Board of directors’ demanding schedules can make it hard for members to keep up with the latest findings in governance research. Directorpoint just made it easy. In our series, Research Recap, we give you the key takeaways from peer-reviewed studies in corporate governance and board management. Skip the pages of pretentious wording. Here’s what you really need to know…
Academy of Management Journal
Dual Directors and the Governance Of Corporate Spinoffs
(Also the title of a knockoff Harry Potter book)
Conclusions are supported by data gathered through structured experimentation.
A corporate spinoff is when a parent company divests itself of one of its business units by splitting it off into a separate, independently-operated company. It’s a divestment strategy that’s grown increasingly popular in recent years. The creation of the new firm is paid for by distributing shares of the spinoff pro rata (proportionately) amongst shareholders of the parent.
Parent companies have a legal right to appoint members of its own board of directors to the board of the spinoff firm. 60% of the 228 spinoffs studied shared directors with a parent firm in their first year of existence.
This study aims to answer two questions:
- How do these “dual directors” affect the relationship between the two companies after the spinoff?
- How does dual directorship affect the performance of both companies?
To answer these questions, the researchers use a lot of math—an obscene amount of math. You don’t need to know any of that. It’s a peer-reviewed journal; the numbers add up.
Stock market returns in parent-spinoff pairs which share at least one director are positive, on average. While dual directorship is an overall value-add to the group, it can benefit the parent and damage the spinoff in cases where the spinoff is heavily dependent on the parent for sales.
Parent firms can find themselves in a position to exercise relatively unchecked power over the spinoff based on the number of directors serving on both boards. That unchecked power often manifests as the exploitation the spinoff’s dependence on the parent as a buyer of its outputs. Even without any direct exploitation, sharing directors can lead to decision-making biases in favor of the parent.
Organizations preparing to act on a spinoff divestment should consider implementing safeguards to “minimize the risk of subsequent opportunistic exploitation” is recommended (Heide, 1994).
We just saved you…
63 minutes, 56 seconds
Estimated reading time of our article = 1 minute, 44 seconds.
Estimated reading time of the research = 65 minutes, 40 seconds
In 63 minutes, 56 seconds you could…
- Watch an episode of 60 Minutes before microwaving some frozen fajitas.
- Beat your record mile time.
- Dance like no one’s watching, then spending 63 minutes avoiding eye contact with your coworkers.
But most importantly, 63 minutes, 56 seconds gives you plenty of time to set up a demo of our easy-to-use board portal today to see how Directorpoint is building better boards across the globe.
FELDMAN, E. R. (2016). Dual Directors and the Governance of Corporate Spinoffs. Academy of Management Journal, 59(5), 1754–1776. https://doi.org/10.5465/amj.2013.0552
Heide, J. B. 1994. Interorganizational governance in marketing channels. Journal of Marketing, 58: 71–85.