Smeal researchers find that busy boards are best for guiding new firms

UNIVERSITY PARK, Pa. -- New research from three members of the Penn State Smeal College of Business Finance Department shows that busy boards — those with more than half of its directors holding three or more directorships — may be advantageous to small, newly public firms.

Past studies indicating that busy boards were less than favorable focused mostly on large, established firms. But Laura Field, Michelle Lowry, and Anahit Mkrtchyan found in a recent paper, “Are busy boards detrimental?” that small IPO firms have different needs and busy boards are better able to meet those needs. In fact, busyness is often a signal of quality in these board members.

New firms are more in need of advising services than larger, established firms. Because newer firms have less experience in navigating public markets, busy boards can be advantageous.

The authors write, “Busy directors, almost by definition, are likely to have had experience with the variety of issues that public firms face, and busy directors are also likely to have a wider network of contacts, which a growing body of literature suggests is quite valuable.”

Monitoring needs, on the other hand, take less priority than in established firms. In new firms, management often holds much of the ownership; when management and ownership are aligned, less outside monitoring is necessary from the board.

Furthermore, the authors pose that director busyness is actually a signal of quality: “Because IPO firms tend to be in emerging industries where the supply of qualified directors is particularly limited, we conjecture that a large number of these firms may be chasing a relatively small number of qualified directors.”

The authors go on to note, though, that as firms mature, both the prevalence and the benefits of busyness on the board decrease — confirming, at least in part, previous research. As a firm’s needs evolve from advising to monitoring, their boards tend to become less busy.

“While 49 percent of firms have busy boards at the IPO, this figure drops to 31 percent 10 years later. Similarly, the fraction of directors who are busy drops from 45 percent at the IPO to 35 percent 10 years later,” the authors reported. “This decrease in busyness is consistent with these more mature firms evaluating the benefits of busyness to be lower.”

Field, the Moore Faculty Fellow in Finance; Lowry, the Calderwood Faculty Fellow in Business; and Mkrtchyan, a doctoral candidate in finance, are part of the Penn State Smeal College of Business. The paper, “Are busy boards detrimental?” is forthcoming in the Journal of Financial Economics.