Board of Director Monitoring, CEO Tenure, and Board Independence

Abstract

In response to recent high-profile governance failures, policy makers have proposed and implemented regulations designed to improve governance. Many of these changes target the board of directors their relationships with CEOs. At the same time, researchers have increased their focus on board-of-director effectiveness within an equilibrium framework. A growing body of theoretical and empirical literature suggests that observed governance structures likely evolve over time within a bargaining framework. If so, mandated changes to board structures may not have the desired effect. To shed additional light on these issues, we analyze the relations between proxies for CEO power (CEO tenure) and board-of-director monitoring (the number of board meetings in a given year). Examining 496 firms and 3,420 firm-years from 1995-2002, we find that (i) board monitoring declines with CEO tenure, the percentage of insiders on the board, and board size and (ii) board monitoring increases with the use of equity incentives for directors. The number of board meetings increases after poor performance, but the rate of increase declines for CEOs with more tenure. Operating performance improves following a significant increase in the number of board meetings, but only for those firms with more experienced CEOs. Board composition does not influence operating improvements following high board activity, and we obtain mixed results for board size. These results suggest that the overriding characteristic that determines improvement following an increase in board activity is CEO tenure and not board characteristics. CEOs likely attain long tenures because they possess more talent. Thus, our evidence supports a bargaining equilibrium in which the CEO's power depends on his or her ability and performance.