What Matters More in Board Independence? Form or Substance?
50 Pages Posted: 13 Oct 2020 Last revised: 27 Sep 2021
Date Written: August 20, 2020
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: Suggested Citation