Do Directors Have a Use-By Date?

Corporate boards serve the important functions of monitoring and advising management. We examine whether corporate boards consisting of longer-serving directors are better able to fulfill these functions due to the firm-specific knowledge accumulation, or whether director performance suffers due to the deterioration of their technical knowledge and/or due to the decreasing independence of the board from managers. Using a sample of up to 3,000 firms over an 18-year period, our evidence suggests that board tenure is positively related to forward-looking measures of market value, with the relationship reversing after about 9 years on average. The detrimental effect of longer board tenure on market value (after an initial period of positive effects) is stronger for high growth firms, which is consistent with the deterioration of the board members’ ability to advise on the technical matters of firms’ operations.