Death by Committee? An Analysis of Corporate Board (Sub-) Committees

Abstract

Boards are working harder over time, but are they working better? Using text-based algorithms to construct a dataset with over 30,000 firm-year observations from 1996 to 2010, we document that the governance reforms of the early 2000s may have had unintended consequences. While readily observable board characteristics have not changed much over time, boards have increasingly delegated responsibilities to committees, staffed by independent directors. We find evidence that this delegation may have erected barriers to communication and elective board decision-making. Investors discount the informativeness of the personal stock purchases for independent directors who are active committee members; returns to firms announcing an acquisition decrease as board delegation increases. Reform-induced delegation does not appear to be value-enhancing; a conservative estimate suggests that Tobin’s q of the typical firm in the sample decreases by 1.7% after the reforms. Board committees are relatively understudied, but our results suggest that ignoring them leads to a very incomplete picture of board governance.