Performance-Based Turnover on Corporate Boards

Abstract

We examine the threat of turnover as an incentive to align the interests of corporate directors with shareholders. Our results suggest an economically significant relation between director turnover and past firm performance. This relation only manifests in idiosyncratic stock returns; consistent with the monitoring of actions attributable to corporate boards. The director turnover-performance sensitivity increases over time as well as post-SOX and contemporaneous listing standards. This sensitivity also varies with numerous governance characteristics, most notably with the presence of an active external blockholder. In sum, the threat of replacement in the context of poor firm performance represents an economically significant incentive for directors.