Why Do Firms Appoint CEOs as Outside Directors?
Charles A. Dice Center for Research in Financial Economics Working Paper No. 2008-10
59 Pages Posted: 17 Jul 2008
Date Written: July 2008
We examine the determinants of appointments of outside CEOs to boards and how these appointments impact the appointing companies. We find that CEOs are most likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance mechanisms to their own firms. It is also more likely that CEOs join firms with low insider ownership and firms with boards that already have other CEO directors. Except for the case of board interlocks, there is no evidence supporting the view that CEO directors have any impact on the appointing firm during their tenure, either positively or negatively. Appointments of CEO directors do not have a significant impact on the appointing firm's operating performance, its decision-making, the compensation of its CEO, or on the monitoring of management by the board. However, operating performance drops significantly for CEO director appointments when the CEO of the appointing firm already sits on the board of the appointee's firm.
Keywords: Director independence, new director appointment, director influence, quiet life
JEL Classification: G30, G34
Suggested Citation: Suggested Citation