The Impact of Director Reputation and Performance on the Turnover and Board Seats of Target Firm Directors

Authors

  • Dr Martin Bugeja,

    1. The first author is from the University of Sydney. The second and third authors are from the University of Western Australia. They acknowledge the helpful comments and suggestions of an anonymous referee, the editor Peter Pope, Philip Brown and participants at seminars held at the University of Western Australia Business School and University of Sydney. They also wish to thank Whitney Hudson for her editorial assistance. This study benefited from funding received from an Australian Research Council Discovery Grant.
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  • Raymond Da Silva Rosa,

    1. The first author is from the University of Sydney. The second and third authors are from the University of Western Australia. They acknowledge the helpful comments and suggestions of an anonymous referee, the editor Peter Pope, Philip Brown and participants at seminars held at the University of Western Australia Business School and University of Sydney. They also wish to thank Whitney Hudson for her editorial assistance. This study benefited from funding received from an Australian Research Council Discovery Grant.
    Search for more papers by this author
  • Andrew Lee

    1. The first author is from the University of Sydney. The second and third authors are from the University of Western Australia. They acknowledge the helpful comments and suggestions of an anonymous referee, the editor Peter Pope, Philip Brown and participants at seminars held at the University of Western Australia Business School and University of Sydney. They also wish to thank Whitney Hudson for her editorial assistance. This study benefited from funding received from an Australian Research Council Discovery Grant.
    Search for more papers by this author

Address for correspondence: Martin Bugeja, Discipline of Accounting, H69, Faculty of Economics and Business, University of Sydney, NSW, 2006, Australia. e-mail: m.bugeja@econ.usyd.edu.au

Abstract

Abstract:  This study examines factors that explain the turnover and board seats held by target firm directors post-takeover. Following successful takeovers the proportion of the board replaced is lower when the target has better performance. In failed takeovers, executive directors have lower turnover and the rate of turnover is reduced after a hostile takeover. Inconsistent with ex-post settling-up, actions that advance target shareholder wealth during the takeover does not assist a director obtain an increase in future board seats. Confirming a reputation effect, directors with multiple directorships have a lower rate of turnover and a higher increase in future board seats.

1. INTRODUCTION

It is commonly argued that a function of the market for corporate control is to remove management that are either underperforming or not acting in the interest of shareholders (e.g., Shliefer and Vishny, 1997). Takeovers are viewed as the appropriate mechanism to carry out this function when the firm's internal monitoring mechanisms are not performing effectively (Jensen, 1986). Prior research from the United States and United Kingdom has documented that the rate of top manager and board turnover increases in the period following both successful (e.g., Martin and McConnell, 1991) and unsuccessful takeovers (e.g., Agrawal and Walkling, 1994) and that the rate of turnover is negatively related to target firm performance prior to the takeover (e.g., Kini et al., 1995). This study follows the career of target firm directors following Australian takeover offers to determine if there is any ex post settling-up (Harford, 2003). We also extend prior research by investigating if a director's reputation and experience (Shivdasani, 1993) influence turnover from the target board or their directorial career post-takeover.

This study makes a contribution, as it is the first non-US study (e.g., Harford, 2003, and Kini et al., 2004) to undertake a detailed multivariate analysis of director turnover and career path post-takeover. Whilst Australia is similar to the United States in that it has a well-developed economy based on common law principles and an active equity market, the existence of institutional and regulatory differences suggests that US results may not hold in Australia. A salient regulatory difference is that there is no Australian equivalent of the United States' Clayton Antitrust Act of 1914, which prohibits director interlocks (i.e., companies having a director in common) where competition may be substantially reduced. Murray (2001) is one amongst several researchers who have documented the high degree of board interlocks in Australia and noted the potential of director interlocks to serve the directors' interests rather than, for example, shareholders' interests. An obvious way interlocks could serve directors' interests, rather than those of shareholders, is by weakening the link between the actions directors take to advance shareholders' interests in takeover bids and their post-takeover outcomes. Another potentially consequential institutional difference between the United States and Australia is that company boards in Australia are smaller, which may limit opportunities for directors post-takeover. For instance, Kang et al. (2007) report an average board size of 8.2 directors in Australia, compared to a mean board size of 12 directors for US takeover targets (Harford, 2003) and approximately seven in UK-listed firms (Constantinou et al., 2005; and Mura, 2007).1,2

We find that the turnover rate of directors is approximately 86% in successful takeovers and 66% in unsuccessful bids. In successful takeovers, poor target firm performance increases the percentage of the board replaced and the turnover of non-executive directors. Consistent with a reputation effect, an increasing number of non-target board seats reduces the likelihood that non-executive directors will be replaced following a successful bid. In unsuccessful takeovers, executive directors remain on the target firm board more frequently than non-executive directors and have lower turnover in hostile takeovers. Consistent with ex post settling-up, the lower rate of turnover for executives in hostile bids is moderated when the target firm was poorly performing prior to the takeover. Furthermore, non-executive directors more frequently retain their board seat when the unsuccessful takeover required greater effort through negotiating with either competing bidders, a foreign acquirer, or a bidder of greater size relative to the target firm.

Our analysis indicates that there is a significant decrease in the total number of board seats held by target firm directors post-takeover. Single-seat directors are, however, successful in partially replacing the lost seat as they achieve a significant abnormal increase in other board seats (i.e., non-target) post-takeover. The increase in board seats for single-seat directors is significantly higher following a hostile takeover, consistent with the rejection of the takeover being perceived to be in the interest of shareholders. Alternatively, the experience gained from acting in a hostile takeover results in these directors being offered other board appointments. Inconsistent with ex post settling-up, we do not find that better target firm performance or undertaking actions during the takeover period that increase shareholder wealth (i.e., increases in offer price, negotiating a higher premium, or encouraging multiple bidders) leads to an increase in future board seats held by target firm directors. In contrast, we find some evidence that undertaking an auction for the target firm actually leads to a lower number of future directorships. Consistent with a reputation effect, we document that following a successful takeover, directors with multiple board seats have an abnormal increase in the number of directorships.

For directors who are replaced on the target firm board, we examine whether the financial impact of losing their target directorship is associated with the change in future board seats, as we expect that the financial impact of losing the target board seat will encourage the director to strive to replace that loss. We find a significant result only for multiple-seat directors, who have a negative association between the proportion of their income lost and the change in future board seats. Consistent with the reputation effect, this finding suggests that the more financially important the lost target seat, the more difficult it is for the director to obtain future employment.

The next section of the paper reviews previous research relevant to the study and develops hypotheses. Section 3 describes the sample, whilst Section 4 presents the research method and results. The final section provides a discussion of the results, with conclusions.

2. PRIOR RESEARCH AND HYPOTHESIS DEVELOPMENT

(i) Prior Research

This disciplinary motive for takeovers has received acceptance within the literature (e.g., Shliefer and Vishny, 1997) and forms the basis of Australia's takeover legislation. For example, Paper No. 4 of the Corporate Economic and Law Reform Program (CLERP No. 4) on takeovers argues that ‘the prospect of a takeover acts to overcome the principal−agent problems inherent in the separation of company ownership and control, for example, where it is impracticable or too costly for shareholders to ensure that directors act in their interests’ (1997, p. 7). Closely related to the disciplinary motive for takeovers is the argument that takeovers are motivated by a desire to replace inefficient or poorly performing target management. As argued by Dodd (1987) and Agrawal and Jaffe (2003), it is not necessary that existing target management be incompetent for a takeover to result in improvements. All that is required is that the new management group be able to extract better performance from the target firm.

