Board Co-option and the Defined-Benefit Pension Policy

Abstract

A board’s ability and disposition to monitor management, estimated as Board Co-option, affects the firm’s pension policy. I implement a novel board monitoring measure as the percentage of directors appointed after the CEO assumes office, Board Co-option, and find that as Board Co-option increases, board monitoring decreases, and risk shifting through pension plan underfunding and pension assets allocation towards risky securities intensifies. Within independent board of directors, my results indicate that only non-coopted independent board members are effective monitors of the corporate pension policies. I identify these effects through the firm-fixed effect model and difference-in-differences estimations. Overall, my findings suggest that not all directors are effective monitors in the context of corporate pension policies. It seems only non-co-opted independent directors are mindful of their obligations toward pension plan beneficiaries.