Governance in the Executive Suite and Board Independence

42 Pages Posted: 9 Jan 2014 Last revised: 29 May 2015

See all articles by E. Han Kim

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

Tsinghua University - School of Economics & Management

Date Written: January 6, 2014

Abstract

The overall independence of a firm’s governance system depends not only on the independence of its board of directors but also on CEO influence over the other top executives. We find that board independence and independence from CEO influence in the executive suite are inversely related. Difference-in-difference estimates using a regulatory shock reveal that strengthening board independence weakens executive suite independence, which is proxied by (the inverse of) the fraction of top executives appointed by a current CEO. We also find that the greater the increase in the fraction of the current CEO’s appointees in the executive suite, the lesser the improvement in monitoring CEO compensation and the lower the shareholder value enhancement in the aftermath of the regulation. These findings imply that one cannot infer overall independence based on board independence alone and that strengthening a specific governance mechanism by regulation can have undesirable spillover effects to a seemingly unrelated governing body.

Keywords: Corporate Governance, Monitoring CEOs, Executive Suite Independence, Unintended Consequences of Regulation

JEL Classification: G34, G38, K22

Suggested Citation

Kim, E. Han and Lu, Yao, Governance in the Executive Suite and Board Independence (January 6, 2014). Ross School of Business Paper No. 1222. Available at SSRN: https://ssrn.com/abstract=2375817 or http://dx.doi.org/10.2139/ssrn.2375817

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

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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