Corporate board attributes and bankruptcy ☆ Harlan Platt a, ⁎, Marjorie Platt b, 1 a Finance and Insurance, Northeastern University, Boston, MA USA b Accounting, Northeastern University, Boston, MA USA abstract article info Article history: Accepted in revised form 6 August 2011 Available online 6 September 2011 Keywords: Boards of directors Bankruptcy Stock ownership Board composition Board characteristics This paper examines how the composition and characteristics of corporate boards relates to firms' success and solvency; the study here focuses on the question of insolvency. This study finds that both board composition and member characteristics relate to whether or not firms can avoid bankruptcy. Boards have a major role to play in whether or not the company can remain solvent. A more versus less independent board, one which is larger and comprised of older members, has more members currently serving as CEOs of other companies, and whose independent/outside directors own less stock is best positioned to help a firm remain out of bankruptcy. Firms may use the results to custom tailor boards as older members retire and new members are inducted. © 2011 Elsevier Inc. All rights reserved. 1. Introduction Corporate boards of directors are responsible for a variety of tasks and responsibilities. Among these, and possibly the most critical is the obligation to maintain the firm's solvency. The importance of this role of a board of directors becomes clear following the 2008 and counting financial crisis which left so many companies either petitioning bankruptcy courts for protection or forcing the selloff of significant assets to repay creditors. This paper addresses the question of how boards of directors and their audit and compensation committees should be configured to reduce the risk of bankruptcy. The study here includes a compilation of statistics enabling the comparison of director attributes of bankrupt and non-bankrupt companies. A future paper addresses the question of whether these board attributes are important antecedents of corporate bankruptcy that adds to the explanatory power of traditional financial ratios. The current paper is important because it provides a detailed assessment of the factors related to corporate governance that distinguish between companies that fail and those that survive. The study may provide benefit to companies in the process of reconfiguring their boards and may assist sitting directors to take steps that would improve the likelihood of corporate survival. The primary findings of this study suggest that many board composition and board characteristics do differentiate between healthy, stable on-going firms (non-bankrupt) and firms that have filed for Chapter 11 protection from creditors (bankrupt). Most notably, non- bankrupt (vs. bankrupt) firms have larger, more independent board members and fewer gray directors. The CEO of non-bankrupt boards is older, as is the average director on the board. Along with greater age, the board members of non-bankrupt boards bring greater expertise, as they sit on more corporate boards than their counterparts on bankrupt boards. Further, independent board members of non-bankrupt boards own less stock in total and on average than do analogous board members of bankrupt firms. This same pattern holds for all outside directors; that is, both independent directors and gray directors. Finally, a higher percentage of non-bankrupt firms' boards are staggered, ensuring predictable turnover of board members which may lead to a longer- term view of corporate policy. The remaining portion of the paper includes three sections. The first section discusses issues relating to board composition. These include questions about the impact on solvency of board size, director independence, and experience. Section two examines how board characteristics such as age, number of boards that directors serve on, and their stock ownership influence corporate solvency. Section three provides conclusions and suggestions about corporate governance to improve the health and solvency of corporations. 1.1. Literature review Most corporate governance literature focuses on healthy, growing firms (Daily, Dalton & Cannella, 2003). Agency theory is the prevailing theoretical foundation for much of the research predicting corporate failure or bankruptcy based on financial and corporate governance factors (Daily, et al., 2003). Most researchers find the simple notion Journal of Business Research 65 (2012) 1139–1143 ☆ The authors thank Olubunmi Faleye and Emery Trahan Northeastern University, and JBR reviewers and editors for reading and commenting on an early version of this article. ⁎ Corresponding author at: Northeastern University, Finance & Insurance Group, College of Business Administration, 413 Hayden Hall, 360 Huntington Avenue, Boston, MA 02115, USA. Tel./fax: +1 617 373 4740/8798. E-mail addresses: h.platt@neu.edu (H. Platt), m.platt@neu.edu (M. Platt). 1 College of Business Administration, 101 Hayden Hall, 360 Huntington Avenue, Boston, MA 02115, USA. Tel./fax: + 1 617 373 4647/2056. 0148-2963/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2011.08.003 Contents lists available at SciVerse ScienceDirect Journal of Business Research