Background to the study
A director is a person duly appointed by the company to direct and manage the business of the company.1 This definition goes a step further than the 1968 Act2 by adding due appointment as a condition precedent. Section 244 (2) provides a rebuttable presumption that all persons described by a company as directors, whether as executive or otherwise, have been duly appointed. This safeguards third parties dealing with the company.
The issue of the multiple directorships attracted the attention of researchers and practitioners. A large literature focused on the concept of multiple directorship by directors and its relationships with internal and external characteristics of the firm. [1]There is a global debate on whether appointing directors who already hold directorships in other companies is a good or bad corporate governance practice[2]. There is a common tradition of supporting multiple directorships as an instrument for the company to engage external skills in fortifying its existing proficiency in improving effectiveness of board activities “ the quality hypothesis”[3]The resource dependency hypothesis also pronounces that this class of directors is well networked and hence assists companies to better exploit the external environment. Loderer and Peyer[4] find a positive association between a firm’s value and the number of directorships that a director holds, and that directors who sit on multiple boards are a good source of knowledge during acquisitions. The quality of the board functions, such as the monitoring and supervisory functions are generally undermined by multiple directorships[5] [6]subsequently increasing agency costs through an affinity for corporate diversification, which has an effect of lowering company value.[7] Furthermore, Fich and Shivdasani (2006) prove that companies with a majority of directors, holding three or more directorships, flaunt inferior market to book ratios, worse profitability, and lower sensitivity of CEO turnover to firm performance. Some studies ([8]highlighted the benefits of increasing the number of directorships held by directors (e.g., additional experience; firm legitimacy). In this study we speak about advantages and disadvantages of multiple directorships on performance of firms.
[1] Jackling and Johl, 2009; Sarkar and Sarkar, 2009; Jiraporn, et al. 2009; Ahn et al. 2010).
[2] Ferris, Jagnathan & Pritchard, 2003; Jiraporn, Kim & Davidson, 2007; Sarker & Sarker, 2008; Fich & Shivdasani, 2006
[3] Beasley, 1996; Kiel & Nicholson, 2005).
[4] Loderer, Claudio & Peyer, Urs. (2002). Board overlap, seat accumulation and share prices. European Financial Management. 8. 165-192. 10.1111/1468-036X.00183.
[5] Olayinka Marte Uadiale, The impact of board structure on corporate financial performance in Nigeria, Canadian Centrer of Science and Education, International Journal of Business and Management, 5, 10, pp.155-166, 2010
[6] (Jiraporn, Kim & Davidson, 2007)
[7] Fich & Shivdasani, 2006.
[8] Sarkar and Sarkar, 2009; Frye and Wang, 2010
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