Director Ownership and Corporate Performance Sanjai Bhagat University of Colorado, Boulder Dennis C. Carey SpencerStuart Charles M. Elson University of Maryland Law School “Media Clippings” “Barron’s”

Why might the CEO (and other senior managers) act in the best interest of shareholders? INTERNAL: External Control Mechanisms n Capital markets. n Mergers, tender offers, proxy fights. n Large shareholders will monitor. n Institutional investors (shareholder proposals). n Managerial labor market. n Product markets: Bankruptcy (not very efficient). Shareholder lawsuits.

Why might the CEO (and other senior managers) act in the best interest of shareholders? Internal Control Mechanisms n Self-interest: Managers also own shares. n Management compensation contracts. n Board of directors n Board members are elected by shareholders. n Is the Board nominating committee unduly influenced by the CEO? n Independent board members will monitor. n Bhagat-Black (2000): Evidence not quite supportive. n Self-interest of board members: Board members own shares.

Sample: 1724 publicly-listed U.S. companies during Large firms: S&P 500 Annual sales (roughly) over $3 billion. Small firms: S&P Small-Cap 600 Annual sales (roughly) under $0.4 billion.

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. Average Number of Shares Granted to A Corporate Director in U.S. During Year: 1=1992, 5=1996 Number of Shares Granted All FirmsSmallLarge

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Table 4, Panel A Larger companies are more likely to compensate their directors with stock. Table 4, Panel B Smaller companies are more likely to compensate their directors with stock option. Companies with greater growth prospects are more likely to compensate their directors with stock option.

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Table 8 Poorer performing companies are more likely to experience discipline-related CEO turnover.

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Table 9 Poorer performing companies are more likely to experience discipline-related CEO turnover, especially if the median director’s ownership of (dollar value) stock and stock-option increases.

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