Governance in Executive Suites

Abstract

This paper investigates how personal connections influencing governance in executive suites are impacted by other governance mechanisms. We use the independent board requirement as an exogenous shock reducing CEO influence in the boardroom. CEOs of the treated firms recoup the loss of influence by increasing their influence in executive suites: The executive suites are filled with more of current CEOs’ appointees with pre-existing social connections to the CEOs, leading to closer CEO connectedness with other top executives. The closer connectedness seems to diminish the intended benefits of the regulation. The improvement in the effectiveness of monitoring CEOs and shareholder value are inversely related to the capacity to increase CEO connectedness. These findings highlight the important role CEO connectedness in executive suites plays in determining the overall governance at the firm level. They also demonstrate strengthening a specific governance mechanism can have spillover effects to a seemingly unrelated governing body.

Keywords: Corporate Governance, Social Connections, Monitoring CEOs, Unintended Consequences of Regulation

JEL Classification: G34, G38, K22