Should Independent Directors Have Term Limits? The Role of Experience in Corporate Governance

Abstract

Using a sample of S&P 1500 firms from 1998-2013, we examine the role of independent directors with extended tenures in board-level governance, monitoring decisions, and advising outcomes. We document a higher level of commitment among these directors as they are more likely to attend board meetings and also become members of board committees. Firms with a higher proportion of directors with extended tenures have lower CEO pay, higher CEO turnover-performance sensitivity, and a smaller likelihood of intentionally misreporting earnings. These firms also restrict the expansion of resources under the CEO’s control as they are less likely to make acquisitions, while the acquisitions that are made are of higher quality. Efforts to impose term limits may, therefore, be misguided.

Keywords: Board of directors, Director tenure, CEO Compensation, Mergers and Acqusitions, CEO Turnover, Dividend Payout Policy, Director Turnover

JEL Classification: G34