The role of nominating committees and director reputation in shaping the labor market for directors: an empirical assessment

Abstract

Research Question/Issue: Do the presence and independence of nominating committees within boards of directors affect the extent of rewards and sanctions provided by the labor market to directors with a reputation for being active in monitoring management? Research Findings/Insights: Results drawn from a longitudinal sample of directors sitting on the board of 200 public French firms suggest that the stronger a director's reputation for being active in increasing control over management, the larger the number of his/her subsequent appointments to (1) boards with a nominating committee, (2) to boards with a nominating committee which excludes the CEO and (3) to boards with a nominating committee dominated by non-executive directors. In contrast, we found that a director's reputation of being active in increasing control over management does not impact the number of his/her subsequent appointments (1) to boards without a nominating committee, (2) to boards with a nominating committee which includes the CEO and (3) to boards with a nominating committee dominated by executive directors. Theoretical/Academic Implications: This study shows that the outcome of the power struggle between the CEO and incumbent directors during the candidate selection process determines the profile of directors who will ultimately obtain the board appointment. On the one hand, independent nominating committees are likely to reduce the influence of CEOs over the process of a director's appointment, and therefore are likely to increase the recruitment of directors with reputations for being active in exercising control over managers. On the other hand, nonexistence of nominating committees or presence of weak nominating committees under the influence of the CEO decouple directors' reputations for being active in controlling management from the likelihood of obtaining new appointments. Practitioner/Policy Implications: This study offers insights to policy makers interested in increasing the efficiency of the labor market for directors. More specifically, it highlights the conditions under which directors with a reputation of being active in increasing control over management are likely to be rewarded by the labor market for directors. These conditions include (1) the creation of a nominating committee; (2) exclusion of the CEO from this committee and (3) domination of this committee by outside directors.