Board Changes and the Director Labor Market: The Case of Mergers

Boards of directors perform the critical tasks of monitoring and advising management and it is logical to suspect that the necessary skills vary with the nature of a particular firm.  That is, a board should be chosen with consideration of the needs associated with advising and monitoring a particular business.  So what happens to boards after a merger?  After all, mergers change the nature of a firm, sometimes in dramatic ways.  Do boards change as well?  

In a recently revised working paper, David Becher, Jared Wilson and I examine this question. However, to ascertain whether board changes around mergers are significantly different from the status quo, we needed a benchmark of normal board changes.  To our surprise, there was little information available in the literature.  Consequently, our work provides evidence on changes around mergers but also provides a benchmark for normal non-merger changes.  

The abstract is below:

Board Changes and the Director Labor Market: The Case of Mergers

David Becher, Ralph Walkling and Jared Wilson

Abstract:      

We examine the stability and composition of acquirer boards around mergers, contrasting changes with the same firms in non-merger years and a sample of non-merging firms. Contrary to perceived wisdom, the post-merger board changes substantially and variation is significantly different from both non-merger years and non-merging firms. Adjustments reflect firms upgrading skills associated with executive and deal experience and bargaining between targets and acquirers rather than agency motives. Conversely, director selection in non-merger years is driven by general skills and diversity. Our analyses provide insight into the dynamic nature of board structure and characteristics valued in the director labor market.

The complete paper may be downloaded here.

All the best,

Ralph

DuPont, Trian and Shareholder Votes

Yesterdays Wall Street Journal had a very interesting article related to Dupont's impending election, noting the importance of small shareholders in the voting process.  The vote will be to elect DuPont's 12 directors.  Trian has nominated an alternative slate containing eight of DuPonts nominees and four of their own, including Trian boss Nelson Peltz.  A decade or so ago, institutions typically sided with management.  Today's institutions appear to take a more nuanced look at the issues and directors upon which they vote.  Still, the typical shareholder is likely to be apathetic with regard to voting, assuming that their small holdings do not count.  

To understand the typical voting distribution, take a look at the chart below from our Journal of Finance paper, Electing Directors.  The typical director gets well over 90% support.

The chart is derived from an analysis of about 2500 director elections (for more detail, see Electing Directors).   However, only four of those were contested.  In the DuPont case, the 12 directors receiving the largest number of votes will be elected.  It will be interesting to see how this one turns out and if Trian is successful, what changes in DuPont's structure and what changes in share value follow.

All the best,

Ralph

Electing Directors

The board of directors is crucial to the successful governance of the modern corporation.  Directors hire and fire the CEO, monitor performance and compliance with regulations and provide crucial advice on strategic matters.  And, of course, related to this blog, the board also approves or disapproves mergers.  Until recently, however, we didn't know much about director elections.  Jay Cai, Jacqueline Garner and I studied over 2500 director elections to remedy that situation.  The abstract of the article is below.  

Electing Directors

Published in the Journal of Finance

Abstract:     

Using a large sample of director elections, we document that shareholder votes are  significantly related to firm performance, governance, director performance, and voting  mechanisms. However, most variables, except meeting attendance and ISS  recommendation, have little economic impact on shareholder votes. Even poorly  performing directors and firms typically receive over 90% of votes cast. Nevertheless,  fewer votes lead to lower 'abnormal' CEO compensation and a higher probability of  removing poison pills, classified boards, and CEOs. Meanwhile, director votes have little  impact on election outcomes, firm performance, or director reputation. These results  provide important benchmarks for the current debate about election reforms.   

The complete article, which was published in the Journal of Finance can be downloaded here.

All the best,

Ralph

The Influence of ISS: The Case of JP Morgan

Merger decisions are dramatically impacted by acquiring and targeted boards.  Boards are elected by shareholders, many of whom lack the time or other resources to carefully scrutinize directors or issues to be voted upon at an annual meeting.  Enter the Proxy Advisory Firms who make a business of issuing recommendations (and, pardon the conflict of interest, selling advisory services - but that is a point for another time). Today, I just want to talk about the influence of advisory firms.  

The influence of Proxy Advisory Firms is receiving renewed attention with the recent vote to separate the CEO and Chairman roles at JP Morgan.  Jamie Dimon 'won' that vote in spite of negative recommendations from Institutional Shareholder Services and Glass Lewis.

Let's examine the 'win' a bit closer and also examine an article in the Wall Street Journal today that suggests the influence of proxy advisory firms is on the decline.  I'm not so sure that Dimon's results suggest any loss of influence of ISS or Glass Lewis.  True, the proposal to split the roles received 33% support this year, down from 40% last year.  But that is in the face of a massive campaign by JP Morgan to influence investors.  In spite of the "London Whale" incident, Dimon is widely regarded as one of the most competent executives on Wall Street and it is clear that Morgan has benefitted under his leadership.  I wouldn't expect firms or executives with lessor records to be able to sway votes.  

The chart below, taken from the WSJ article, suggests that an ISS recommendation is associated with a change in votes by about 15%.  This simple chart doesn't indicate that the ISS recommendation swings votes by that much as factors that influence ISS also influence shareholders themselves.  However, it is interesting to note that the 15% level is quite similar to our own analysis of over 2400 director elections.  In that analysis we found that a negative recommendation by ISS moved votes by over 18% - after controlling for all of the other logical factors (firm performance, director performance, etc.).  We'll discuss those results in a subsequent post.  Here we also note that the three directors from the risk committee of JP Morgan received a negative recommendation from ISS and garnered less than 60% shareholder support.  Those are very low numbers for directors.  They typically receive over 90% support.

The WSJ article can be downloaded here.  More detail on our analysis of Board Elections will be found in a subsequent post.

All the best,

Ralph