Corporate Crises Lead to Director Defections: Study
Corporate crises certainly give company leaders a lot to worry about, such as losing customers, sales, employees, and reputation. We can add one more to the list: board members. A new study shows that a common response directors have to company crises is to leave the board.
The researchers recently summarized their work in the Harvard Business Review. They sampled the boards of S&P 1500 firms from 2003 to 2014. They measured negative attention by using both stock-analyst recommendations and a trading database that tracks media coverage. The study is titled “Saving Face: How Exit in Response to Negative Press and Star Analyst Downgrades Reflects Reputation Maintenance By Directors.”
The research showed directors are 15 percent more likely to leave boards after a downgrade and 29 percent more likely to leave after negative media coverage. The researchers tried to account for other factors such as negative company performance, lawsuits, and financial restatements.
Rather than simply quit, the directors typically opt to not stand for reelection when their terms are up. Just think of what it must be like these days to be a director of embattled companies such as Uber, Volkswagen, Chipotle, and Wells Fargo. (In fact, just last week the bank announced board changes, including the exit of three longtime directors.)
“Because directors must protect their reputations, some appear to leave when negative media and analyst attention on the firm gets too intense,” the researchers write.
Some factors made it even more likely that board members would leave: if they were high-ranking executives elsewhere, if they served on several boards, and if their tenure was long-term. Conversely, chairpersons were less likely to leave, probably due to a deeper commitment to the company.
One example the researchers give is of directors leaving the boards of Baker Hughes and Halliburton after those companies were downgraded by equity analysts in the wake of the Obama administration banning oil drilling in 2010.
The researchers note that “directors primarily serve to build and service their individual reputations,” so they would be especially sensitive to how a company crisis could hurt their own stature. The researchers note that outside directors are “a relatively small group of people atop the world’s largest organizations” who “care deeply about their reputations.”
Another tactic these board members take to mitigate the negative affect on them is to join additional boards. The researchers write: “Directors on the board of a firm that received bad press were more likely to be appointed to other public company boards following the negative attention, whether or not they left the original firm.
The researchers say companies should try to improve the reputations of their directors so they don’t feel compelled to leave when the heat gets to be too much. This can be done by creating non-executive chairs and lead independent-director positions and by simply praising individual directors more, including through media relations.
The researchers are Joseph S. Harrison of Texas Christian University, Steven Boivie and Nathan Y. Sharp of Texas A&M University, and Richard J. Gentry of the University of Mississippi.
Photo Credit: Rob Wilson/Shutterstock
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