The common implication of the disciplinary and inefficient management hypotheses is that the turnover of target firm management will increase post-takeover. Consistent with this expectation, research in both the United States (e.g., Walsh, 1989; Martin and McConnell, 1991; Agrawal and Walkling, 1994; and Hartzell et al., 2004) and the United Kingdom (Kennedy and Limmack, 1996) documents a greater rate of turnover of the top target firm manager subsequent to a successful takeover, with the likelihood of turnover being higher in poorly performing target firms (Martin and McConnell, 1991; Kini et al., 1995; and Kennedy and Limmack, 1996). The impact of other variables on management turnover is inconsistent across studies. Takeover hostility is found to increase management turnover by Agrawal and Walkling (1994) but is insignificant according to Martin and McConnell (1991) and Kennedy and Limmack (1996). Martin and McConnell (1991) find no association between management turnover and takeover premiums in the United States, whilst Kennedy and Limmack (1996) report a positive association in the United Kingdom. This is interpreted as indicating greater possible efficiency gains in takeovers where the top manager is replaced.

Based on Jensen (1986), Kini et al. (1995) argue that boards dominated by insiders are less likely to discipline managers, necessitating that this task be completed by the takeover market. As hypothesised, their results show that CEO turnover post-takeover is only related to poor performance in insider-dominated boards. Furthermore, Kini et al. (2004) find that this relationship is only significant over the period 1979 to 1988, which they argue is characterised by a period of weak corporate governance. In addition, consistent with a disciplining argument, Florou (2005) reports that the likelihood of board chairperson dismissal increases if he or she appointed a poorly performing CEO.

US evidence on target firm director turnover post-successful takeover is provided in Harford (2003). Those results indicate that 19% of insiders and 10% of grey and other directors are retained following a successful takeover. Whilst inside directors are more likely to be retained when the target is performing well and the takeover is friendly, these variables are unrelated to outside director turnover. Franks and Mayer (1996) report that turnover of directors in successful UK takeovers is related to takeover hostility and not target firm performance. Whilst 50% of directors are removed in friendly bids, the percentage increases to 90% in hostile takeovers.

Studies from the United States also report an increase in target firm CEO turnover subsequent to a failed takeover (Agrawal and Walkling, 1994; and Denis and Serrano, 1996). Denis and Serrano (1996) find that CEO turnover is driven by outside blockholders acquiring a stake in poorly performing targets. The turnover of board members in unsuccessful takeovers is analysed in Franks and Mayer (1996) and Harford (2003) for the United Kingdom and United States, respectively. In the United Kingdom, 39% of target directors are replaced, compared to 15% in the United States. Both studies find that, compared to successful takeovers, director turnover is significantly lower in unsuccessful offers.

(ii) Hypothesis Development

This study investigates the retention of target firm directors post-takeover and the impact of a takeover on the career path of target firm directors. The main hypotheses tested in this paper are what we label the experience and reputation hypothesis and the ex post settling-up hypothesis as described by Harford (2003).

Prior research has argued that the number of board seats held by a director is an indicator of the director's reputation and experience as a monitor (Shivdasani, 1993; and Vafeas, 1999). Consistent with this hypothesis, Shivdasani (1993) finds that the likelihood a firm will be subject to a hostile takeover is negatively related to the number of additional directorships held by a firm's directors. Building on this finding, we predict that the number of other directorships held by a target firm director will be negatively related to the probability of turnover from the target firm board.3 Additionally, we predict that directors with greater experience and a better reputation will be appointed to a greater number of boards post-takeover. An alternative argument is that holding multiple board seats may increase a director's likelihood of losing a target board seat due to concerns over whether that director has sufficient time to cope with the workload (Fich and Shivdasani, 2006).

As takeovers are less likely to succeed when the target board is hostile (see Walkling and Long, 1984; Walkling, 1985; Eddey and Casey, 1989; Cotter and Zenner, 1994; Holl and Kyriazis, 1996; and Henry, 2004), a target firm board may recommend the rejection of a bid that is in the interest of shareholders to protect their board seat. Harford (2003) argues that the future career path of target firm directors will be determined by their performance with the target firm and their actions during the takeover contest. Directors who pursue their own interests will be punished ex post through lower future directorships, whilst those directors who develop a reputation for acting in the shareholders' interests during a takeover will be rewarded with additional directorships (Fama, 1980). Consistent with ex post settling-up, Harford (2003) documents that outside directors have a lower number of future directorships if a merger fails after poor performance.4 Similarly, inside multiple-seat directors gain significantly more future board seats when the target is performing well.

We test the ex post settling-up hypothesis by determining if the abnormal change in board seats held by target firm directors subsequent to a takeover offer is associated with target director actions both before and during the takeover contest. Similar to Harford (2003), we expect that pre-takeover performance will be positively related to the number of future directorships and retention on the target board. Where the board takes steps during a takeover contest to increase shareholder wealth (i.e., conducting an auction or extracting an increase in the offer) or is required to exert greater effort in negotiations (e.g., dealing with a foreign or relatively larger firm), we predict an increase in future directorships. Despite testing for the impact of hostility on future directorships, the predicted direction is uncertain, as it is not always clear if hostility is in the interest of shareholders. The impact of hostility may also depend on the reputation of target firm directors. Nevertheless, we do expect that hostility following a period of poor performance will be negatively related to future directorships.

3. DATA

Takeovers for targets listed on the Australian Stock Exchange (ASX) between 2000 and 2002 were sourced from the Connect 4 Mergers and Acquisitions database. To ensure that target firms were included in the sample only once where competing takeover bids were made, only the successful takeover offer was included. In situations where all competing bids were unsuccessful, the initial takeover offer was retained. After these exclusions, the final sample comprised 135 unique target firms.

The name and role of target firm directors at the time of the takeover were identified from the target statement lodged with the ASX. This search identified 733 directors. The annual report for the financial year prior to the takeover announcement was used to identify target directors who were blockholders5 and to collect information on target directors not disclosed in the target statement. The number of other ASX directorships held by each target firm director was determined using the Connect 4 Boardroom database. The bidder's statement provided to the ASX was used to determine if any target directors also sit on the board of the bidder. Summary information on the directors and sample firms is provided in Table 1.

Table 1. 
Summary Statistics for Directors and Takeover Offers
Panel A: Director Characteristics
  All Directors (n = 733)Executive (n = 196)Non-executive (n = 537)
  1. Notes:
    This table contains summary information on the 733 target firm directors included in this study. Information on target firm directors is collected from target and bidder firm documents lodged with the ASX as well as target firm annual reports. Data on additional ASX directorships are collected from the Connect 4 Boardroom database.

  2. *** Indicates that the mean is significantly different at the 1% level to the comparable mean for non-executive directors.

Percentage blockholders 11.6019.39***8.75
Percentage cross-sit on bidder's board 6.006.125.96
Percentage with additional 37.6526.53***41.71
ASX directorships    
Number of additional    
ASX directorships    
Full sampleMean0.690.38***0.80
Median0.000.000.00
Only directors with additional directorshipsMean1.831.44***1.92
Median1.001.00***2.00
 
Panel B: Takeover Characteristics
  % of Events
FriendlyMultiple BidsSuccessful Outcome
 
All events (n= 135) 59.2612.5969.63
Bid is friendly  10.0092.50
Multiple bids   15.96

Executive directors, who comprise 27% of the sample, are significantly more likely to be blockholders than non-executive directors. Non-executive directors, however, sit more frequently on other boards than executive directors (42 vs. 27%), with the difference being statistically significant. Overall, 11.6% of target directors are blockholders, which is much higher than the 3% of directors reported for the United States in Harford (2003). For those target directors with additional ASX board seats, the average number of additional board seats is 1.92 for non-executive directors and 1.44 for executive directors. Approximately 6% of target directors hold a seat on the board of the bidder.6 Panel B of Table 1 contains summary information on the takeovers included in the sample. In 59% of bids the target board recommends acceptance of the offer and just below 70% of takeovers succeed. Consistent with other research, the attitude of the target firm board is associated with bid outcome.7

4. RESEARCH METHOD AND RESULTS

(i) Turnover from the Target Board

(a) Descriptive Statistics and Univariate Analysis

In successful takeovers, a target firm director is considered replaced if he or she does not sit on the acquiring firm board two years after the date of takeover completion. For unsuccessful takeovers, turnover is assessed by examining the target firm board two years after offer termination. A two-year period is chosen as it provides sufficient time for any adjustment to directorships to take place. This length of time is comparable to the two-year post-takeover period used to determine management turnover in previous studies (e.g., Kini et al., 1995; and Kini et al., 2004; in the United States and Franks and Mayer, 1996; and Kennedy and Limmack, 1996; in the United Kingdom). Furthermore, it is a more extensive period of time than that used in Harford's study (2003), which establishes director turnover using the first proxy statement following either takeover completion for successful bids or takeover termination in unsuccessful offers.

