There’s quite a bit of truth in the old adage that, “it’s not what you know, it’s who you know.” This article provides a compelling argument that incumbent board members and their connections have an outsized influence on director appointments and on the nature of the future board itself. Here’s what the research says about how to get on a board of directors.

Director Appointments: It Is Who You Know

  • Jay Cai, Tu Nguyen, Ralph Walkling
  • The Review of Financial Studies
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.

What are the research questions?

Although boards are the foundation of the governance structure of a firm, shareholders typically do not nominate or vote on the directors who represent them. That job is left to the current board which nominates and elects new directors. Using a database of 9,801 director appointments, the authors are the first to analyze the controlling role that boards and their connections play in director appointments. The sheer frequency of board candidates drawn from the contacts of current board members is striking.

What are the Academic Insights?

  1. Boards appoint candidates with direct and strong connections to the current directors. Just under 69% of new director appointments came from the first- or second-degree network of the current board. Considering only the firms in the S&P 500, a little over 90% were chosen from the same pool of candidates. The majority of the connections were professional. Connected candidates are more similar to the current board in their experiences and industry backgrounds, and other characteristics and are more likely to be appointed. Candidates are more likely to be appointed if there are second-degree connections or connections through a more reputable direct contact.
  2. Firms appointing a connected director exhibit higher announcement returns and receive more shareholder votes when the need to coordinate the search is greater. The appointment of a connected director reduces firm value. It would receive lower shareholder votes for an already homogeneous board if the firm were more complex or in a more competitive environment. Firm value is also reduced, and fewer shareholder votes are received if the candidate is connected to an entrenched CEO. Firm value is reduced, and fewer shareholder votes are received if the candidate is connected to an entrenched CEO.
  3. The appointment of a connected candidate is associated with higher candidate quality (defined as having CEO experience or with S&P 500 board experience, for example) and higher external search costs, especially for candidates with a background or experience different from the current board or if the firm was more complex or operated in a more competitive environment.

Why does it matter?

We have written previously that the state of affairs for women in business and finance, in particular, is abysmal.  For example, see our article on the percentage of female CFOs/CAOs. Not only are the numbers disappointing in the US, but they are also disappointing worldwide.  One could reasonably argue that the issue starts at the top of the management chain. This research summary provides insights into the significance of social connections to board appointments, specifically how director nominees are selected by the board and whether or not they are connected to current members.  The results have an application to the literature on board diversity and how diversity affects firm performance. See Table 5 for results on the relationship between board connections and board diversity and expertise.

The most important chart from the paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained.  Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.


Using 9,801 director appointments during 2003–2014, we document the dramatic impact of connections. Sixty-nine percent of new directors have professional ties to incumbent boards, a group representing 13% of all potential candidates. Consistent with facilitating coordination and reducing search costs, connections help boards bring in gender diversity, new skills, and new industry background. More complex firms and firms in more competitive environments tend to appoint connected directors and experience better market reactions and higher shareholder votes. Connections to incumbent CEOs, however, result in lower announcement returns and shareholder votes. We use death (merger)-induced network loss (gain) as instruments.