I found Emilie Feldman’s research intriguing. She suggests that Director incentives might only be effective when combined with “expertise”. Emilie labeled non-expert outside directors “significant ownership, low expertise” (a/k/a “SOLE”), and uses the following criteria to define SOLE directors:
1. Not the founder of a FORTUNE 500 company
2. Not the current or retired CEO or chairman of a Fortune 500 company
3. Not a director of more than one Fortune 500 company
4. Owns shareholdings of at least 0.1%
1. There is no question in my mind that expertise as a CEO, Chairman, and service on multiple Boards is a scarce and valuable strategic asset. But I also see other view points that must be carefully considered when determining board composition and aligning incentives.
2. Certain board committees may actually benefit from non-expert, non-CEO, non-Chairman, non-Board, and diverse outside experience. For example, cybersecurity is a rapidly evolving skill set necessary for risk management, and could preserve firm value if management needs oversight and guidance. Cybersecurity expertise is not defined by the SOLE criteria above.
3. The period (2004 – 2010) was exceptionally volatile for equity market valuations which influences the numerator of Tobin’s Q. During this period the equity value of many companies was marked by net declines. This may or may not have materially affected the regression tests.
4. Tobin’s Q does not fully reflect the value of intellectual capital such as knowledge, technology, goodwill, and intangible assets. Intellectual capital can affect a firm’s value.
Further analysis is necessary to (a) rigorously test exception cases and (b) determine the significance, relevance, and accuracy of the findings.
Agency theory predicts that incentives will align agents’ interests with those of principals. However, the resource-based view suggests that to be effective, the incentive to deliver must be paired with the ability to deliver. Using Fortune 500 boards as an empirical context, this study shows that the presence of directors who lack top-level experience but own large shareholdings is negatively associated with firm value, an effect that increases in the number of such directors. Firm value rises after such directors depart from boards, with the greatest increases occurring when many of these directors leave. While agency theory highlights the importance of the right incentives being in place, this research suggests that this can be ineffective if the right resources are not also in place. Copyright © 2013 John Wiley & Sons, Ltd.
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Emilie R. Feldman
Assistant Professor of Management
The Wharton School
University of Pennsylvania