Most public companies have a fair share of busy executives from other businesses on their boards. This Norton Rose Fulbright blog cites a recent study by Arizona State’s Luke Stein & Hong Zhao addressing a downside of having busy execs on a corporate board – the problem of distracted directors.
The study said that distracted directors were less effective in their advisory and monitoring roles – and that distraction concerns were most significant when their primary employer was performing poorly. It turns out that distracted directors are a particular problem for M&A:
Of particular interest is the impact that distracted directors may have on a company’s acquisition decisions. Directors often take on an advisory role when selecting and negotiating mergers and acquisitions. When directors are not actively engaged in the process as a result of outside obligations, Stein and Zhao found there to be lower returns around the announcement of acquisitions. When directors with M&A experience in particular were distracted during this period – those who the company would presumably turn to for valuable advice – the returns were significantly lower.
The study’s authors suggest that the answer to the distracted director problem is larger boards comprised of directors from more diverse industries.
– John Jenkins