Locally-Rooted Directors

Abstract

We study the influence of locally-rooted directors, i.e., board members with personal ties to a company’s geographic location, on firm performance. Locally-rooted directors may be elected for two contrasting reasons. First, they may provide important local know-how and business relations that can prove beneficial to a company. Second, they may be elected solely because of social ties with company insiders, such as fellow board directors, top executives, or large shareholders. In the latter case, locally-rooted directors may lack both relevant experience, business skills, and independence. We use the directors’ alma mater as a proxy for local roots. Almost 30% of all directors in our sample are locally-rooted. The empirical analysis indicates that locally-rooted directors are negatively related with Tobin’s Q, which suggests that they are chosen due to their social ties with insiders rather than because they add local business know-how. However, the negative relationship with Tobin’s Q is not present in domestically-oriented companies, i.e., firms without material foreign sales, and firms in regulated industries. Thus, the results do not rule out that, in some cases, the presence locally-rooted directors may be optimal.