Board Changes in Response to Extremes in Performance

Abstract

This study contrasts changes in board structure in firms at the extremes of industryadjusted performance. We find pervasive changes in board size, composition, and director pay for firms whose stock market performance ranks in the uppermost and lowest deciles of industryadjusted returns over the period 2001-2005. Our evidence shows that these companies tended to change their board’s size, added outsiders to the board, and increased director pay. Significant differences between the two groups are documented, with poor performers making more dramatic changes in all three of these governance metrics. We failed to find changes in other structural characteristics such as classified boards and shareholdings of directors.