Details on target firm director turnover are provided in Panel A of Table 2. Information is provided on an overall basis and then partitioned by takeover outcome. The sample size is reduced to 574 directors, as it is not possible to assess the impact of the takeover on directors whose firm is successfully acquired by a foreign company not listed on the ASX or an Australian non-listed entity.

Table 2. 
Turnover of Target Board Members
Panel A: Turnover After TakeoverAll BidsSuccessfulUnsuccessful 
  1. Notes:
    Directors holding a position on the target board at the time of the takeover announcement are identified from the target firm documents lodged with the ASX. A director is considered to be replaced if two years after completion of a successful takeover he or she does not hold a seat on the board of the bidder. In unsuccessful takeovers, directors are considered replaced if they do not hold a seat on the target firm board two years after takeover termination. Turnover of directors for ASX firms not subject to takeover offers are shown in Panel B.

  2. ***, ** and * indicate significant at the 1, 5 and 10% levels, respectively.

Percentage turnover of directors    z stat
All directors (n= 574)79.2686.7666.185.84***
CEOs (n= 80)71.2584.3148.283.42***
Executive directors (n= 147)74.8385.7153.064.30***
Non-executive directors (n= 427)80.6187.1369.684.40***
Blockholders (n= 53)72.6086.1159.462.55**
Cross-sit directors (n= 35)42.8638.4662.50−1.20
Accept recommendation (n= 321)85.4085.3788.89−0.50
Reject recommendation (n= 148)74.32100.0060.535.35***
Percentage of board replaced (mean)    t stat
All directors77.7885.7765.093.20***
Executive directors71.9883.9050.003.38***
Non-executive directors79.4585.9369.162.62***
Accept recommendation84.6885.1380.000.25
Reject recommendation70.74100.0056.114.93***
Percentage of boards where    z-stat
Entire board is removed56.0763.0846.341.69*
Entire board is retained3.770.009.30−2.59***
 
Panel B: Director Turnover in Non-target Firms200020012002 
 
Percentage turnover of directors
All directors32.6934.2331.80 
CEOs27.6328.6428.19 
Executive directors31.6631.7130.87 
Non-executive directors33.1835.3732.21 

As in Harford (2003), target firm directors are significantly more likely to lose their board seat following a successful takeover than an unsuccessful bid. In completed takeovers, 87% of target directors lose their position, compared to 66% in unsuccessful offers.8 The significant difference in director turnover across takeover outcome holds for executive and non-executive directors, CEOs, and directors who are target blockholders. The impact of takeover outcome on the target board is also highlighted in the last two rows of Panel A of Table 2. In 63% of successful takeovers, the entire board is removed, compared to 46% in unsuccessful bids. Where the target firm board recommends offer acceptance, 85% of directors are replaced within two years of the bid, with the rate of turnover statistically similar for unsuccessful and successful bids. In contrast, in hostile takeovers, director retention varies by takeover outcome. In unsuccessful takeovers, 61% of directors no longer retain their board position. In comparison, there is a real cost to the board of hard bargaining if the bid succeeds as 100% of directors lose their board seat.

Our results indicate that a failed bid does not ensure retention of a board seat, as only 34% of the target board remains in position two years after bid termination. Although, retention rates are higher for executive directors than non-executive directors after an unsuccessful takeover, still approximately half of executive directors no longer hold a board seat. This finding stands in contrast to Harford (2003), who finds that 85% of US boards are retained following a terminated merger. A partial explanation for this different finding is the longer period of time used to determine director turnover in this study. When turnover is recalculated using one year after the termination of a takeover, director turnover is reduced to 35%.

As a means of comparison with the rate of director turnover following a takeover offer, we calculate the number of other ASX directors (i.e., non-target) on the Connect 4 Boardroom database that were replaced in the subsequent two years for 2000, 2001 and 2002. These statistics are presented in Panel B of Table 2. The rate of turnover for directors not involved in takeover offers is similar for each of the three years, with approximately 30–35% of directors being replaced in the subsequent two-year period. Highlighting the impact of a takeover, the frequency of replacement of directors not involved in a takeover is significantly lower to the turnover of directors following both successful and unsuccessful takeovers.

As our findings indicate a higher rate of director turnover in unsuccessful bids than documented in the United Kingdom and the United States, we determine the reason target firm directors are replaced by searching through announcements made to the ASX and disclosures in target firm annual reports. These explanations are summarised in Table 3. The majority of directors leave the target board following their resignation. Unfortunately, in the vast majority of cases no reason is provided for the director's resignation and where a reason is given, the explanation is essentially ‘the pursuit of other interests’ by the director. Similar to the findings of Denis and Serrano (1996), a substantial proportion of directors cease their board position after the purchase of a substantial stake in the target by a new shareholder. In only three cases was the director voted out by the company's shareholders.

Table 3. 
Reasons for Director Turnover Following Unsuccessful Takeovers
ExplanationNumber of Directors%
  1. Notes:
    This table presents explanations provided by the target company for the turnover of target firm directors in the two years following the termination of an unsuccessful takeover. The reason for the replacement of the director is sourced from announcements made to the ASX and annual reports.

Resigned 76 56.7
Removed following purchase of major interest by a new stakeholder 34 25.4
Dismissed on appointment of liquidator 14 10.4
Retired  6  4.5
Voted out by shareholders  3  2.2
Replaced as shareholder nominee  1  0.8
 
Total134100.0

(b) Multivariate Analysis

To gain insight into factors that influence the removal of directors from their target board seat post-takeover, we estimate a logit regression model, equation (1a), that includes explanatory variables for target firm performance, director characteristics, and takeover characteristics. The dependent variable (Turnover) is coded as 1 if the director does not retain his or her board seat post-takeover. To allow the influence of the independent variables to vary across takeover outcome, the model is estimated separately for successful and unsuccessful takeovers.

We include a number of variables to test for the ex post settling-up hypothesis. These include target firm performance (Perf), measured as the target firm buy-hold abnormal return over the 24 months to 6 months prior to the takeover announcement. Abnormal returns are calculated by subtracting the return on the All Ordinaries Accumulation Index from each firm's return. Share prices are extracted from the Core Research Database maintained by the Securities Industry Research Centre of Asia-Pacific. It is expected that the probability of turnover will be negatively related to target firm performance.

Directors' hostility is included in the model of equation (1a) using a dummy variable indicating takeovers where the initial recommendation of the target board is to reject the offer (Hostile). The recommendation of the target board is obtained from the target response to the takeover lodged with the ASX. Consistent with Harford (2003), we expect that director turnover will be higher in successful hostile takeovers. In unsuccessful takeovers, if shareholders benefit from the defeat of a hostile takeover, the rejection of the takeover may increase director retention. Alternatively, if hostility is not considered to be in the interest of shareholders, director turnover may increase. As hostility that follows a period of poor prior performance is unlikely to be in the interest of shareholders, we also include an interaction variable in equation (1a) between target firm performance and hostility (PerfHost).

