Between 1993 and 2000 at least 18 countries saw publication of guidelines that propose minimum representation of outside directors on corporate boards. The apparent premise underlying this movement is that boards with significant outside directors will make different and, perhaps, better decisions than boards dominated by inside directors. As the first-mover in this movement, the U.K. provides a laboratory for a “natural experiment” to examine this presumption empirically. We investigate one important board task - - the appointment of the CEO - - to determine whether boards are more likely to appoint an outside CEO after they have increased the representation of outside directors to comply with the exogenously imposed standards. We find that the (coerced) increase in outside directors leads to an increase in the likelihood of an outside CEO appointment. Additionally, announcement period stock returns indicate that investors appear to view appointments of outside CEOs as good news. Apparently, boards with more outside directors make different (and perhaps better) decisions.
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