Trading techniques....watch the board

In recent years there has been a drive to increase the numbers and powers of independent directors (sometimes referred to a non-executive directors) on corporate boards. The argument for such directors is that because they don’t directly work for the firm, or hold lots of shares, they can ask tough questions without being worried that their careers will suffer or the value of their investments fall. They can also in theory bring a wider range of perspectives to bear on issues faced by the company.

Many people argue that the lack of “skin in the game”, their part-time nature and the fact that they are appointed by the company’s management limits the usefulness of such directors. Still, there is evidence that it is worth paying attention to their actions – especially when they unexpectedly leave the board.

A 2017 study by Rüdiger Fahlenbrach of EPFL, Angie Low of Nanyang Business School and René Stulz of Fisher College of Business focused specifically on unexpected departures by independent directors (as defined by a relatively short time served) from S&P 500 companies between 1999 and 2010. They found that firms that had experienced such a departure went on to suffer “worse stock performance, worse accounting performance, a greater likelihood of an extreme negative return, a greater likelihood of a restatement and a greater likelihood of being sued by their shareholders” than the rest of the market. However, when resignations were expected (for instance, when the director was elderly and set to retire, or had been with the company for a long time) there were no statistically significant effects on returns, either negative or positive.