Celebrity hit parade: a stock price bump ... then what?

Author:Kaback, Hoffer

MANY ISSUES regarding the optimal composition of boards remain controversial. For example:

* Should all members of the audit committee possess sophisticated knowledge of financial accounting and auditing, or does it suffice if only one of them does? (See my column, "Putting the Dalai Lama on the Audit Committee," Directors & Boards, Spring 1999.)

* Is the ideal board one where: each director brings to the boardroom different and particular business or financial experience or, instead, the number of present or former CEOs is maximized? (See my "Cast of Characters," Spring 2006.)

* Is it a good (or a bad) idea to seek "celebrities" for corporate boards?

On this last question, University of Missouri B-school professor Stephen Ferris proffers an answer. In a recent study (not yet formally published as of early April), Ferris and his co-authors maintain that their statistical analyses show that bringing celebrities onto boards generates immediate positive shareholder value, leads directly to other events that increase visibility and create value (specifically, increased analyst coverage and institutional ownership), and engenders positive long-term returns.

The study finds positive excess market returns on the announcement of the board appointments of 723 celebrities during 1985-2006, and also finds such returns at one, two, and three-year intervals.

To try to isolate the celebrity effect, the study distinguishes among (a) celebrities possessing experience "related" to the company's business; (b) celebrities who had no such related experience; and (c) non-celebrity appointees with related experience.

However, it is noticeable that the study deems Rupert Murdoch to have "related" experience vis-a-vis his directorship at Philip Morris (solely because he possesses "extensive business experience"), but--emphasizing the "military" nature of his (first) stint as Secretary of Defense--classifies Donald Rumsfeld as having experience "unrelated" to his board service at food company Kellogg, which began in 1985.

Now, though certainly Rumsfeld had been heavily involved in politics and government since the late 1950s, he also served as CEO of G.D. Searle, a drug, food-additive (Nutrasweet), and marketing-intensive company, from 1976 to 1985--i.e., for the nine years immediately preceding the start of his multiyear tenure on Kellogg's board. Plainly, Rumsfeld's experience (separate and apart from his government positions) as CEO of Searle is more "related"...

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