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so my research investigates uh what happens when companies appoint what I call dual directors following the
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completion of corporate spin-offs so let me take a step back and talk about what
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these deals actually are so a spin-off occurs when uh one company issues shares in an existing division to its
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shareholders uh and that results in the creation of a new company so you have the divesting firm which is the parent
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company and the deveste firm which is the spin-off company and so in Reading uh the legal regulations about these
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deals what I found is that companies are actually allowed parent companies are actually allowed to appoint their own
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directors to serve simultaneously on the boards of their spin-off firms uh so I call these directors that serve on both
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company boards at the same time dual directors and I look at their implications for the performance of each
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of the two companies and what I find is that these directors are positively associated with the average performance
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uh stock market returns of the two companies together uh in general but then in situations where the spin-off
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firm makes a large share of its sales to the parent company uh the Dual directors
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are negatively associated with spin-off firm performance but positively associated with parent firm performance
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so we have an average positive effect overall but a Divergent distributional effect when we look at spin-offs where
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there's a sales relationship between the spin-off firm and the parent firm so there are two key takeaways that
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I get out of the research uh both really interesting I think so one is about the
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prevalence of these directors so about 60% of the parent and spin-off from pairs so a pair again uh emerges from
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the fact that the parent company is divesting uh the spin-off company so these two companies were associated with
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one another prior to the spin-off and then they get separated by the deal so 60% of the parent spin-off firm pairs in
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my sample share one of these dual directors at least one of these dual directors in the effective year of the
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spin-off so that's a really high percentage uh 60% of these companies sharing the same director much higher
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than uh any other proportion of director interlock uh meaning an overlapping director between two companies that
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exists in regular American corporations we don't nearly see a proportion like
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that and what's interesting also is that even as you proceed a few years after
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the completion of the spin-off so let's take three years after the spin-off as
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the example uh 35% of the companies still share these dual directors uh which is still a really high number
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relative to what we see among other companies in terms of sharing common directors uh so I think that just the
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prevalence of this phenomenon and being able to identify this uh is a really unique contribution of of this study no
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one's done this before no one's looked at this phenomenon and that's that's
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something that I was able to contribute there the second key takeaway that I would raise is the idea of power right
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so I was talking before about this positive average effect versus this Divergent distributional implication by
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which I mean that the parent firm does well whereas the spin-off firm does poorly uh following the completion of
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these spin-offs um and so what this really boils down to is a question of power so if you think about a firm that
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undertakes a spin-off right the parent firm this company's been around for a
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number of years it's established it has its management team it has its reputation it has its position in the
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market uh it has existing business practices relationships with other companies and stakeholders so this
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company is pretty well situated the parent company not so for the spin-off firm these companies are created
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completely from scratch they have to start everything uh from the beginning they have to get their management team
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they have to build their reputation they have to build an analyst's following
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they have to establish their own business practices so on average in general the parent company is more
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powerful than the spin-off fir to begin with so when you have one of these dual directors in most cases they're not
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really going to have any motivation to take advantage of the spin-off firm or do things to benefit the parent firm at
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the spin-off firm's expense right so they have power the parent firm has power over the spin-off firm but that
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sort of mutes the uh effect that dual directors will have on the spin-off firm so that's why we see a positive average
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effect in some situations these dual directors might even help the spin-off firm in terms of establishing itself as
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a new company so that's the positive average effect however in situations where the parent firm is a big buyer of
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the spin-off firm's output in other words when the spin-off firm is selling a lot of its output to the parent firm
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that puts the parent company in a position of even greater power over the spin-off firm because not only is
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established uh an existing in the marketplace more so than the spin-off firm but on top of that uh the spin-off
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firm uh is basically dependent on the parent company as a buyer for its output so that puts the Dual directors in a
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position where they have both the ability and the motivation to take actions uh at the at the spin-off firm's
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expense to benefit the parent firm right so once the power Dynamic shifts to the
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point where it favors the parent firm even more significantly than it does the spin-off firm this is when we start to
