A new paper published by the Social Science Research Network (SSRN) titled, Effects of Local Director Markets on Corporate Boards, examines how local director labor markets affect board composition and the quality of corporate governance.
The article addresses how the supply of potential directors in the local labor market strongly affects board composition of Standard and Poor’s (S&P) 1,500 companies, namely, the proportion and expertise of independent directors. For instance, in an average sample firm, a third of independent directors in S&P 1,500 firms holding executive positions are employed locally.
Similarly, the authors tests show access to a larger local pool of prospective directors has a positive effect on the proportion of independent directors. At firms located near larger local pools of prospective directors, a significantly higher fraction of independent directors are employed locally. Overall, boards of firms located near larger pools of managerial talent include a larger percentage of independent directors who are executives from other nearby firms.
Additionally, the article examines several dimensions of director expertise, including executive, technology, financial, academic, and legal expertise, and director education, to proxy specialized skills and abilities to perform effective monitoring and advisory roles. The articles found that those organizations closer to a large pool of potential director talent (general or specialized) have a higher proportion of independent directors with these respective types of expertise on their boards.
The findings provide strong evidence of the importance of local director labor markets.
Or in our opinion the importance of access to a supply of directors with expertise in those areas that fit the strategic direction of your organization
The entire article can be accessed here.