The Costs of a (Nearly) Fully Independent Board

44 Pages Posted: 27 Aug 2014  

Olubunmi Faleye

Northeastern University - Finance Group

Date Written: August 26, 2014

Abstract

A significant and growing percentage of U.S. firms now have boards where the CEO is the only employee director (i.e., fully independent boards). This paper studies whether and how this practice impacts board effectiveness. I find that fully independent boards are associated with a significant reduction in firm performance. Further tests suggest two channels for this effect. First, full independence deprives the board of spontaneous and regular access to the firm-specific information of other senior executives. Second, full independence eliminates the first-hand exposure of future CEOs to board-level discussions of strategy, which steepens the learning curve for eventually promoted candidates.

Keywords: CEO-only boards, Board independence, Employee directors

JEL Classification: G34

Suggested Citation

Faleye, Olubunmi, The Costs of a (Nearly) Fully Independent Board (August 26, 2014). Available at SSRN: https://ssrn.com/abstract=2487230 or http://dx.doi.org/10.2139/ssrn.2487230

Olubunmi Faleye (Contact Author)

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

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