00:00:05
so my research investigates uh what
00:00:07
happens when companies appoint what I
00:00:09
call dual directors following the
00:00:11
completion of corporate spin-offs so let
00:00:13
me take a step back and talk about what
00:00:15
these deals actually are so a spin-off
00:00:17
occurs when uh one company issues shares
00:00:21
in an existing division to its
00:00:24
shareholders uh and that results in the
00:00:26
creation of a new company so you have
00:00:27
the divesting firm which is the parent
00:00:29
company and the deveste firm which is
00:00:31
the spin-off company and so in Reading
00:00:34
uh the legal regulations about these
00:00:35
deals what I found is that companies are
00:00:38
actually allowed parent companies are
00:00:40
actually allowed to appoint their own
00:00:42
directors to serve simultaneously on the
00:00:45
boards of their spin-off firms uh so I
00:00:47
call these directors that serve on both
00:00:49
company boards at the same time dual
00:00:52
directors and I look at their
00:00:54
implications for the performance of each
00:00:56
of the two companies and what I find is
00:00:59
that these directors are positively
00:01:01
associated with the average performance
00:01:04
uh stock market returns of the two
00:01:06
companies together uh in general but
00:01:09
then in situations where the spin-off
00:01:11
firm makes a large share of its sales to
00:01:14
the parent company uh the Dual directors
00:01:17
are negatively associated with spin-off
00:01:19
firm performance but positively
00:01:21
associated with parent firm performance
00:01:23
so we have an average positive effect
00:01:25
overall but a Divergent distributional
00:01:28
effect when we look at spin-offs where
00:01:30
there's a sales relationship between the
00:01:32
spin-off firm and the parent
00:01:37
firm so there are two key takeaways that
00:01:40
I get out of the research uh both really
00:01:42
interesting I think so one is about the
00:01:44
prevalence of these directors so about
00:01:47
60% of the parent and spin-off from
00:01:50
pairs so a pair again uh emerges from
00:01:53
the fact that the parent company is
00:01:55
divesting uh the spin-off company so
00:01:57
these two companies were associated with
00:01:59
one another prior to the spin-off and
00:02:00
then they get separated by the deal so
00:02:03
60% of the parent spin-off firm pairs in
00:02:06
my sample share one of these dual
00:02:08
directors at least one of these dual
00:02:10
directors in the effective year of the
00:02:11
spin-off so that's a really high
00:02:13
percentage uh 60% of these companies
00:02:16
sharing the same director much higher
00:02:18
than uh any other proportion of director
00:02:20
interlock uh meaning an overlapping
00:02:22
director between two companies that
00:02:24
exists in regular American corporations
00:02:27
we don't nearly see a proportion like
00:02:28
that and what's interesting also is that
00:02:31
even as you proceed a few years after
00:02:33
the completion of the spin-off so let's
00:02:35
take three years after the spin-off as
00:02:37
the example uh 35% of the companies
00:02:40
still share these dual directors uh
00:02:42
which is still a really high number
00:02:44
relative to what we see among other
00:02:46
companies in terms of sharing common
00:02:48
directors uh so I think that just the
00:02:50
prevalence of this phenomenon and being
00:02:52
able to identify this uh is a really
00:02:54
unique contribution of of this study no
00:02:56
one's done this before no one's looked
00:02:58
at this phenomenon and that's that's
00:02:59
something that I was able to contribute
00:03:01
there the second key takeaway that I
00:03:04
would raise is the idea of power right
00:03:07
so I was talking before about this
00:03:09
positive average effect versus this
00:03:11
Divergent distributional implication by
00:03:13
which I mean that the parent firm does
00:03:15
well whereas the spin-off firm does
00:03:17
poorly uh following the completion of
00:03:19
these spin-offs um and so what this
00:03:21
really boils down to is a question of
00:03:23
power so if you think about a firm that
00:03:25
undertakes a spin-off right the parent
00:03:27
firm this company's been around for a
00:03:29
number of years it's established it has
00:03:32
its management team it has its
00:03:33
reputation it has its position in the
00:03:36
market uh it has existing business
00:03:38
practices relationships with other
00:03:40
companies and stakeholders so this
00:03:42
company is pretty well situated the
00:03:44
parent company not so for the spin-off
00:03:46
firm these companies are created
00:03:48
completely from scratch they have to
00:03:49
start everything uh from the beginning
00:03:52
they have to get their management team
00:03:53
they have to build their reputation they
00:03:55
have to build an analyst's following
00:03:56
they have to establish their own
00:03:58
business practices so on average in
00:04:00
general the parent company is more
00:04:02
powerful than the spin-off fir to begin
00:04:04
