The role of prestige and networks in outside director appointment

Publication Date
Financial Markets Group Discussion Papers DP 582
Publication Authors

We study the role of prestige and social networks in the selection of outside directors, and the subsequent effect on firm value. Both prestige and social networks may act as barriers to good corporate governance, as merit based candidates might be disadvantaged when compared to candidates with a similar social background to the incumbent board. Using a unique database of U.K. directors, Lord or Sir titles (one of the proxies we use for prestige) and networks, we find evidence of such self-selection amongst outside directors that hold the same title. Contrary to popular suspicion, appointments of prestigious outside directors have no effect on firm value, with the exception of appointments to very large boards. We find that titled directors are more likely to hold more directorships, and retire later from their positions. In addition to prestige, a director's professional qualifications and higher education are positively related to the number of directorships they hold. We find no evidence that a shared social network or prestige of outside directors is contrary to shareholder interests.

Also included in: Corporate Governance Series 002.