The Independent Board Requirement and CEO Connectedness

59 Pages Posted: 11 Dec 2011  

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

University of Michigan - Stephen M. Ross School of Business; Tsinghua University, SEM

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2011

Abstract

When regulation forces a board to become more independent than endogenously determined, the CEO may counteract by strengthening connectedness with other key players governing the firm. We find the independent board regulation triggered an increase in the fraction of top-executives appointed (FTA) during the incumbent CEO’s tenure, with the newly appointed executives showing more pre-existing network ties to the CEO. The closer connectedness seems to weaken the regulatory effect. When the regulation is binding in FTA — i.e., firms have little room to increase FTA, CEO compensation becomes lower, CEO pay becomes more sensitive to performance, forced CEO turnover becomes more likely when performance suffers, and Tobin’s Q increases. When firms have sufficient room to increase FTA to counter the regulation, we find the opposite — higher CEO compensation, lower CEO pay-for-performance sensitivity, lower forced CEO turnover-performance sensitivity, and lower Q. For these firms, the regulation leads to CEO entrenchment in executive suites, weakening monitoring and lowering shareholder value.

Suggested Citation

Kim, E. Han and Lu, Yao, The Independent Board Requirement and CEO Connectedness (December 10, 2011). Available at SSRN: https://ssrn.com/abstract=1970591 or http://dx.doi.org/10.2139/ssrn.1970591

E. Han Kim (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Yao Lu

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan St. Rm R4323
Ann Arbor, MI 48109
United States
7347093843 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Tsinghua University, SEM ( email )

Wenlun Building 347#
Beijing, 100084
China
8610-62797399 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

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