Impact of Professors in the Boardroom: Why I have to be a professor!

A recent paper which seemingly is the first to focus entirely on the impact of academic directors on corporate governance and firm performance has come up with very interesting results. The paper titled “Professors in the Boardroom and their Impact on Corporate Governance and Firm Performance” is available here.

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The abstract of the paper reads thus:

“Directors from academia served on the boards of more than one third of S&P 1,500 firms over the 1998-2006 period. This paper investigates the effects of academic directors on corporate governance and firm performance. We find that companies with directors from academia are associated with higher performance. In addition, we find that professors without administrative jobs drive the positive relation between academic directors and firm performance. We also show that professors’ educational backgrounds affect the identified relationship. For example, academic directors with business-related degrees have the most positive impacts on firm performance among all the academic fields considered in our regressions. Furthermore, we show that academic directors play an important governance role through their monitoring and advising functions. Specifically, we find that the presence of academic directors is associated with higher acquisition performance, higher number of patents, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are effective monitors and valuable advisors, and that firms benefit from academic directors.”

The paper empirically investigates whether the presence of academic directors affects firm performance and corporate governance. Based on the independence theory, expertise theory, and diversity theory, the researchers hypothesize that academic directors can improve board efficacy and subsequent firm performance. They find that compared to other outside directors, academic directors have several unique characteristics that could enhance the effectiveness of corporate boards. In the first place, academic directors are outside directors with relatively strong reputations and a tradition of independent thinking. They are trained to be critical thinkers with their own opinions and judgments, and they are less influenced by others and can be tough when necessary.

Secondly, professors have indirect connections with insiders as compared to many other outside directors, and therefore can be more independent.

Independent Directors: 111 Frequently Asked Questions Aptly Answered

Thirdly, professors are specialized experts in their research fields, including business, technology, and law. Directors with academic backgrounds can enhance the competitive advantage of firms by facilitating access to and absorption of external knowledge spillover. In most announcements of appointing professors as non-executive directors, CEOs and chairmen often note that a professor’s academic expertise will be of great benefit to the company.

Fourthly, the expertise theory indicates that academic directors can be valuable advisors who bring unique expertise into the boardroom.

Fifthly, academic directors’ primary areas of expertise are academic in nature. They tend to think through problems differently than non-academics and can provide different perspectives in the boardroom, which adds to the board’s diversity. Prior studies have shown that board diversity is an important factor that influences board efficacy and firm performance.

Sixthly, job-related diversity, including the presence of academics on boards, could enhance the functional area knowledge and skill on the board. Thus, the diversity theory also predicts that academic directors increase board diversity and improve board efficacy.

On the negative side, there are two issues which the researchers identified. One, academia emphasizes scholarly rigor and accurate results, which might clash with the goal of optimal firm performance. Two, some academic directors hold administrative positions and thus may have connections to companies through university endowments or other fundraising relationships, which may make them less independent than inside managers.

Nevertheless, it is noteworthy that they find that academic directors bring about, and not merely reflect, an improved firm performance; are better at board governance than other outside directors; strengthen the management oversight by boards; the presence of academic directors is significantly and positively related to the number of patents, indicating that academic directors enhance firms’ innovation capacity through their specialized expertise; the presence of academic directors is significantly and positively related to acquisition performance, suggesting academic directors play important advising and monitoring roles during acquisition decisions.

You can freely access the full research paper here.

Independent Directors: 111 Frequently Asked Questions Aptly Answered

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One comment on “Impact of Professors in the Boardroom: Why I have to be a professor!
  1. Aykonsult says:

    I agree with this article. In my opinion I believe that in future corporate governance codes, a provision compelling companies to have at least one academic director should be made. This will go a long way in moving the companies forward and further lead to their development.

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