Director Networks

Abstract:     
This paper investigates the role of director networks in firms' decision-making. Using data on 25,621 unique directors who served on the boards of S&P 1,500 firms between the years 1996-2004, we map the entire network of directors and generate measures that account for each director's importance in the network. We find strong evidence that in firms whose directors are more central in the network, CEO pay is higher, CEO pay is less sensitive to firm performance, CEO turnover is less sensitive to firm performance, and forced CEO turnover is less likely to occur. Moreover, well-connected directors are more likely to be awarded more directorships in the future. These results continue to hold when we look only at the connectedness level of independent directors. Our results support what we refer to as the reputation hypothesis - when directors are not connected they build their reputation by providing superior monitoring but when they are highly connected they provide softer monitoring of the CEO as they feel that their status in the network is secure.

Keywords: Executive compensation, Networks, Directors, Corporate Governance

JEL Classifications: G3, G34, K22, L14

Working Paper Series