We also include dummy variables to denote takeovers where there are competing bidders (Multiple) or where the bidding firm increases its offer price (Revision). The level of effort exerted by target firm directors is proxied using the relative size (Relsize) of the target to the bidding firm and a dummy variable denoting foreign acquirers (Foreign). The relative size of the target to the bidder is calculated using the market capitalisation of the target and bidder three months before the takeover announcement. The ex post settling-up hypothesis predicts that in unsuccessful takeovers, these four variables will have a negative coefficient. In successful takeovers, encouraging a competitive takeover contest or extracting a higher price may lead to antagonism towards the target firm board from the successful acquirer, resulting in an increased rate of director turnover. Directors of relatively small targets are expected to have a higher rate of turnover in successful bids owing to their reduced bargaining power and the lower demand by the acquiring firm for the expertise and experience of directors of a smaller firm. In a successful bid by a foreign firm, whilst target directors may be more likely to retain their board seat for their local expertise, it is also possible for them to be removed from the board because of cultural and language differences.

To test the reputation and experience hypothesis, we include the number of other directorships held by the director at the time of the takeover announcement (Otherdir). We expect this variable will be negatively related to the probability of turnover from the target firm board.

The remaining variables included in equation (1a) are primarily control variables. We use dummy variables to control for four director characteristics: These variables denote whether the director is a blockholder (Block), an executive director (Exec), a managing director/CEO (CEO), or a director who cross-sits on the board of the bidder (Cross). It is predicted that the turnover of a target director's board seat will be lower for executive directors and CEOs, as their expertise is likely to be of greater value post-takeover. Directors who already hold a seat on the board of the acquiring firm are predicted to be removed less frequently. Harford (2003) finds that director blockholders in successful takeovers have a lower rate of turnover, consistent with these directors using the influence of their shareholding to negotiate a position on the acquiring firm board. Following the results in Kini et al. (1995), we include a dummy variable highlighting target firm boards with a majority of non-executive directors (Boardind). If boards dominated by insiders are less likely to discipline management, turnover will be negatively related to an independent target firm board.

We control for the takeover premium, as a higher premium may indicate greater possible efficiency gains from removing poorly performing managers (Kennedy and Limmack, 1996). A positive association would also be consistent with Hartzell, Ofek and Yermack (2004), who report that CEOs may be willing to sell their firms at a lower premium in exchange for a board seat post-takeover. The takeover premium is measured as the offer price less the target share price 20 days prior to the takeover announcement, divided by the target share price 20 days before the announcement (Premium). The final control variable included in the model of equation (1a) is an indicator variable signifying bidder and target pairs that are in the same Global Industry Classification Standard (GICS) industry (Industry). It is expected that turnover will be higher where the bidder and target firm operate in the same industry, as the acquiring firm is less likely to require the target director's expertise.

The model of directors' turnover can be summarised as follows:

image((1a))

As equation (1a) is estimated at the director level, each target firm is included multiple times. We also estimate an OLS variation of the model at firm level (after excluding director level variables), with the dependent variable being respecified as the proportion of the target board that is replaced (Propturn). This alternative model is:

image((1b))

The results of estimating equation (1a) are provided in Table 4. The model is estimated separately for successful and unsuccessful takeovers and then within takeover outcome for executive and non-executive directors.9 We first discuss the results for successful takeovers, which provide significant coefficients only for non-executive directors. Non-executive directors are significantly more likely to be replaced following a period of poor performance, consistent with ex post settling-up. This result is in contrast to Harford (2003), who reports better performance increases retention for insider directors. Given that non-executive directors are not involved in the day-to-day operations of the firm, it is surprising that they be penalised for poor prior firm performance. Perhaps in line with the argument of Jensen (1986) and Florou (2005), outside directors are punished for not disciplining poorly performing executives. Alternatively, the turnover of non-executive directors suggests that their expertise is no longer required. Consistent with the reputation hypothesis, an increasing number of other directorships reduce the likelihood that non-executive directors will be removed from the board.

Table 4. 
Model of Turnover of Target Directorship at the Director Level
 Successful TakeoversUnsuccessful Takeovers
All Directors (n = 370)Executive Directors (n = 98)Non-executive Directors (n = 272)All Directors (n = 204)Executive Directors (n = 49)Non-executive Directors (n = 155)
  1. Notes:
    This table presents the results of a logit model designed to estimate the likelihood that a director will be removed from the target board or the merged company board two years after the takeover offer. Results are presented separately for successful and unsuccessful takeovers. Perf is the target firm BHAR from 24 months to 6 months prior to the takeover announcement. Otherdir is the number of other directorships on ASX-listed companies held by the target firm director at the time of the takeover announcement. Premium is calculated as the offer price minus the target share price 20 days before the takeover announcement, divided by the target share price 20 days before the takeover announcement. Relsize is the ratio of target firm to bidder firm market capitalisation three months prior to the takeover announcement. Dummy variables are included in the model to indicate target boards with a majority of non-executive directors (Boardind), takeovers where the target board recommends bid rejection (Hostile), takeovers with competing bidders (Multiple), takeovers where the bidder is a foreign-domiciled firm listed on the ASX (Foreign), target directors who are blockholders (Block), target directors who also sit on the board of the bidder (Cross), executive target directors (Exec), the top executive director of the target firm (CEO), takeovers where the target and bidder are in similar industries (Industry), and takeovers where the bidder increases the offer price (Revision). PerfHost is an interaction variable between Perf and Hostile. The t statistics are presented in parentheses.

  2. ***, ** and * indicate significant at the 1, 5 and 10% levels, respectively.

Intercept1.67922.22391.32541.11172.36250.9118
(3.82)***(2.33)**(2.55)**(2.50)**(1.48)(2.02)**
Perf−1.04820.0342−1.6569−0.0411−0.0938−0.1314
(−3.38)***(0.05)(−3.84)***(−0.41)(−0.47)(−0.96)
Hostile26.800026.462026.663−1.0178−2.8015−0.6628
(0.00)(0.01)(0.00)(−2.35)**(−2.51)**(−1.35)
PerfHost1.48861.95991.8812−1.3695−1.2487−1.1132
(0.00)(0.00)(0.00)(−2.80)***(−2.34)**(−2.03)**
Multiple0.32042.31540.5103−2.2264−2.0587−1.3778
(0.43)(1.28)(0.52)(−1.84)*(−0.00)(−1.83)*
Foreign−0.0847−1.34210.3862−0.5488−0.7149−0.7864
(−0.15)(−1.33)(0.50)(−1.72)*(−0.61)(−1.75)*
Relsize−0.2963−0.3935−0.1521−0.1121−0.2574−0.1048
(−0.63)(−0.32)(−0.28)(−1.69)*(−1.03)(−1.71)*
Revision−0.7652−1.5750−0.759127.630048.205426.8360
(−1.50)(−1.36)(−1.18)(0.00)(0.00)(0.00)
Otherdir−0.2473−0.5287−0.2060−0.07030.5128−0.1647
(−1.79)*(−1.45)(−2.20)**(−0.45)(1.15)(−0.97)
Premium0.70291.1486−0.17580.09011.4575−0.4101
(1.35)(1.03)(−0.21)(0.13)(0.69)(−0.49)
Block−0.2594−0.5147−0.0835−0.1756−1.9554−0.2177
(−0.44)(−0.63)(−0.07)(−0.38)(−1.28)(−0.41)
Cross−2.7267−1.3523−3.6939−0.6753−24.8720−0.1138
(−5.41)***(−1.07)(−5.25)***(−0.74)(−0.00)(−0.11)
Exec−0.3895--−1.4570--
(−0.68)  (−2.23)**  
CEO−0.1071−0.2334-−0.14280.9152-
(−0.16)(−0.32) (−0.19)(0.75) 
Boardind0.4263−1.13403.10662.36491.64252.3570
(0.72)(−1.34)(2.31)**(1.45)(1.35)(1.30)
Industry0.86690.67991.41970.3229−2.52190.6802
(1.98)**(0.77)(2.32)**(0.61)(−1.85)*(1.12)
McFadden R20.22610.18510.33490.20840.35720.1992
% Classified Correctly89.1987.7691.1875.0077.6174.84

