Executive Suite Independence: Is It Related to Board Independence?

Forthcoming in Management Science

Ross School of Business Paper No. 1246

46 Pages Posted: 20 Jul 2014 Last revised: 22 Jul 2016

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: July 18, 2016

Abstract

The executive suite and the board are closely bound to each other through their fiduciary responsibility to same shareholders. With CEOs’ prominent role in both governing bodies, their independence from CEOs’ self-serving behavior might be related to each other. We explore the interdependence using an external shock increasing board independence. The shock weakens executive suite independence by increasing CEO connectedness within executive suites through appointments and pre-existing social ties. We also uncover interesting dynamics between the two governing bodies: (1) the spillover does not occur when treated firms increase CEO-independent director social ties, suggesting CEO-executive connections and CEO-director connections are substitutes; (2) consistent with theories of board independence, when information environment calls for dependent boards, increasing CEO-executive connections, which helps negate the shock effect on the board, has positive marginal effects on firm performance. Our findings are not driven by the Sarbanes-Oxley Act and are robust to a battery of other tests. We conclude that independence in the board and executive suite are inversely related; inferring the overall independence from board independence alone can be highly misleading.

Keywords: The C-Suite, CEO Connectedness in Executive Suites, CEO-Independent Director Social Ties, The Independent Board Requirement, Corporate Governance, Information Environment.

JEL Classification: G34, G38, K22

Suggested Citation

Kim, E. Han and Lu, Yao, Executive Suite Independence: Is It Related to Board Independence? (July 18, 2016). Forthcoming in Management Science; Ross School of Business Paper No. 1246. Available at SSRN: https://ssrn.com/abstract=2468103 or http://dx.doi.org/10.2139/ssrn.2468103

E. Han Kim

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 (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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