Striving for a Breath of Fresh Air: Board Refreshment and Board Performance

• In Event: Management and the Board

Abstract

Board refreshment is an important issue in contemporary corporate governance. Hiring new directors to the board increases the board’s resource pool and may bring in new insights or ideas. We consequently expect an important impact of hiring new directors to the board on board performance. We distinguish between the board’s monitoring and advisory function, proxying board monitoring by discretionary accruals and audit fees, while board advising is measured by firm financial and non-financial performance. Using a Heckman selection model to control for self-selection bias, our analyses show that board refreshment by itself is not related to board performance. Rather, it matters to what extent the newly appointed director differs from the existing board members in terms of his or her characteristics. Differences between new and remaining directors increase the diversity in a board’s resources, which may then positively affect board performance. Corroborating this reasoning, our results show a positive association between the interpersonal distance between the newly appointed director and the existing board members on the one hand, and board monitoring and firm financial performance on the other hand. However, we are unable to demonstrate such an association with firm non-financial performance. Jointly considered, our results suggest that board refreshment is a viable strategy to enhance board performance, to the extent that it increases the cognitive diversity and resource pool of the board. Our results are robust to alternative specifications of the interpersonal distance measure and entropy balancing. Understanding the positive effects of board refreshment should be of interest to regulators and companies alike.

Authors

• Mieke Dingenen, KU Leuven

• Ann Gaeremynck, KU Leuven

• Mathijs Van Peteghem, Universiteit Maastricht