FOR IMMEDIATE RELEASE

FROM: William E. Simon Graduate School of Business Administration
Rochester, NY 14627
George Tomczyk 716/275-8189
FOR: Padilla Speer Beardsley
950 Third Avenue
New York, NY 10022
John Johmann 212/752-8338; [email protected]

LURE OF BOARD SERVICE CAN POSITIVELY IMPACT PERFORMANCE OF SOON-TO-RETIRE CEOs

Study Explores New Evidence That Continued Board Service Offsets Horizon Problems in CEO's Final Years of Employment

Cronyism Less Of A Factor Than Critics Say

Rochester, NY June 09, 1997 -- Merit, not cronyism, is a key factor in appointments to lucrative seats on corporate boards of directors, and is an underutilized incentive to offset horizon problems facing CEOs in their final years of employment, a new study shows.

Stock returns and accounting performance are particularly important factors in explaining the likelihood of a soon-to-retire CEO's service on his own board. Retiring CEOs who stay on their company's board generated 10.7 percent higher annual stock returns and 1.9 percent higher accounting returns in their final years of employment than those who did not remain on the board, the study demonstrates.

In a new paper, "What Happens To CEOs After They Retire?: New Evidence On Career Concerns, Horizon Problems, And CEO Incentives," James A. Brickley, professor of economics and management at the William E. Simon Graduate School of Business Administration at the University of Rochester, and James S. Linck and Jeffrey L. Coles of Arizona State University, dispute the view of critics who claim that strict cronyism is a primary - more -

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method for selection of outside directors and examine a previously unexplored source of CEO incentives as retirement approaches -- concerns about post-retirement board service.

The authors identified 277 CEOs (culled from Forbes and Dow Jones data) who left office during 1988-1992, representing 257 companies, and measured performance (using both accounting data and stock returns) over the executives' tenure as CEO or last four years in office, whichever was less. For the full sample, 139 CEOs continued to serve on their own boards, while 138 did not.

"Poorly performing CEOs are not only more likely to lose their jobs, they are also less likely to hold board seats after they leave office," said Professor Brickley. "Our results suggest that firms consider merit/ability in selecting outside directors, and are inconsistent with the view of critics who claim that strict cronyism is the primary method for selection of outside directors."

The authors clearly demonstrate that the average CEO's "career" does not end upon retirement. Empirical analysis revealed that CEOs in the sample hold on average 2.55 board seats two years after retirement. Nearly 90 percent hold at least one board seat, 42 percent hold three or more, and over 28 percent of the retired CEOs hold four or more seats. About 16 percent continue to serve as Chairman of the Board. One retired CEO in the sample, Allen F. Jacobson, former head of Minnesota Mining & Manufacturing, three years after departure serves as a director on the boards of nine large corporations.

Board service can be quite lucrative. Past studies indicate that the average annual pay for an outside director serving on a single board is $44,000. The authors estimate that his third year after departing as CEO, Mr. Jacobson received approximately $597,900 (including stock and - more -

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option grants) for board service. Many companies also provide directors with pension plans, insurance and other benefits. Thus, it is likely that managers care about these lucrative, high-status opportunities.

The authors controlled for various factors, including CEO age, tenure, stockholdings, founder status, firm size, industry, book-to-market, and calendar year. Overall, the results strongly supported the hypothesis that a retiring CEO with good performance is more likely to be retained on the board than a CEO with bad performance. ###

The Simon School is ranked among the top 25 graduate business schools in surveys published by Business Week and U.S. News & World Report. The School, recognized worldwide for its leading scholarship in education, provides a distinctive approach to business education because of its flexibility, innovation, youth, size, global outlook and vision.

Note: Professor Brickley is available for an interview. Copies of the study, which include charts with individual and company listings, are also available to the media upon request.

Information about the Simon School is also available on the World Wide Web at http:// www.ssb.rochester.edu.