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Co-opted Boards

Jeffrey L. Coles1; Naveen D. Daniel2; Lalitha Naveen3

1 University of Utah · 2 Drexel University · 3 Temple University

Review of Financial Studies 2014

We develop two measures of board composition to investigate whether directors appointed by the CEO have allegiance to the CEO and decrease their monitoring. Co-option is the fraction of the board comprised of directors appointed after the CEO assumed office. As Co-option increases, board monitoring decreases: turnover-performance sensitivity diminishes, pay increases (without commensurate increase in pay-performance sensitivity), and investment increases. Non-Co-opted Independence—the fraction of directors who are independent and were appointed before the CEO—has more explanatory power for monitoring effectiveness than the conventional measure of board independence. Our results suggest that not all independent directors are effective monitors.

DOI
10.1093/rfs/hhu011
Volume
27 (6)
Pages
1751-1796
Language
en
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