Corporate Governance When Founders are Directors
Journal of Financial Economics, Forthcoming
51 Pages Posted: 23 Aug 2010 Last revised: 9 Jan 2011
Date Written: December 23, 2010
We examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Overall, the evidence suggests that boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms.
Keywords: Founder, CEO compensation, CEO turnover, family firms, corporate governance, board of directors
JEL Classification: G3, G34
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