The market for independent directors

Manuscript Type Empirical Research Question/Issue Research Findings/Insights Using the US setting from 1996 to 2006, we examine how the market for independent directors responds to increasingly stringent scrutiny. Despite the unambiguous increase in the demand for independent directors (with financial expertise) since 2000, independent directors (with financial expertise) have not expanded their board seats but reduced them. Incumbents are more likely to depart from firms that are costly to advise and monitor, but only post-2000. Meanwhile, we document an influx of new directors to the labor market. These new directors are more likely to be hired by firms that are costly to advise and monitor post-2000 and are more likely to be financial experts so that the increased demand can be satisfied. Theoretical/Academic Implications Practitioner/Policy Implications Hypothesis We provide evidence that the demand-supply framework adequately captures the market for independent directors. In particular, rather than the demand effect simply dominating the supply effect for a particular group of directors, the demand is fulfilled by opposing supply effects of different types of directors, specifically incumbents versus new entrants. Policy makers should not underestimate the (dis)incentives that directors have to provide services to the market when initiating future governance reforms (e.g. writing the limit on the number of directorships held by directors into best practice/law). Firms, especially ones that are costly for directors to advise and monitor, are encouraged to explore effective ways to retain valuable directors and prepare thorough succession plans whenever the supply of directors is expected to shrink.