Advisors
Kevin Murphy (co-chair)
Oguzhan Ozbas (co-chair)
John Matsusaka
Pedro Matos
Guofu Tan
 


Email: horstmey@usc.edu

• Horstmeyer, D. (2011), ''Beyond Independence: CEO Influence and the Internal Operations of the Board''

  Abstract: This paper serves to extend our understanding of board control beyond traditional measures of independence. Using a detailed, hand-collected dataset on board sub-structure, I document that the board of directors for the average firm underwent a significant transformation between 1999 and 2005, not in terms of its size or composition (independence), but in terms of the CEO's participation in the internal decision-making processes of the board. Over this time period, (i) the CEO presided over (had a voting stake in) fewer board meetings; (ii) the fraction of meetings held in independent (outside director controlled) monitoring committees increased over 80 percent; and (iii) the fraction of board-time spent by the CEO in the executive committee decreased 40 percent. Together, these findings suggest that the principal governance reform following the corporate scandals of 2000-2002 was through an alternative channel of 'independence' on the board - the reduction in the CEO's ability to influence board oversight and control the internal operations of the board. Next, consistent with the view that the drastic shift in board operations between 1999 and 2005 was contrary to the preferences of the CEO, I find that CEO power is negatively associated with the fraction of meetings held outside of the CEO's presence in independent monitoring committees, and positively associated with the fraction of meetings held in the executive committee. In total, the results extend the literature on board structure by highlighting that the governance standards of the modern board are not only defined by the composition and size of the board, but also by its internal operating form.    

• Horstmeyer, D. (2011), ''Monitoring the Monitors''

  Abstract: In this paper, I address whether the sub-structure of the board has a material impact on the policies and internal governance of the board. Namely, I investigate how the size of the nominating committee and the cross-membership of directors between the nominating committee and other monitoring committees affect the effort level of directors and the self-assessment of the board. Through an examination of compensation, audit, and governance decisions, large nominating committees are at best weakly associated with lower effort/quality of decisions. More significantly, both the size of the nominating committee and the cross-membership between the nominating committee and other committees are negatively related to outside director turnover. This finding highlights the self-evaluation problem faced by large nominating committees and the benefits of such a board feature to directors - outside directors primarily structure large nominating committees to secure their board positions and insulate themselves from turnover.    

• Horstmeyer, D. (2011), ''The Internal Governance of the Board''

  Abstract: If the vast majority of director elections are uncontested (Bebchuk (2003); Cai et al. (2009)), then how does the board of directors structure itself to govern and monitor its own members? In this paper, I detail how the formation and composition of the nominating/governance committee relate to board member characteristics and firm determinants in a manner that is in accordance with the contracting relationship between shareholders and board members. For a sample of NYSE firms over the 2005 to 2009 period, I find that directors who are in high demand and directors who have performed well are more likely to hold nominating committee positions. In addition, firms associated with higher risk levels, and boards structured with a greater number of these high demand and strong performing directors create larger nominating committees to attract and retain their directors' services. The results serve to address the apparent conflict between the prevalence of large nominating committees and the insulating nature of such a board feature.    

• Horstmeyer, D., and J. Zhu (2011), ''Boardroom Dynamics and Firm Value''

  Abstract: We analyze how board members communicate information within the boardroom and make decisions about projects presented by the CEO. In particular, we augment the existing research by concentrating on how intra-board relationships and possibly divergent board member incentives affect CEO behavior and board characteristics. The strategic interaction within the boardroom and between the board and CEO lend new insights into some previously unexplored determinants of optimal board structure and yields several testable hypotheses. Specifcally, we find that reputation concerns may lead to some largely silent board members. In dynamic firm environments these board members act as endogenous call options on information, highlighting the value of board heterogeneity. Furthermore, we show board size affects the tradeoff between efficiency and quality in CEO-board decision making. This connection defines how various firm characteristics relate to optimal board size.    

• Horstmeyer, D. (2011), ''When Do Governance Mechanisms Matter Most?''

  Abstract: This paper investigates how various governance mechanisms present in the firm interact with industry-specific economic conditions. First, shareholder rights (absence of antitakeover protection) exhibit procyclical value - shareholder rights primarily function to constrain management in economic upturns. This result lends insight into the operational strength of antitakeover protection over economic conditions, and its role as an insulating device. Second, aggregative measures of institutional ownership demonstrate countercyclical value - large blocks of institutional investors are more effective monitors and offer greater oversight in industry-specific economic downturns. Third, board size exhibits countercyclical value - large boards operate most efficiently in economic downturns when operational slack is minimal. This finding challenges the standard notion of small board optimality and offers new clarity on the trade-off between monitoring and coordination costs in board structure. In addition, the agency costs associated with these three findings are in congruence with the 'quiet life' hypothesis - governance inefficiencies over economic states are associated with increases in administrative, overhead and input costs (safe decisions). Finally, no definite relation persists between economic conditions and other firm-level governance mechanisms.    

• Horstmeyer, D., and J. Zhu (2011), ''The Evolution of the Board'' (Work in Progress)

  Abstract: Over the past half-century the size and composition of the board of directors has changed drastically. Accompanying a shift from 50% to 85% board independence over this time period, we have also witnessed the disappearance of large (20+ member) inefficient boards. In this paper, we develop a theoretical model to investigate these time-series phenomena for the average firm in the economy. Our model highlights that the shift in the relative importance of CEO 'managerial-specific ability' and 'firm-specific human capital' has a material impact on the structure of the board and may explain the documented trends. First, this shift in the necessary skill set of the CEO induced a diminishing value to the information of insiders and hence a transition toward more independent boards. Second, this change in the optimal CEO skill set also affected the CEO's relative bargaining position over board member replacement, which subsequently affected the prevalence of large boards. We explore alternative explanations, including governance trends, and document how the endogenous changes still hold.    

        Email: Derek.Horstmeyer.2011@marshall.usc.edu

        Office: ACC B1B
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