Abstract
We provide evidence that the presence of technical expertise in a firm’s governance structure allows the firm to reduce reliance on contractual incentives to control the potential agency problem. Specifically, we find that firms with a board finance committee, or a Chief Executive Officer (CEO) who has a financial background, tend to use lower levels of incentive-based compensation for their Chief Financial Officers (CFOs). Our findings suggest financial experts provide stronger oversight and/or direction with regard to the firm’s financial policies and strategies, thereby allowing firms to reduce reliance on incentive compensation. Our study provides insight into the role of technical expertise and board committees in firm governance, and into the benefits of common functional expertise within top management teams.
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