Lead Independent Directors: Good Governance or Window Dressing?

Abstract

We document the emergence of the lead independent director (LID) board role in a sample of U.S. firms in 1999-2015. We find that firms that adopt a LID board role are larger and have more independent boards, higher institutional investor holdings, and an NYSE listing. Firms with greater anticipated benefits from monitoring also adopt a LID role, e.g., firms with dual CEO-Chairman, with more takeover defense mechanisms, and with higher cash holdings. Using an event study methodology, we find that investors respond positively to the adoption of a LID board role. Lastly, using instrumental variables to address endogeneity in the LID board role, we find that firms with a LID are more likely to terminate poorly performing CEOs. Taken as a whole, these results suggest that the LID board role enhances firm value and improves the quality of corporate governance.

Keywords: Lead Independent Directors, Independent Directors, Board Structure, CEO-Chairman

JEL Classification: G32, G34