Independent Executive Directors: How Distraction Affects Their Advisory and Monitoring Roles

53 Pages Posted: 5 Apr 2017 Last revised: 23 Feb 2019

Date Written: February 2019

Abstract

Active corporate executives are a popular source of independent directors. Although their knowledge, expertise, and network can bring value to firms on whose boards they sit, independent executive directors may be more likely to be distracted than other directors due to their outside executive roles. Using newly constructed data linking independent directors to their employers, we identify periods when employers’ poor performance may distract them from board service. We find that firms with distracted independent executive directors have lower performance and value, higher CEO compensation, reduced CEO turnover–performance sensitivity, lower earnings quality, and lower M&A performance. These adverse effects are mainly driven by distracted directors who sit on relevant committees, and are stronger for small boards.

JEL Classification: G34, G32, M12, M41

Suggested Citation

Stein, Luke C.D. and Zhao, Hong, Independent Executive Directors: How Distraction Affects Their Advisory and Monitoring Roles (February 2019). Available at SSRN: https://ssrn.com/abstract=2946579 or http://dx.doi.org/10.2139/ssrn.2946579

Luke C.D. Stein (Contact Author)

Babson College ( email )

Tomasso Hall
231 Forest Street
Babson Park, MA 02457-0310
United States
781-239-5223 (Phone)

HOME PAGE: http://lukestein.com

Hong Zhao

NEOMA Business School

59 Rue Pierre Taittinger
Reims, 51100
France

HOME PAGE: http://sites.google.com/site/hongzhaofinance/

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