What Matters More in Board Independence? Form or Substance?

50 Pages Posted: 13 Oct 2020 Last revised: 27 Sep 2021

See all articles by Arun Upadhyay

Arun Upadhyay

Florida International University

Özde Öztekin

Florida International University (FIU)

Date Written: August 20, 2020

Abstract

Prior studies show uncertain associations between board independence and firm performance. We propose a novel measure of board independence and argue that influential CEO-directors (ICDs), those with higher compensation than the appointing firm’s CEO, are more independent of appointing firm’s top management. Controlling for conventional measures of board independence, we show that ICDs are effective monitors who help appointing firms by improving CEO pay-performance sensitivities. Through improved managerial incentives, ICDs have a significantly positive impact on long-term firm performance. In contrast, uninfluential CEO-directors are ineffective monitors whom presence on the board is either inconsequential or even detrimental to the firm.

Keywords: Board independence, influential CEO-directors, firm value, CEO compensation, CEO turnover

JEL Classification: G30, G34, J33, M40

Suggested Citation

Upadhyay, Arun and Öztekin, Özde, What Matters More in Board Independence? Form or Substance? (August 20, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3678355 or http://dx.doi.org/10.2139/ssrn.3678355

Arun Upadhyay

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Özde Öztekin (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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