As expected, the control variables indicate that turnover is decreased for non-executive directors, when the target and bidder are in dissimilar industries and when the target director has a seat on the board of the bidder. Unexpectedly, the results indicate that turnover is higher for directors when the board is independent. This finding is likely explained by the bidder not requiring the services of a greater number of non-executive directors who lack management expertise with the target firm.10 Similar to Martin and McConnell (1991), we find that neither takeover hostility nor bid premium influences director turnover. The insignificant coefficients on Multiple, Premium, and Revision indicate that engaging in hard bargaining does not influence the probability that a director will be retained by the acquiring firm.11

The results for unsuccessful takeovers indicate that executive directors have a lower frequency of separating from the target firm than non-executive directors, thereby suggesting that non-executive directors believe they can no longer make a worthwhile contribution to the firm. Executive directors are also more likely to retain their board seat if the takeover was hostile, indicating that the failure to complete a friendly takeover results in pressure being applied for their resignation. Alternatively, the reputation of these directors allows them to retain their board seat. Although the insignificant coefficient on Perf and Revision is inconsistent with ex post settling-up, non-executive directors are more likely to retain their board seat when they exert greater effort during the takeover (negotiating with a relatively large or foreign bidder) or conduct an auction for the firm.12 The significant negative coefficient on PerfHost also supports the ex post settling-up hypothesis, as director turnover is higher when a poorly performing target defeats a takeover.13

The results for the firm-level variation of the model of equation (1) are presented in Table 5 and provide results broadly consistent with the director-level model. In successful takeovers, the proportion of the board replaced is significantly higher in hostile bids and following a period of poor target performance. For unsuccessful takeovers, the proportion of directors who leave the target firm board is reduced following a hostile takeover offer, a takeover contest that involved multiple bidders, or the negotiation of an increased offer price. The significant results on Multiple, Revision, Relsize and PerfHost support the ex post setting up hypothesis.

Table 5. 
Model of Turnover of Target Directorship at the Firm Level
 Successful Takeovers (n = 65)Unsuccessful Takeovers (n = 41)
  1. Notes:
    This table presents the results of an OLS model designed to estimate the proportion of the target firm board that will be removed two years after the takeover. Perf is the target firm BHAR from 24 months to 6 months prior to the takeover announcement. Premium is calculated as the offer price minus the target share price 20 days before the takeover announcement, divided by the target share price 20 days before the takeover announcement. Relsize is the ratio of target firm to bidder firm market capitalisation three months prior to the takeover announcement. Dummy variables are included in the model to indicate target boards with a majority of non-executive directors (Boardind), takeovers where the target board recommends bid rejection (Hostile), takeovers with competing bidders (Multiple), takeovers where the bidder is a foreign-domiciled firm listed on the ASX (Foreign), takeovers where the target and bidder are in similar industries (Industry), and takeovers where the bidder increases the offer price (Revision). PerfHost is an interaction variable between Perf and Hostile. The t statistics are presented in parentheses.

  2. ***, ** and * indicate significant at the 1, 5 and 10% levels, respectively.

Intercept0.71690.6195
(11.29)***(6.51)***
Perf−0.1115−0.0062
(−2.21)**(−0.48)
Hostile0.2386−0.2305
(4.31)***(−2.25)**
PerfHost0.1524−0.2200
(1.57)(−2.34)**
Multiple0.0332−0.2918
(0.53)(−2.58)**
Foreign−0.0402−0.0657
(−0.44)(−0.48)
Relsize0.0004−0.0126
(0.01)(−1.73)*
Revision−0.0606−0.4454
(−1.08)(−5.34)***
Premium0.0513−0.0386
(1.60)(−0.28)
Boardind−0.01600.2684
(−0.21)(1.69)
Industry0.10920.1149
(1.65)(0.92)
Adjusted R20.05880.0836
F statistic1.401.37

(c) Sensitivity Analysis

A major limitation with our analysis of target director turnover is that target directors are classified as being replaced following a successful takeover when they are not appointed to the acquiring firm board. This approach overclassifies director turnover, as some board members will obtain a position with the acquiring firm without being appointed to the firm's board. To ascertain whether this problem impacts our findings, we searched through the acquiring firm's annual report and Jobson's Yearbook of Public Companies to determine if each target director is employed in a senior position with the acquiring firm. This search determined that 16 additional directors originally classified as ‘replaced’ still hold an office with the acquiring firm. Re-estimating our regression analysis after reclassifying these observations does not change the results.

(ii) Directors' Career Path Post-Takeover

(a) Descriptive Statistics and Univariate Analysis

The career path of target firm directors subsequent to a takeover offer is determined by calculating the total number of directorships on ASX-listed firms held by each target firm director in the year of the takeover announcement and two years after takeover completion or termination. These data are sourced from the Connect 4 Boardroom database. In an attempt to exclude changes in the number of directorships resulting from non-takeover events, we form a control group of directors. This control group includes all directors on the Connect 4 Boardroom database, other than those in our sample, holding seats on ASX-listed companies in 2000. For each of these directors, we calculate the change in the total number of directorships held between 2000 and 2002. Each director in the control sample is then grouped based on the total number of directorships held in 2000. For each grouping, we determine the median change in directorships over the two-year period. Target directors are matched to a control group based on the total number of board seats held at the time of the takeover. The difference between the change in directorships for each target director and the median change for the matching control group is calculated to determine the abnormal change in directorships held by sample directors. This abnormal change in the number of directorships is used as an indication of the impact of a takeover offer on directors' careers.14

Panel A of Table 6 gives details of the mean abnormal change in the number of directorships held by target directors. The first group of columns presents data including the effect of the takeover on the target board seat. The second group of columns focuses only on the effect of the takeover on non-target board seats.15 Results are presented for the complete sample and then separately for executive and non-executive directors and within these groups for single- and multiple-seat directors. Except for multiple-seat executive directors in failed takeovers, the impact of a takeover on the total number of board seats held is significantly negative. On average, executive directors and non-executive directors have abnormal decreases in the total number of directorships of 0.44 and 0.62, respectively. For executive directors, the abnormal decrease in total directorships is significantly greater in successful takeovers. In contrast, non-executive directors experience a decrease in the total number of board seats irrespective of takeover outcome.

Table 6. 
Abnormal Change in the Number of Directorships Post-Takeover
Panel A: All DirectorsAbnormal Change Including Target SeatAbnormal Change in Other Seats
AllSucc.Unsucc.AllSucc.Unsucc.
  1. Notes:
    The number of directorships on ASX-listed firms held by each target director at the time of takeover completion or termination is compared to the number two years later. The abnormal change in the number of directorships is calculated by subtracting the median change over two years for a control group of directors matched to target directors using the starting number of total directorships. Panel A shows the abnormal change for all directors. Panel B reports the abnormal change in other board seats for single-seat directors partitioned by whether the target director retains his or her board seat two years after the takeover.

  2. ***, ** and * indicate that the mean abnormal change is significantly different from zero at the 1, 5 and 10% levels, respectively.

