked on the research with Jing Dai, a doctoral candidate at CUNY Baruch College, and Professor Emanuel Zur at the University of Maryland. Together, the team investigated more than 1,000 directors who lost a board seat involuntarily, due to the firm being acquired in a merger or acquisition, and the impact that had on their additional workload. Brown’s research involved U.S. companies and spanned 12 years, ending in 2014.

The researchers discovered that when a board member who serves on multiple corporate boards loses one seat due to M&A, he or she has more time to focus on duties at the remaining boards, and those companies benefit from that additional attention through improved performance.

However, they also discovered that firms with directors who lost access to the most well-connected target firm boards did not experience the same improvements in performance (and some even experienced negative effects). Director positions frequently foster useful connections through the sharing of information, perspective and resources. Firms where directors lost access to the least well-connected target firm boards showed the most dramatic improvements in performance.

Therefore, the researchers conclude that a reduction in additional director duties usually benefits firm performance. Yet when directors lose access to a very well-connected board, the negative impact of the loss of access to resources cancels out any benefit of reduced time commitments.

Impact on Financial Reporting, Strategy

The trio also looked at the effects of two key oversight roles of the board of directors: monitoring the quality of financial reporting and advising top management about investing and strategy. They discovered that board connections are most important for advising strategy, but financial reporting quality is most strongly related to a director’s time commitment to the organization.

In addition, they examined how executive directors, such as CEOs or CFOs, were impacted by a reduction in workload and connections. They discovered that executive directors are less likely to allocate more time to board duties when they experience a workload reduction, perhaps because they are more focused on their executive duties instead.

In order to assess the costs and benefits of multiple directorships, Brown and her colleagues suggest that researchers, practitioners and policymakers should jointly consider the effect of board members time constraints and business connections.

A Challenging Analysis

Brown said she is intrigued by research that tackles issues that are difficult to study. The role of directors and their additional commitments is one that is particularly vexing to analyze. By looking at the impact of mergers and acquisitions on board roles, the researchers found a path to investigate a subject that’s hard to disentangle, she said.

About 50 percent of board members serve just one company, but it isn’t unheard of for highly sought-after board members to sit on four or five boards simultaneously, Brown said. Many corporations restrict the number of firms for which a director can serve, but not all do.

“We’re hoping this is of interest to regulators and lawmakers considering restrictions on the number of seats board members can hold and to companies seeking well-connected directors,” she said.