with so when you have one of these dual
00:04:06
directors in most cases they're not
00:04:08
really going to have any motivation to
00:04:11
take advantage of the spin-off firm or
00:04:13
do things to benefit the parent firm at
00:04:15
the spin-off firm's expense right so
00:04:18
they have power the parent firm has
00:04:20
power over the spin-off firm but that
00:04:21
sort of mutes the uh effect that dual
00:04:24
directors will have on the spin-off firm
00:04:26
so that's why we see a positive average
00:04:28
effect in some situations these dual
00:04:29
directors might even help the spin-off
00:04:31
firm in terms of establishing itself as
00:04:33
a new company so that's the positive
00:04:35
average effect however in situations
00:04:38
where the parent firm is a big buyer of
00:04:42
the spin-off firm's output in other
00:04:43
words when the spin-off firm is selling
00:04:44
a lot of its output to the parent firm
00:04:46
that puts the parent company in a
00:04:48
position of even greater power over the
00:04:50
spin-off firm because not only is
00:04:52
established uh an existing in the
00:04:54
marketplace more so than the spin-off
00:04:56
firm but on top of that uh the spin-off
00:04:58
firm uh is basically dependent on the
00:05:01
parent company as a buyer for its output
00:05:03
so that puts the Dual directors in a
00:05:05
position where they have both the
00:05:07
ability and the motivation to take
00:05:09
actions uh at the at the spin-off firm's
00:05:11
expense to benefit the parent firm right
00:05:14
so once the power Dynamic shifts to the
00:05:16
point where it favors the parent firm
00:05:18
even more significantly than it does the
00:05:20
spin-off firm this is when we start to
00:05:22
see the cost to the spin-off firm which
00:05:25
benefits the parent company right so
00:05:26
this Divergent distributional
00:05:28
implication that I was talking about
00:05:30
where the parent firm benefits at the
00:05:32
spin-off firm's expense only happens
00:05:34
when there's a situation where there's a
00:05:36
sales relationship between the two
00:05:41
companies so I would say that there is
00:05:43
implications for the parent and spin-off
00:05:45
firms that are involved in these deals
00:05:47
and then there are also implications
00:05:48
more from a regulatory and societal
00:05:50
standpoint um so I'll take each of these
00:05:52
in turn so starting with the companies
00:05:54
that are involved in the spin-off um I
00:05:56
think that the implication for uh parent
00:05:59
companies is that dual directors can be
00:06:02
a really useful tool with which to
00:06:03
manage their relationships with the
00:06:05
spin-off firm so the parent firm has the
00:06:07
right to place these dual directors on
00:06:09
the boards of their spin-off firm and
00:06:11
that gives them the ability to somehow
00:06:14
control or shape the relationship uh the
00:06:16
spin-off Firs actions in a way that it
00:06:18
wouldn't have the ability to do if it
00:06:20
just did the spin-off and the that
00:06:21
company was off on its own independent
00:06:24
um so the implication there is that
00:06:26
parent firms can proactively use these
00:06:28
directors to manage their ongoing
00:06:30
relationships uh with the spin-off firm
00:06:33
however there's kind of a dark side to
00:06:34
this story in the sense that the Dual
00:06:37
directors create the potential for
00:06:38
opportunism on the parent firm's part in
00:06:41
situations where there there is this
00:06:43
sales relationship so the dark side is
00:06:45
that yes duol directors can be a useful
00:06:46
tool but they can also be used for evil
00:06:49
rather than for good um and allow the
00:06:51
parent firm to take advantage of the
00:06:53
relationship with the spin-off firm so I
00:06:55
don't know that I would say that we want
00:06:57
to advise parent companies to use dual
00:06:58
directors to take advantage of their
00:07:00
spin-off firms but it's certainly an
00:07:01
implication that comes out of the
00:07:03
research and continuing in this vein
00:07:05
sort of the opposite implications are
00:07:07
true for the spin-off firms that on the
00:07:09
one hand uh these dual directors can be
00:07:12
a really useful tool with which to kind
00:07:14
of ease the separation process of uh
00:07:17
sort of creating a new company starting
00:07:19
from scratch building up these
00:07:20
relationships that I was talking about
00:07:22
earlier um however the spin-off firm
00:07:24
needs to guard against this opportunism
00:07:26
that I was mentioning in terms of the
00:07:28
parent firm potentially taking advant
00:07:29
Vantage of the spin-off firm especially
00:07:31
in situations where there is sales
00:07:33
dependence between the spin-off and the
00:07:34
paing companies um so that's the first
00:07:37
implication in terms of the companies
00:07:39
that are involved in spin-offs the
00:07:41
second implication has to do with more
00:07:43
of a regulatory um or societal
00:07:46
perspective and I think there are two
00:07:48
points to bring up here the first one is
