Outside directors are supposed to serve as helpful, yet less biased, advisers on a firm’s board. Having made their wealth and their reputations elsewhere, they presumably have enough independence to disagree with the chief executive’s proposals. If the sky, and the share price is falling, outside directors should be able to give advice based on having weathered their own crises.
The researchers from Ohio University used a database hat covered more than 10,000 firms and more than 64,000 different directors between 1989 and 2004. Then they simply checked which directors stayed from one proxy statement to the next. The most likely reason for departing a board was age, so the researchers concentrated on those “surprise” disappearances by directors under the age of 70. They fount that after a surprise departure, the probability that the company will subsequently have to restate earnings increased by nearly 20%. The likelihood of being named in a federal class-action lawsuit also increases, and the stock is likely to perform worse. The effect tended to be larger for larger firms. Although a correlation between them leaving and subsequent bad performance at the firm is suggestive, it does not mean that such directors are always jumping off a sinking ship. Often they “trade up.” Leaving riskier, smaller firms for larger and more stable firms.
But the researchers believe that outside directors have an easier time of avoiding a blow to their reputations if they leave a firm before bad news breaks, even if a review of history shows they were on the board at the time any wrongdoing occurred. Firms who want to keep their outside directors through tough times may have to create incentives. Otherwise outside directors will follow the example of Ms. Simmons, once again very popular on campus.
1. According to Paragraph 1, Ms. Simmons was criticized for .
[A]gaining excessive profits
[B]failing to fulfill her duty
[C]refusing to make compromises
[D]leaving the board in tough times
2. We learn from Paragraph 2 that outside directors are supposed to be .
[A]generous investors
[B]unbiased executives
[C]share price forecasters
[D]independent advisers
3. According to the researchers from Ohio University after an outside director’s surprise departure, the firm is likely to .
[A]become more stable
[B]report increased earnings
[C]do less well in the stock market
[D]perform worse in lawsuits
4. It can be inferred from the last paragraph that outside directors .
[A]may stay for the attractive offers from the firm
[B]have often had records of wrongdoings in the firm
[C]are accustomed to stress-free work in the firm
[D]will decline incentives from the firm
5. The author’s attitude toward the role of outside directors is .
[A]permissive
[B]positive
[C]scornful
[D]critical
