Abstract
We examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Overall, the evidence suggests that boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms.
Highlights
We examine corporate governance outcomes when the founder of a company serves as a director on its board by studying three corporate decisions - CEO compensation, CEO turnover, and mergers and acquisitions (M&A)
To understand some channels that might drive the positive association between founder-directors and firm value, we examine CEO compensation, CEO turnover, and M&A decisions of founder-director firms to see whether and how these decisions differ compared to non-founder firms
Compensation, CEO turnover, and mergers and acquisitions when the founder of a company serves as a director on its board with a non-founder successor as the CEO
Summary
We examine corporate governance outcomes when the founder of a company serves as a director on its board by studying three corporate decisions - CEO compensation, CEO turnover, and mergers and acquisitions (M&A). The higher PPS, lower excess compensation, and higher turnover-performance sensitivity are uniquely associated with founder-directors They are not observed when other directors with firm specific experience (e.g., prior CEOs) serve on the board even when these prior CEOs have high levels of equity ownership in the company. This result suggests a need to rethink the founder-CEO valuation premium documented in prior literature because a more comprehensive set of control variables explains away the positive relation between founder-CEOs and firm valuation. To provide a benchmark for the economic significance of the results, we find that the average PPS for CEOs of non-founder firms in our sample is 5.20, i.e., the CEOs annual total compensation increases (decreases) by about $5.20 for a $1,000 increase (decrease) in the market value of the firm. The impact of the founder-director is incremental to the impact of equity holding by the board of directors and the presence of a block holder on the board.
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