Powerful Independent Directors
55 Pages Posted: 11 Jan 2014 Last revised: 20 Jan 2022
Date Written: March 4, 2021
Shareholder valuations are economically and statistically positively correlated with independent director power, gauged by a composite of social network power centrality measures. Powerful independent directors’ sudden deaths reduce shareholder value significantly; other independent directors’ deaths do not, consistent with powerful independent directors increasing firm valuations. Further tests associate more powerful independent directors with less value-destroying M&A, less free cash flow retention, more CEO accountability, and less earnings management. We interpret these findings as more powerful independent directors better detecting and countering CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.
Keywords: CORPORATE GOVERNANCE, DIRECTOR INDEPENDENCE, MILGRAM EXPERIMENT, POWER CENTRALITY, BEHAVIORAL FINANCE
JEL Classification: G34, G38, G02, D85, K22, L2, M12, Z13
Suggested Citation: Suggested Citation