00:07:51
that uh we need to think about uh how we
00:07:55
classify independent directors right so
00:07:57
the Dual directors that I'm talking
00:07:59
about are independent in the governance
00:08:01
sense of the term right so what that
00:08:03
means is that they're uh independent of
00:08:05
the management of the spin-off firms
00:08:07
that are separated in these deals so
00:08:09
that normally would be viewed by
00:08:11
Regulators as a good thing right because
00:08:13
they're they're they're free from any
00:08:15
bias free from any uh sort of taint of
00:08:17
being associated with uh the existing
00:08:20
management of the spin-off firm however
00:08:22
for dual directors even though they're
00:08:24
classified as independent it's sort of a
00:08:26
funny situation because they're not
00:08:27
really independent in the sense that
00:08:29
that first of all they originate from
00:08:31
the parent company so obviously there's
00:08:32
a relationship between the parent and
00:08:35
the spin-off firm from before the deal
00:08:37
um and so that's sort of a question mark
00:08:40
in terms of the independence the second
00:08:42
is that they may have a great deal of
00:08:43
familiarity with the spin-off firm uh
00:08:46
from its days as a as a subsidiary
00:08:48
within the parent company right so the
00:08:50
independence there gets called into
00:08:51
question as well so we hear a lot in the
00:08:53
press and popular media from Regulators
00:08:56
about how we want independent directors
00:08:58
as a marker of good Corp corporate
00:08:59
governance and that's completely fine
00:09:02
that's all well and good um but there's
00:09:04
sort of gray areas let's say in terms of
00:09:07
how we see this with dual directors so I
00:09:09
think that that's a regulatory
00:09:10
implication that's worth noting the
00:09:13
second point the second regulatory
00:09:14
implication that kind of goes hand
00:09:16
inhand with this is the idea that uh
00:09:19
when we think about this positive
00:09:21
average effect of dual directors on the
00:09:24
average performant of the parent
00:09:25
spin-off firm average performance of the
00:09:27
parent and spin-off firms together
00:09:29
that's really masking this uh uh
00:09:32
different effect that we see for the
00:09:34
parent and spin-off firms right so yes
00:09:36
we have a positive average effect
00:09:37
meaning that the Dual directors are good
00:09:39
on average but in one situation when we
00:09:41
have this High sales dependence we
00:09:44
actually have uh sort of a
00:09:45
redistribution of value from the
00:09:47
spin-off firm to the parent firm and
00:09:49
that's not really getting picked up in
00:09:50
the overall data because we're sort of
00:09:52
seeing the positive average effect so
00:09:54
from a regulatory standpoint you know
00:09:56
yes maybe we do want dual directors as a
00:09:58
tool to manage relationships between the
00:10:00
parent and spin-off firms and sort of
00:10:02
they're beneficial on average and that's
00:10:04
fine but one has to be careful or
00:10:07
mindful of the situation in which we see
00:10:10
uh this High sales dependence because
00:10:12
again that opens up the uh possibility
00:10:14
of opportunism and that's sort of hidden
00:10:16
by the average effect so Regulators need
00:10:18
to be mindful of how directors dual
00:10:20
directors might be misused in situations
00:10:22
of high sales dependence between the
00:10:25
spin-off firm and the parent firm
00:10:30
so I'm actually really excited about
00:10:32
this project there are three I think
00:10:34
really useful and interesting avenues
00:10:36
for for future research that I'd like to
00:10:38
pursue in this so I'll tell you about
00:10:39
them one by one um so the first uh area
00:10:42
that I'd like to consider is what
00:10:44
happens when dual directors leave the
00:10:47
boards of the parent and spin-off firms
00:10:50
so there's three ways that this could
00:10:51
happen one is that the Dual directors
00:10:53
remember that they're shared on both
00:10:55
firms boards so the Dual directors could
00:10:57
leave the boards break the Dual
00:10:59
directorship by departing from the
00:11:00
parent firm's board and just staying on
00:11:02
the spin-off firm's board so that's one
00:11:04
type of departure the second type of
00:11:06
departure would be that the Dual
00:11:07
director could leave the spin-off firm's
00:11:08
board and stay on the parent firm's
00:11:10
board breaking the connection between
00:11:11
the two companies or third the Dual
00:11:14
director could leave both both boards at
00:11:16
the same time so my hunch is that there
00:11:18
are very different reasons for each of
00:11:20
these types of Departures and therefore
00:11:22
there are going to be very different uh
00:11:24
performance implications and management
00:11:25
implications probably operational
00:11:27
implications uh for the companies uh for
00:11:30
example if you have the Dual director
00:11:32
leaving the parent firm's board and
00:11:34
staying on the spin-off firm's board
00:11:36
