Director retention does not necessarily facilitate post-acquisition firm performance, study shows

Author: Shannon Roddel


Firm acquisition is a complicated process in which acquiring companies often try to smooth the transition by retaining at least one board-level director from the target company. New research from the University of Notre Dame calls into question the wisdom of this move.

Often, poor post-acquisition outcomes are attributed to the idea that the employees from the target firm never quite feel at home with the new employer, or that the acquirer doesn’t fully understand the target and has a hard time realizing synergies. It therefore stands to reason that retaining a director from the target firm would encourage stronger post-acquisition performance. Primarily, it signals to the employees that their previous leadership is valued and that a director from the target firm might have some unique insight to help smooth the transition.

However, the opposite is true, according to “Retaining problems or solutions? The post-acquisition performance implications of director retention,” forthcoming in Strategic Management Journal from John Busenbark, assistant professor of management at Notre Dame’s Mendoza College of Business.

The team — including Robert Campbell from the University of Nebraska-Lincoln, Scott Graffin from the University of Georgia and Steven Boivie from Texas A&M University — examined how well firms fare in the period after they acquire a target firm, by empirically studying a factor that might impact post-acquisition value creation for the acquirer’s shareholders. Specifically, they looked at director retention, which occurs when the acquiring firm integrates at least one director from the target company onto its own board.

“Across several time frames of post-acquisition performance, statistical techniques and different samples of acquisitions, we consistently find that director retention tends to undermine post-acquisition performance compared to firms that did not retain a director,” said Busenbark, who specializes in corporate governance and research methods. 

The team empirically analyzed more than 550 acquisitions that occurred between 2004 and 2014 and in which the acquiring firm assumed a fully controlled interest in the target firm. They then investigated the composition of the boards of directors both prior to and after the acquisitions to determine whether any directors from the target were retained by the acquiring firm’s board.

They analyzed the relationships between retaining a director and long-term investor value appropriation — a variable that captures value to shareholders — for one, two, three and five years following the acquisition.

“In supplementary analyses, we also offer a preliminary look at factors which might enhance or suppress this relationship, which we hope opens the door for future research to gain a more comprehensive understanding of why this negative relationship exists,” Busenbark said.

The research offers at least two crucial contributions to leadership at the acquiring organizations. First, they encourage top executives to consider why they might want to retain a director from the target. In extensive supplementary analyses, they found that acquiring managers are typically hesitant to retain a director, but that they might do so either because it’s part of the acquisition bargaining process or because it might ease the machinations inherent in the process. In both cases, the research suggests managers might want to approach director retention with trepidation.

Second, the study initiates a broader exploration into why director retention might undermine post-acquisition performance.

“Although this component is exploratory in our study,” Busenbark said, “we tentatively find that director retention might say more about the relatively stronger power of the target firm than the desires of the acquirer. Acquiring managers might not think twice about onboarding a new director, though, so we are hopeful our research encourages them to view requests from the target like this through a more critical lens.”


Contact: John Busenbark, 574-631-1735,