Co-opted Boards

Abstract:     
We propose a new measure to capture the extent of co-option of the board by the CEO and relate that measure to corporate outcomes. Based on the notion that CEOs are at least implicitly involved in the selection of new directors, we define Co-option as the proportion of the board comprised of directors who joined the board after the CEO assumed office. The CEO is likely to favor directors who have similar views or directors who have social ties or some other basis for affinity with the CEO. We find that as Co-option increases board monitoring intensity decreases (CEO turnover-performance sensitivity diminishes, CEO pay level increases, but CEO wealth-performance sensitivity is unaffected). Higher Co-option increases investment in firm-specific human capital and increases firm risk. Finally, Tobin’s q increases in Co-option, particularly for firms with high human capital intensity. Our results are robust to using: a variety of controls, including board independence and size; fixed effects, IV, and other fixes for endogeneity including a natural experiment; and an alternative tenure-weighted measure of co-option. Additional results suggest that co-opted independent directors are not effective monitors. In contrast, the fraction of independent directors who are not co-opted is a more incisive measure of monitoring effectiveness than is board independence.

Number of Pages in PDF File: 68

Keywords: Corporate Governance, Board Co-Option, CEO Entrenchment, Board Composition

JEL Classification: G32, G34, K22

working papers series