Total sample
All directors raw−0.58***−0.61***−0.51***0.23***0.27***0.14**
change(574)(370)(204)(733)(529)(204)
Single-seat raw−0.56***−0.60***−0.48***0.30***0.34***0.20**
change(346)(220)(126)(457)(331)(126)
Multiple-seat raw−0.60***−0.62***−0.56***0.120.150.05
change(228)(150)(78)(276)(198)(78)
Multiple-seat %−0.27***−0.29***−0.24***0.020.030.01
change(228)(150)(78)(276)(198)(78)
Exec. Dir.
All directors raw−0.44***−0.55***−0.22**0.29***0.28***0.31***
change(147)(98)(49)(196)(147)(49)
Single-seat raw−0.42***−0.49***−0.28***0.33***0.33***0.25***
change(108)(72)(36)(144)(144)(36)
Multiple-seat raw−0.51***−0.73***−0.080.150.050.46
change(39)(26)(13)(52)(39)(13)
Multiple-seat %−0.26***−0.34***−0.090.050.030.11
change(39)(26)(13)(52)(39)(13)
Non-exec. dir.
All directors raw−0.62***−0.63***−0.61***0.21***0.26***0.09
change(427)(272)(155)(537)(382)(155)
Single-seat raw−0.63***−0.66***−0.47***0.28***0.33***0.18***
change(238)(148)(90)(313)(223)(90)
Multiple-seat raw−0.62***−0.60***−0.66***0.120.18−0.03
change(189)(124)(65)(224)(159)(65)
Multiple-seat %−0.27***−0.27***−0.26***0.020.03−0.01
change(189)(124)(65)(224)(159)(65)
 
Panel B: Single-Seat Directors   Target Seat RetainedTarget Seat Lostt-test
 
Executive   0.19*0.39***−1.50
Non-executive   0.50***0.17***2.16**

The second set of columns presents the impact of a takeover on the number of other board seats held by target directors. Although the overall results indicate a significant abnormal increase in the number of other board seats (both executive and non-executive), closer analysis indicates that the results are driven by an increase in directorships for single-seat directors.16 To determine if the increase in board seats for single-seat directors is explained by those directors who have lost their target board seat striving to replace it, we partition the results for single-seat directors according to whether the director is retained on the target board. The results provided in Panel B of Table 6 indicate that single-seat directors achieve a significant abnormal increase in other directorships irrespective of whether they remain on the target board. For directors who retain their target board seat, Harford (2003) conjectures that the increase in board seats is explained by target directors being rewarded for the experience gained from acting in a takeover bid.

(b) Multivariate Analysis

To determine the factors that influence the outcome of a target director's career post-takeover, we estimate an OLS regression model, equation (2), using the abnormal change in non-target directorships post-takeover as the dependent variable (AbnChange). The explanatory variables included in the model are identical to those in equation (1a) and, once more, the model is estimated separately after partitioning the sample by takeover outcome. The ex post settling-up hypothesis predicts positive coefficients for target firm performance, the presence of competing bidders, a foreign acquirer, an increase in offer price, and the relative size of the target to the bidder. The impact of hostility is unclear, owing to its dependence on whether hostility is viewed as being in the shareholders' interest. The reputation hypothesis predicts a positive coefficient on Otherdir. No expectations are formed for the other variables included in equation (2).

The number of other directorships held post-takeover will be influenced by whether the director retains his or her target board seat, considering directors removed from the target board are likely to actively seek other board positions to replace the lost seat. Their ability to replace the board position will be constrained, however, by the negative signal sent to other firms by their removal from the target board. The inclusion of Turnover in the model of the change in other directorships is problematic, however, as turnover from the target board will be explained at least partially by the other regressors. To avoid this endogeneity problem, we follow the approach of Harford (2003) and include the prediction error from equation (1a) as an additional variable (UnexpTurn) in equation (2). The following is the complete model used to determine the factors that influence the abnormal change in the number of other board seats post-takeover:

image(2)

The analysis of the number of future board seats held by target firm directors assumes that target directors accept all board seats offered to them. If directors do not accept all positions offered, perhaps due to a desire to be less active following a takeover contest, our results understate the number of directorships potentially held by target firm directors. This limitation must be noted when assessing our findings.

The results of estimating the regression model of equation (2) are presented separately in Table 7 for successful and unsuccessful takeovers. Given that the univariate results in Table 6 suggest a different outcome for single- and multiple-seat directors, equation (2) is estimated after further partitioning the sample into directors that hold single and multiple board seats. As described in Harford (2003), the results must be interpreted cautiously, as each coefficient encapsulates two effects. The first effect is the direct effect of each variable on the number of future board seats. For each variable, there is also an indirect effect on the number of future board seats arising from that variable's effect on director turnover.

Table 7. 
Model of Abnormal Change in the Number of Other (Non-Target) Directorships
 Successful TakeoversUnsuccessful Takeovers
Single Seat (n = 220)Multiple Seats (n = 150)Single Seat (n = 126)Multiple Seats (n = 78)
  1. Notes:
    This table presents the results of equation (2), analysing the abnormal change in the number of non-target directorships held by target directors two years after takeover completion or termination. Perf is the target firm BHAR from 24 months to 6 months prior to the takeover announcement. Otherdir is the number of other directorships on ASX-listed companies held by the director at the time of the takeover announcement. Premium is calculated as the offer price minus the target share price 20 days before the takeover announcement, divided by the target share price 20 days before the takeover announcement. Relsize is the ratio of target to bidder market capitalisation three months prior to the takeover announcement. Dummy variables are included to indicate: target boards with a majority of non-executive directors (Boardind), takeovers where the target board recommends bid rejection (Hostile), takeovers with competing bidders (Multiple), takeovers where the bidder is a foreign-domiciled firm listed on the ASX (Foreign), target blockholder directors (Block), target directors who also sit on the board of the bidder (Cross), executive target directors (Exec), the top executive director of the target firm (CEO), takeovers where the target and bidder are in similar industries (Industry), and takeovers where the bidder increases the offer price (Revision). PerfHost is an interaction variable between Perf and Hostile. UnexpTurn is the prediction error from equation (1a) estimating turnover from the target board. The t statistics are presented in parentheses.

  2. ***, ** and * indicate significant at the 1, 5 and 10% levels, respectively.

Intercept0.2270−0.5504−0.0070−0.1631
(2.78)***(−2.19)**(−0.12)(−0.57)
Perf0.0119−0.2282−0.00540.0244
(0.14)(−1.69)*(−0.58)(0.70)
Hostile0.3983−0.37900.28490.2150
(2.61)***(−1.21)(2.47)**(0.93)
PerfHost0.7489−0.1775−0.09080.0022
(2.19)**(−0.39)(−1.23)(0.01)
Multiple−0.1715−0.2445−0.1224−0.6720
(−1.84)*(−0.81)(−1.17)(−1.69)*
Foreign0.01850.5192−0.1047−0.3023
(0.13)(1.32)(−0.75)(−0.74)
Relsize−0.0633−0.08990.02100.0008
(−0.77)(−0.67)(2.20)**(0.05)
Revision0.02790.3398−0.05970.1241
(0.28)(1.57)(−0.72)(0.35)
Otherdir-0.2527-0.0896
 (2.83)*** (0.74)
Premium0.35160.10430.09480.0256
(1.42)(0.51)(0.85)(0.07)
Block−0.1388−0.23320.0194−0.6375
(−1.40)(−0.86)(0.13)(−1.26)
Cross-−0.2755−1.0178
 (−1.25) (−1.34)
Exec0.2100−0.2617−0.13850.9059
(1.41)(−0.89)(−1.45)(2.24)**
CEO−0.08400.05260.1944−1.6188
(−0.49)(0.16)(1.73)*(−3.13)***
Boardind−0.13490.5468−0.09400.3982
(−0.90)(1.41)(−0.97)(1.20)
Industry−0.05740.30520.20070.0843
(−0.49)(1.44)(2.10)**(0.35)
UnexpTurn0.2937−0.34040.0833−0.4091
(1.66)*(−1.67)*(0.56)(−1.50)
Adjusted R20.12440.05940.09300.1042
F-Statistic3.22***1.59*1.92**1.56

The results show that single-seat directors achieve an abnormal increase in directorships following a successful hostile takeover. This is consistent with either board resistance being viewed as in the shareholders' interest or these directors being sought by other boards due to the experience gained from acting in a hostile takeover. Furthermore, these directors obtain an even greater increase in future directorships when board hostility follows a period of superior target performance, since in these circumstances the target board is more justified in resisting the advances of the acquiring firm. Consistent with the reputation hypothesis, multiple-seat directors gain a greater number of future directorships after a successful takeover when they have a higher number of non-target board seats. Inconsistent with ex post settling-up, multiple-seat directors of better-performing targets have an abnormal decrease in directorships subsequent to a successful takeover. An explanation for this result can be found by revisiting the findings in Table 4, which shows that directors are more likely to be retained on the board of the merged firm when the target performs better. The lower number of future board positions held by these directors is consistent with these directors choosing to focus their efforts on a smaller number of firms after being appointed to the board of the larger merged firm. The results on Multiple, Revision, and Relsize are inconsistent with ex post settling-up. In fact, single-seat directors have a lower number of future board appointments when there are competing bidders.