that might mean that the spin-off firm
00:11:38
has finally reached a state of maturity
00:11:40
where it's able to function on its own
00:11:41
and it doesn't need that connection
00:11:42
anymore or if the Dual director leaves
00:11:45
the spin-off firm's board but stays on
00:11:47
the parent firm's board maybe the
00:11:49
implication is something like the parent
00:11:51
firm no longer needs the oversight or
00:11:53
the management of the relationship with
00:11:54
the spin-off firm so I'm really curious
00:11:56
to dig more into these three types of
00:11:58
Departures and think about uh what their
00:12:00
potential implications might be for the
00:12:02
two companies and then to test that
00:12:03
empirically so that's the First Avenue
00:12:05
that I'd like to pursue in this research
00:12:08
the second is that I'm really interested
00:12:10
in trying to understand more about the
00:12:12
Dual director's personal characteristics
00:12:15
so I was mentioning before that uh when
00:12:17
we think about these dual directors
00:12:19
especially in the context of
00:12:20
Independence there are connections
00:12:22
between uh the spin-off and the parent
00:12:24
firm in terms of the fact that the Dual
00:12:26
directors uh are serving on both
00:12:28
companies board but really originated
00:12:29
with the parent firm so I'm curious to
00:12:31
dig deeper into that uh into that issue
00:12:34
right so are these directors typically
00:12:35
managers of the parent firm um what
00:12:38
kinds of personal characteristics do
00:12:40
they have what is their work experience
00:12:42
what is their professional experience
00:12:43
and why might the parent firm be wanting
00:12:46
to apply that experience to the spin-off
00:12:48
firm in terms of appointing those
00:12:49
directors to the spin-off firm's board
00:12:51
and even further what are the Dual
00:12:53
director's Financial incentives uh
00:12:55
they're obviously getting paid by both
00:12:57
companies they're obviously owning uh
00:12:59
shares of stock in both companies since
00:13:00
they serve on both firms boards
00:13:02
directors all uh get paid for their
00:13:04
board service and and have ownership
00:13:06
stakes in the companies that they serve
00:13:07
on um so I'm curious to see a bit more
00:13:10
about sort of where these directors
00:13:12
incentives lie and this is really one of
00:13:14
the novel things about this study in the
00:13:16
sense that it's really the first to
00:13:18
consider uh what's happening to the
00:13:20
parent and spin-off firms together at
00:13:22
the same time as opposed to treating the
00:13:24
two companies completely independently
00:13:26
once the spin-offs are complete so by
00:13:28
looking more more at these Financial
00:13:30
incentives by virtue of the fact that
00:13:31
the directors are serving on both both
00:13:33
firms boards I can actually pull apart
00:13:36
uh some of these implications for uh
00:13:38
understanding how these two companies
00:13:40
the parent and the spin-off firms work
00:13:42
together so that's the second Avenue
00:13:44
that I'd like to pursue in my research
00:13:46
and then the third is an even more
00:13:48
general question or an even more General
00:13:50
issue right so I've been talking about
00:13:52
dual directors as managing ongoing
00:13:54
relationships between the parent and the
00:13:55
spin-off firms and that's a really
00:13:57
interesting empirical context in which
00:13:59
to do that this context of corporate
00:14:01
spin-offs that's really what motivates
00:14:02
most of my research uh this this context
00:14:05
of corporate spin-offs but I would
00:14:06
imagine that there are other uh
00:14:08
empirical situations other professional
00:14:10
situations where we do see or we might
00:14:12
want to see uh overlapping directorships
00:14:15
so one that immediately comes to mind is
00:14:17
a buyer supplier relationship in general
00:14:20
of two companies that are not
00:14:21
necessarily linked by a spin-off but you
00:14:23
could imagine a dual director being a
00:14:25
really useful uh tool to manage that
00:14:28
kind of relation ship another example
00:14:30
might be a technological ecosystem where
00:14:33
uh we see relationships between uh
00:14:35
various companies that are participating
00:14:37
in the same technological ecosystem so
00:14:39
if you think about a smartphone uh the
00:14:41
producer of the chip the producer of the
00:14:43
glass that goes on the front these dual
00:14:45
directors could be a really useful uh
00:14:47
tool with which to manage uh the the
00:14:50
overlapping relationships between
00:14:51
companies that need to work together to
00:14:53
put certain products or Services
00:14:55
together uh for consumers to to use um
00:14:58
and so so I'd like to uh try to broaden
00:15:00
the lens a little bit of my research to
00:15:02
look at other contexts in which these
00:15:04
dual directorships are similar types of
00:15:06
phenomena might be a useful uh useful
00:15:09
mechanism to manage those types of
00:15:11
relationships
00:15:19
[Music]