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see the cost to the spin-off firm which benefits the parent company right so this Divergent distributional
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implication that I was talking about where the parent firm benefits at the spin-off firm's expense only happens
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when there's a situation where there's a sales relationship between the two
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companies so I would say that there is implications for the parent and spin-off firms that are involved in these deals
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and then there are also implications more from a regulatory and societal standpoint um so I'll take each of these
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in turn so starting with the companies that are involved in the spin-off um I think that the implication for uh parent
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companies is that dual directors can be a really useful tool with which to manage their relationships with the
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spin-off firm so the parent firm has the right to place these dual directors on the boards of their spin-off firm and
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that gives them the ability to somehow control or shape the relationship uh the spin-off Firs actions in a way that it
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wouldn't have the ability to do if it just did the spin-off and the that company was off on its own independent
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um so the implication there is that parent firms can proactively use these directors to manage their ongoing
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relationships uh with the spin-off firm however there's kind of a dark side to
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this story in the sense that the Dual directors create the potential for opportunism on the parent firm's part in
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situations where there there is this sales relationship so the dark side is that yes duol directors can be a useful
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tool but they can also be used for evil rather than for good um and allow the parent firm to take advantage of the
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relationship with the spin-off firm so I don't know that I would say that we want
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to advise parent companies to use dual directors to take advantage of their spin-off firms but it's certainly an
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implication that comes out of the research and continuing in this vein sort of the opposite implications are
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true for the spin-off firms that on the one hand uh these dual directors can be a really useful tool with which to kind
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of ease the separation process of uh sort of creating a new company starting from scratch building up these
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relationships that I was talking about earlier um however the spin-off firm needs to guard against this opportunism
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that I was mentioning in terms of the parent firm potentially taking advant Vantage of the spin-off firm especially
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in situations where there is sales dependence between the spin-off and the paing companies um so that's the first
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implication in terms of the companies that are involved in spin-offs the second implication has to do with more
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of a regulatory um or societal perspective and I think there are two points to bring up here the first one is
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that uh we need to think about uh how we classify independent directors right so
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the Dual directors that I'm talking about are independent in the governance sense of the term right so what that
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means is that they're uh independent of the management of the spin-off firms
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that are separated in these deals so that normally would be viewed by Regulators as a good thing right because
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they're they're they're free from any bias free from any uh sort of taint of
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being associated with uh the existing management of the spin-off firm however for dual directors even though they're
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classified as independent it's sort of a funny situation because they're not
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really independent in the sense that that first of all they originate from the parent company so obviously there's
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a relationship between the parent and the spin-off firm from before the deal um and so that's sort of a question mark
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in terms of the independence the second is that they may have a great deal of familiarity with the spin-off firm uh
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from its days as a as a subsidiary within the parent company right so the independence there gets called into
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question as well so we hear a lot in the press and popular media from Regulators
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about how we want independent directors as a marker of good Corp corporate governance and that's completely fine
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that's all well and good um but there's sort of gray areas let's say in terms of
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how we see this with dual directors so I think that that's a regulatory implication that's worth noting the
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second point the second regulatory implication that kind of goes hand inhand with this is the idea that uh
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when we think about this positive average effect of dual directors on the average performant of the parent
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spin-off firm average performance of the parent and spin-off firms together that's really masking this uh uh
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different effect that we see for the parent and spin-off firms right so yes we have a positive average effect
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meaning that the Dual directors are good on average but in one situation when we
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have this High sales dependence we actually have uh sort of a redistribution of value from the
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spin-off firm to the parent firm and that's not really getting picked up in the overall data because we're sort of
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seeing the positive average effect so from a regulatory standpoint you know yes maybe we do want dual directors as a
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tool to manage relationships between the parent and spin-off firms and sort of they're beneficial on average and that's
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fine but one has to be careful or mindful of the situation in which we see uh this High sales dependence because
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again that opens up the uh possibility of opportunism and that's sort of hidden
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by the average effect so Regulators need to be mindful of how directors dual directors might be misused in situations
