PERFORMANCE OR NETWORK? APPOINTMENT OF CEOS AS DIRECTORS AND POST-APPOINTMENT PERFORMANCE

Abstract

I first use a matched sample of firms to study factors affecting the likelihood of active CEOs being appointed as non-executive directors. I find that a CEO who possesses a larger network has a marginally higher probability of becoming a director of another firm. This probability also improves with greater directorial experience. However, I do not find any evidence that better firm performance improves the probability of a CEO becoming a director. This suggests that boards favour CEOs for who they know but not for how their firms performed. I then find that network size does not appear to have an impact on firm performance, although boards seem to select CEOs as directors for their networks. I also find that prior accounting and stock performance of the CEO’s firm are not good predictors of post-appointment performance of the appointing firm. Contrary to expectations, I find some evidence that CEOs from less well-performing firms improve the performance of appointing firms more than better-performing CEOs. This suggests that boards appointing well-performing CEOs as directors should not expect much improved performance.