Determinants and Impact of Corporate Directors’ Tenure: Evidence from Spain

Maribel Saez Lacave (Universidad Autonoma de Madrid)
Maria Gutierrez (Carlos III)

Abstract

In this paper we present useful empirical evidence to guide decisions about limits on the desirable length of corporate directors' terms. Specifically, we study, firstly, the factors that determine directors’ seniority and, secondly, the effects of greater seniority on directors’ commitment to their supervisory tasks. We use panel data from Spanish listed companies and their directors for the period 2013-2020.

Results show a high turnover rate for independent directors during their early years. Additionally, independent directors are most likely to be replaced at any given time, compared to designee and executive directors. Moreover, the likelihood of replacement does not increase with tenure but it is greater for directors who were appointed by previous CEOs. Additionally, there seems to be a trial period for directors before they become members of board committees and, in the case of independents, before they become chairs of the committees where they participate. Our results also indicate that older independents are less committed to the oversight of executives. Specifically, senior independent directors show lower attendance to board meetings and reduce the likelihood of CEO turnover (especially in the case of independents who sit on the appointments committee), while the presence of directors who were appointed before the CEO increases it.

Taken together, the results suggest a significant influence of the CEO on the initial and subsequent appointments, which leads to capture and reduces independents’ commitment to active supervision.

All this leads us to conclude that, although the main regulatory concern regarding directors’ tenure has been that, absent term limits, independents may remain too long in office, the regulator should also be concerned with the problem of unfriendly independents being ousted by the CEO and not spending enough time in office

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