A major challenge of the study was to ascertain that it was board tenure that affected firm performance, and not vice-versa — that is, high average board tenure was not just a reflection of the trouble poorly performing firms might have in attracting new directors. To probe this possibility, Huang analyzed the response of investors to the sudden deaths of directors, reasoning that significant stock movements in the immediate aftermath of the deaths would strongly suggest that causality ran from directors to performance and not the opposite way. The results not only suggested the former to be the case but provided confirmation of nine years as a significant dividing line: sudden deaths that move average board tenure towards nine years attract a three-day mean abnormal announcement return of plus 1.038%, while those that move board tenure away from nine years observe a mean abnormal announcement return of minus 1.429%.
The study also provides evidence that one size does not fit all companies when it comes to board tenure. Building on earlier research, Huang extracts from his sample firms with greater advising needs and those with greater monitoring needs. In the former group, consisting of companies with complex operations and many intangible assets, “board members likely require more time to acquire the knowledge needed to advise on the appropriate strategy,” and the optimal length of average board tenure turns out to be about 11 years. In contrast, among firms with great monitoring needs, such as those covered by few stock analysts or with weak shareholder power, “the marginal costs of entrenchment may quickly dominate the marginal benefits of leaning,” and firm value reaches a maximum at an average board tenure of about seven years.
The sample for the study consisted of companies in the S&P 1,500 during the period 1998-2010, a total of 2,158 firms that yielded 13,989 firm-years of data. For about 85% of the sample, outsiders constituted a board majority, and average board size (outsiders plus insiders) was 9.2 directors.
Surprisingly, the effect of board tenure on firm performance has been only sparsely studied, a striking contrast to the vast literature on the effects of diversity. As Huang writes at the outset of the paper, explaining his choice of subject, “Anecdotal evidence suggests that long board tenure is negatively associated with firm performance, and that shareholders are concerned about boards with long tenure. However, empirical evidence on how board tenure affects corporate decisions and firm performance is scarce.”
The paper, entitled “Zombie Boards: Board Tenure and Firm Performance,” was among hundreds of scholarly presentations at the American Accounting Association meeting, which drew more than 3,000 scholars and practitioners to Anaheim, CA from August 3 to 7. The AAA is a worldwide organization devoted to excellence in accounting education, research, and practice. Journals published by the AAA and its specialty sections include The Accounting Review, Accounting Horizons, Issues in Accounting Education, Behavioral Research in Accounting, Journal of Management Accounting Research, Auditing: A Journal of Practice & Theory, and The Journal of the American Taxation Association.