1. Director Ownership and Corporate Performance Sanjai Bhagat University of Colorado, Boulder Dennis C. Carey SpencerStuart Charles M. Elson University of Maryland Law School http://bus.colorado.edu/faculty/bhagat “Media Clippings” “Barron’s”

2. 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.

3. 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.

4. Sample: 1724 publicly-listed U.S. companies during 1992-1996. 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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6. . Average Number of Shares Granted to A Corporate Director in U.S. During 1992-1996 0 50 100 150 200 250 300 12345 Year: 1=1992, 5=1996 Number of Shares Granted All FirmsSmallLarge

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

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18. 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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