Similar to the results for successful takeovers, single-seat directors following a failed bid achieve an abnormal increase in future directorships after a hostile takeover. The insignificant finding on PerfHost is inconsistent with ex post settling-up and indicates that target firm hostility benefits the future career path of directors irrespective of target firm performance. Given that the results in Table 4 indicate that hostility reduces turnover from the target board, these directors seeking to replace their lost board seat cannot explain this finding. The result, therefore, is consistent with the experience in defeating a takeover being a skill required by other boards or, alternatively, board hostility was viewed as being in the shareholders' interest. Single-seat directors are appointed to a greater number of future boards when they are the target firm CEO or defeat a takeover from a larger firm or from within the same industry. The result for Relsize is consistent with ex post settling-up or may reflect an offer to join other boards following the experience gained from defeating a takeover from a larger firm. The finding cannot be explained by these directors seeking to replace their lost target board seat, as Relsize was inversely related to turnover in the model of equation (1a).

There is a significant increase in future board seats for multiple-seat executive directors. Since executive directors were less frequently replaced on the target board (see Table 4), the finding indicates that they are sought for their experience. In contrast, CEOs experience a decline in the number of future board appointments, suggesting that the takeover represents a wake-up call to focus their attention on the affairs of the target. Inconsistent with ex post settling-up, multiple-seat directors are appointed to a lower number of future boards if there are competing bidders. As the results presented previously show a lower rate of director turnover in unsuccessful takeovers with competing bidders, an explanation for this finding is that these directors choose to refocus their attention on the target and resign from other board seats. Inconsistent with ex post settling-up, the coefficients on Perf and Revision are insignificant.

The results in Table 7 include all directors in the sample. We repeat the analysis including only directors who do not retain their target board seat after including an additional variable, Feelost, that attempts to capture the financial incentive for directors to strive to replace their lost seat. For single-seat directors, this variable is defined as the natural logarithm of the base fee paid to the director in the year prior to the takeover.17 With multiple-seat directors, Feelost is calculated as the base fee paid by the target firm in the year prior to the takeover, divided by the total base fees received by that director from all companies where he or she holds a board seat.18 The results for this regression are reported in Table 8.19

Table 8. 
Model of Abnormal Change in the Number of Other (Non-Target) Directorships for Directors Who are Replaced on the Target Board
 Successful TakeoversUnsuccessful Takeovers
Single Seat (n = 198)Multiple Seats (n = 123)Single Seat (n = 86)Multiple Seats (n = 48)
  1. Notes:
    This table presents the results of equation (2), analysing the abnormal change in the number of non-target directorships held by target directors who lose their target board seat. The abnormal change in directorships is measured two years after takeover completion or termination. Perf is the target firm BHAR from 24 months to 6 months prior to the takeover announcement. Feelost is calculated for multiple-seat directors as the base fee received from the target firm divided by the total base fees received from all firms on which the director holds a seat. For single-seat directors, Feelost is the natural logarithm of the base fee paid to the director by the target firm. Premium is calculated as the offer price minus the target share price 20 days before the takeover announcement, divided by the target share price 20 days before the takeover announcement. Relsize is the ratio of target to bidder market capitalisation three months prior to the takeover announcement. Dummy variables are included in the model to indicate target boards with a majority of non-executive directors (Boardind), takeovers where the target board recommends bid rejection (Hostile), takeovers with competing bidders (Multiple), takeovers where the bidder is a foreign-domiciled firm listed on the ASX (Foreign), target blockholder directors (Block), target directors who also sit on the board of the bidder (Cross), executive target directors (Exec), the top executive director of the target firm (CEO), takeovers where the target and bidder are in similar industries (Industry), and takeovers where the bidder increases the offer price (Revision). PerfHost is an interaction variable between Perf and Hostile. UnexpTurn is the prediction error from equation (1a) which estimates turnover from the target board. The t statistics are presented in parentheses.

  2. ***, ** and * indicate significant at the 1, 5 and 10% levels, respectively.

Intercept0.15170.6331−0.22361.3069
(0.76)(1.17)(−0.82)(1.96)*
Perf−0.0272−0.13270.00410.8475
(−0.20)(−0.47)(0.34)(1.27)
Hostile0.4686−0.58450.13910.6430
(2.35)**(−1.22)(2.24)**(2.32)**
PerfHost0.7458−0.0172−0.0326−0.9796
(2.08)**(−0.04)(−0.31)(−1.29)
Feelost−0.0028−0.97940.01630.1209
(−0.33)(−2.39)**(1.24)(0.30)
Multiple−0.18320.0210−0.0582−0.7240
(−1.80)*(0.07)(−0.33)(−1.72)*
Foreign0.08490.3391−0.0662−0.9007
(0.49)(0.68)(−0.29)(−1.53)
Relsize−0.0631−0.02150.04000.0582
(−0.76)(−0.17)(3.84)***(1.45)
Revision0.02480.24740.1294−1.5731
(0.21)(0.74)(0.39)(−1.83)*
Premium0.3757−0.0989−0.03990.2414
(1.45)(−0.54)(−0.21)(0.64)
Block−0.1589−0.4529−0.2277−0.5047
(−1.21)(−1.08)(−1.44)(−1.46)
Cross0.5950−0.8036
 (0.62) (−1.57)
Exec0.2572−0.09370.27041.4850
(1.84)*(−0.27)(2.44)**(3.60)***
CEO−0.06930.18560.1692−15.5590
(−0.39)(0.47)(1.67)*(−2.44)**
Boardind−0.06490.6460−0.0944−0.8432
(−0.42)(1.33)(−0.45)(−1.29)
Industry−0.07020.15330.14000.0290
(−0.49)(0.55)(1.97)**(0.07)
UnexpTurn−0.12230.0184−0.87532.9525
(−0.16)(0.01)(−0.93)(2.08)**
Adjusted R20.14830.02030.14870.0113
F statistic3.29***1.171.99**1.03

The coefficient on Feelost is insignificant except for multiple-seat directors in successful takeovers. For these directors, the more important the target firm is to the director as a source of remuneration, the smaller the increase in future directorships. This result suggests that the displacement of directors from their more prestigious and lucrative directorship has a negative impact on their reputation. The findings and interpretations on the other variables remain largely consistent with those reported in Table 7. The results are inconsistent with ex post settling-up, as target firm performance is insignificant and the only significant findings on Multiple and Revision are contrary to predictions. One possible explanation is that as actions that increase target shareholder wealth come at the expense of the bidder, it may increase antagonism within the corporate community towards these directors, resulting in reluctance from other boards to nominate these directors for board appointments. Alternatively, the significant effort involved in negotiating an increased offer or having discussions with competing bidders leads to directors reducing their commitment on company boards. Adding to the result in Table 7, there is further evidence that hostility has a positive effect on a director's future career, since Hostile is now also significant for multiple-seat directors in unsuccessful offers. In addition, the findings show that executive directors achieve a greater abnormal increase in directorships than their non-executive counterparts.20

(iii) Additional Analysis

Owing to a lack of disclosure, we were unable to identify the age and tenure for each target firm director. As a sensitivity test, the regression analysis in equations (1a) and (2) was repeated using those observations for which we had information on the directors' tenure and age.21 In both regression models these two variables had insignificant coefficients. Both models were also re-estimated after including a dummy variable denoting gender. This variable was insignificant.

