Professionals on Corporate Boards: How Do They Affect the Bottom Line?

Abstract

Professional-directors – licensed professionals who sit on corporate boards – play varied roles under different circumstances, leading to differential corporate performance. We develop a two-dimensional framework with the “wise counsel” role in relation to the professional-capital dimension, and the “cop” and “entrepreneur” roles along the risk-taking dimension. We demonstrate, using data on all publicly quoted companies in Japan during 2004-2015, that the presence of professional-directors increases profitability and corporate value across sectors, indicative of their wise counsel role. Their presence also leads to higher stock return volatility, evidence of their risk-endorsing role, in regulated industries than in less regulated industries. Professional-directors thus constitute a specific type of resource that influences corporate strategy, leading to corporate performance heterogeneity.

Keywords: Professional-directors, board of directors, lawyers, accountants, corporate governance

JEL Classification: M12, L84, G32, G34