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of high sales dependence between the spin-off firm and the parent firm so I'm actually really excited about
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this project there are three I think really useful and interesting avenues for for future research that I'd like to
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pursue in this so I'll tell you about them one by one um so the first uh area
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that I'd like to consider is what happens when dual directors leave the boards of the parent and spin-off firms
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so there's three ways that this could happen one is that the Dual directors remember that they're shared on both
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firms boards so the Dual directors could leave the boards break the Dual directorship by departing from the
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parent firm's board and just staying on the spin-off firm's board so that's one
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type of departure the second type of departure would be that the Dual director could leave the spin-off firm's
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board and stay on the parent firm's board breaking the connection between the two companies or third the Dual
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director could leave both both boards at the same time so my hunch is that there
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are very different reasons for each of these types of Departures and therefore there are going to be very different uh
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performance implications and management implications probably operational implications uh for the companies uh for
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example if you have the Dual director leaving the parent firm's board and staying on the spin-off firm's board
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that might mean that the spin-off firm has finally reached a state of maturity where it's able to function on its own
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and it doesn't need that connection anymore or if the Dual director leaves the spin-off firm's board but stays on
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the parent firm's board maybe the implication is something like the parent firm no longer needs the oversight or
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the management of the relationship with the spin-off firm so I'm really curious
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to dig more into these three types of Departures and think about uh what their potential implications might be for the
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two companies and then to test that empirically so that's the First Avenue that I'd like to pursue in this research
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the second is that I'm really interested in trying to understand more about the
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Dual director's personal characteristics so I was mentioning before that uh when
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we think about these dual directors especially in the context of Independence there are connections
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between uh the spin-off and the parent firm in terms of the fact that the Dual directors uh are serving on both
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companies board but really originated with the parent firm so I'm curious to
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dig deeper into that uh into that issue right so are these directors typically managers of the parent firm um what
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kinds of personal characteristics do they have what is their work experience what is their professional experience
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and why might the parent firm be wanting to apply that experience to the spin-off
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firm in terms of appointing those directors to the spin-off firm's board and even further what are the Dual
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director's Financial incentives uh they're obviously getting paid by both
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companies they're obviously owning uh shares of stock in both companies since
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they serve on both firms boards directors all uh get paid for their board service and and have ownership
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stakes in the companies that they serve on um so I'm curious to see a bit more
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about sort of where these directors incentives lie and this is really one of the novel things about this study in the
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sense that it's really the first to consider uh what's happening to the parent and spin-off firms together at
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the same time as opposed to treating the two companies completely independently once the spin-offs are complete so by
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looking more more at these Financial incentives by virtue of the fact that the directors are serving on both both
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firms boards I can actually pull apart uh some of these implications for uh understanding how these two companies
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the parent and the spin-off firms work together so that's the second Avenue that I'd like to pursue in my research
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and then the third is an even more general question or an even more General issue right so I've been talking about
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dual directors as managing ongoing relationships between the parent and the spin-off firms and that's a really
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interesting empirical context in which to do that this context of corporate spin-offs that's really what motivates
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most of my research uh this this context of corporate spin-offs but I would imagine that there are other uh
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empirical situations other professional situations where we do see or we might want to see uh overlapping directorships
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so one that immediately comes to mind is a buyer supplier relationship in general
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of two companies that are not necessarily linked by a spin-off but you could imagine a dual director being a
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really useful uh tool to manage that kind of relation ship another example might be a technological ecosystem where
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uh we see relationships between uh various companies that are participating in the same technological ecosystem so
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if you think about a smartphone uh the producer of the chip the producer of the glass that goes on the front these dual
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directors could be a really useful uh tool with which to manage uh the the overlapping relationships between
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companies that need to work together to put certain products or Services together uh for consumers to to use um
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and so so I'd like to uh try to broaden the lens a little bit of my research to
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look at other contexts in which these dual directorships are similar types of phenomena might be a useful uh useful
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mechanism to manage those types of relationships [Music]