Searching for Directors

We examine a Securities and Exchange Commission (SEC) rule mandating disclosure of the source recommending new independent directors (NID). In a sample from 2010 to 2019, 42% of the NID are recommended by search firms, 29% by current independent directors, and 20% by CEO and other executives. The recommending source is systematically associated with certain NID characteristics and subsequent actions. These associations suggest that boards turn to search firms when they need to go beyond their immediate network and identify candidates with greater executive expertise, or to diversify in terms of gender and race. In contrast, CEO-recommended candidates are more common when the CEO is powerful and closer to these candidates, consistent with CEOs using their influence to appoint loyal directors. Along these lines, CEO-recommended NID adopt a more management-friendly stance. Finally, we document widespread non-compliance with the disclosure requirement and recommend that the SEC revamp and enforce the rule.