5. CONCLUSIONS AND DISCUSSION

This study investigated the factors that influence the rate of turnover of target firm directors subsequent to Australian takeovers. Although, as found overseas, director turnover is higher in completed takeovers, we document that even in unsuccessful takeovers about half of the target board leaves the target firm within two years of the takeover. This rate of turnover in failed bids is much higher than that reported in the United Kingdom (Franks and Mayer, 1996) and United States (Harford, 2003). An area for future research is to examine if these board changes lead to target firm performance improvements.

In consequence of the high turnover rate of directors from the target board, we find that the total impact of a takeover is to significantly reduce the total number of directorships held by target firm directors. Single-seat directors, however, partially succeed in replacing the lost board seat within two years of the takeover. Regression analysis indicates that, irrespective of takeover outcome, the abnormal increase in other directorships for single-seat directors is higher in hostile takeovers, thereby suggesting that these directors are appointed to other boards due to the experience gained from acting during a hostile takeover contest.

The evidence on the ex post settling-up hypothesis is mixed. Consistent with ex post settling-up, poor prior target firm performance increases the proportion of the target board replaced in successful takeovers. Director-level analysis indicates that this negative association between board retention and target firm performance exists only for non-executive directors. In unsuccessful takeovers, we find a negative association between takeover hostility and board turnover. As predicted by the ex post settling-up hypothesis, this association is ameliorated for executive directors when the target firm was performing poorly prior to the takeover. The results, however, only provide limited evidence that the time and effort exerted by a board assists a director's career post-takeover. For non-executive directors in unsuccessful takeovers, we document that the greater the effort required in negotiation, the higher the likelihood a director will retain his or her target board seat. In contrast, we cannot find evidence that directors are rewarded with an abnormal increase in future directorships for negotiating a higher takeover premium, conducting an auction for the target, or obtaining an offer price increase. Furthermore, there is no positive association between target firm performance and the increase in the number of future board seats held by target firm directors.

Extending prior literature, we report that following a successful takeover a director's reputation and experience is beneficial in the directorial labour market, as multiple-seat directors are less likely to be removed from the target board and are more likely to obtain an increase in other directorships.

Footnotes

  • 1

    Board composition in Australian and US corporations exhibits a similar proportion of inside directors. Henry (2005) reports executive directors (i.e., inside) comprise 30% of Australian target firm boards, in comparison to the 26% reported for the United States in Harford (2003) and 30% in Cotter et al. (1997). These proportions are lower, however, than the ratios of more than 50% inside directors in the United Kingdom reported in Constantinou et al. (2005) and Mura (2007).

  • 2

    As in the United Kingdom, shareholders in Australia have the legislative ability to replace a director at any time by vote at a general meeting. As such, target firms cannot use staggered boards as a takeover defence.

  • 3

    It is likely that the marginal impact on director turnover of additional board seats will be decreasing. This, however, does not change our expectation that greater experience and a positive reputation as a director will reduce the likelihood that the director will be replaced on the target firm board.

  • 4

    A link between performance and the number of future directorships has also been found in other contexts. Kaplan and Reishus (1990) demonstrate that top executives of firms who cut dividends are less likely to be employed on other boards. Gilson (1990) finds that departing directors of firms who file for bankruptcy or restructure their debt hold significantly fewer future board seats. The number of future board seats that a retiring CEO sits on is reported by Brickley et al. (1999) to be positively related to the CEO's accounting performance.

  • 5

    In Australia, a blockholder is defined as an investor with a holding of more than 5% of issued shares.

  • 6

    The average target firm board size in this study is 5.4 directors. This statistic is similar to the mean board size of 5.7 reported by Henry (2005).

  • 7

    Over the period of this study, the number of companies listed on the ASX increased from 1,400 to 1,600 (ASX 2004 Annual Report), with a corresponding increase in the number of directorships from approximately 5,400 in 2000 to over 7,400 in 2004 (Connect 4 Boardroom Database). These statistics indicate that the career opportunities available to target firm directors over the time frame of this study were not restricted by a limited employment market.

  • 8

    In the two years after takeover completion, 41% of acquiring firms enlarge their board size.

  • 9

    An analysis of the correlation between the independent variables indicates that multicollinearity is unlikely to be an issue in estimating the model of equation (1). As would be expected, Multiple is significantly positively correlated with Perf, Hostile, and Revision. A significant positive correlation is also found between Perf and Premium, Hostile and Revision, and Block and Exec. No significant correlation is found between Block and either Premium, Revision, or Hostile.

  • 10

    As Kini et al. (1995) find that turnover is only associated with performance for insider-dominated boards, equation (1a) was re-estimated including an interaction variable between Perf and Boardind. This interaction variable was insignificant and the other results unchanged.

  • 11

    As the relative size of the target to bidder is unrelated to director turnover in completed takeovers, we re-estimated the analysis for successful takeovers after redefining Relsize using an indicator variable denoting target firms that are between 80 and 120% of the size of the bidding firm, as these takeovers are essentially a merger of ‘equals.’ The results for the respecified Relsize remained insignificant. Furthermore, to assess whether blockholders have more bargaining-power in a takeover of similar-sized firms, we re-estimated the analysis with an interaction between Block and both the original and respecified Relsize variables. The interaction variable was insignificant.

  • 12

    As there are only a small number of takeovers where the target remains independent after a multiple bid, the significant result on Multiple should be interpreted cautiously as it may be driven by an outlier.

  • 13

    To determine if hostility that increases shareholder wealth is related to turnover, we also estimate the regression model of equation (1a) with the addition (in turn) of interaction variables between Hostile and Premium and Hostile and Revision. The coefficients on both interaction variables were insignificant and the conclusions drawn from the other variables unchanged.

  • 14

    Harford (2003) matches target firm directors to a control director with the same age and total number of directorships. A lack of consistent disclosure for directors in the sample prevents us from using age to match sample directors to a control director. To the extent that younger directors hold fewer directorships, matching based on the total number of directorships will provide an indirect control for age.

  • 15

    The sample size increases when analysing the change in other board seats as it is possible to include target firms that have been successfully acquired by foreign-listed or private companies.

  • 16

    The lack of a significant increase in non-target board seats for multiple-seat directors is consistent with the marginal impact of losing their target board seat being lower than for single-seat directors.

  • 17

    The average base amounts paid to executive and non-executive directors in the year prior to the takeover are, respectively, $164,000 and $41,500. The average amounts of ‘other remuneration’ paid are, respectively, $255,842 and $29,076 for executive and non-executive directors. Options to purchase shares are held, respectively, by 48 and 24% of executive and non-executive directors.

  • 18

    For both single- and multiple-seat directors the analysis is repeated using the total remuneration received by the directors instead of base fees, with no change in the results reported in Table 8.

  • 19

    As Feelost will decrease with an increasing number of other directorships held by multiple-seat directors, we exclude Otherdir from the estimation of equation (2) to avoid multicollinearity.

  • 20

    To assess whether hostility that increases shareholder wealth is related to future directorships, we re-estimate the results presented in Tables 7 and 8 with the addition (in turn) of interaction variables between Hostile and Premium and Hostile and Revision. The coefficients on the interaction variables were insignificant and the conclusions from the other variables remained unchanged.

  • 21

    Information on tenure was available for 65% of the sample, whilst details of directors' ages were available for 45% of the sample.

Ancillary