Co-opted Directors Research Articles

Does a co‐opted director affect a firm's financial distress risk?

AbstractThis study examines the relationship between co‐opted directors (CODIR), measured as the fraction of directors appointed after the Chief Executive Officer (CEO) assumes office to board size, and firms' financial distress risk (FFDR). Understanding the relationship between CODIR and FFDR is imperative due to the significant impact of high risk‐taking on financial crises and the heightened expectations placed on board members for risk oversight. Despite growing research on corporate governance and FFDR, little attention has been paid to the role of CODIRs, presenting a significant gap in the literature. Using a US sample from 1996 to 2019, covering 13,486 firm‐year observations, we document that CODIR reduces FFDR, supporting the hypothesis that co‐opted directors have a lower financial distress risk‐taking propensity than their non‐co‐opted counterparts. We also find that a critical mass of at least three CODIRs and independent CODIRs reduces FFDR. Our results also document that CEO power in the form of CEO duality and CEO tenure, external monitoring in the form of the number of analysts following the firm, competition, and takeover susceptibility do not drive our main conclusions for co‐option and FFDR. Finally, the results show that CODIR reduces FFDR through liquidity channels. The findings remain robust to various definitions of co‐option and distress risk, and are consistent in both difference‐in‐differences analysis and propensity score matching.

Co-opted directors and greenhouse gas emissions: Does ESG compensation matter?

Greenhouse gas (GHG) emissions pose a serious threat to human habitats because they are the cause of the increasing number of ecological problems and adverse weather events blighting our planet. Considering the rising trend in environmental concerns and the critical role of the board of directors in strategic corporate decisions, this paper examines the impact of co-opted boards on GHG emissions and the moderating effect of environmental, social, and governance (ESG) performance-based compensation on the relationship. Using a sample of US firms from 2002 to 2018, the results show a significant negative relationship between co-opted directors and total GHG emissions, i.e., an increase of one standard deviation in the proportion of co-opted directors reduces GHG emissions by 0.27. Additional analysis reports that an increase of one standard deviation in co-opted boards reduces direct and indirect GHG emissions by 0.37 and 1.3, respectively. This implies that firms with co-opted boards ensure the sustainability of their own operations while also making their partner firms environmentally sustainable. Further analysis documents that the influence of co-opted directors on GHG emissions is more pronounced for firms that tie executives’ compensation with ESG performance. Our study provides policy implications for regulators against a background of public outcry and stakeholder pressure on firms to mitigate environmental damage and implement environmentally sustainable business practices.

Director co-option and future market share growth

This paper examines the effect of director co-option on product market outcomes. We find that future market share growth declines as executives co-opt more of the board. Co-opted directors also inhibit the product market benefits from cash reserves. These findings hold in a variety of robustness tests, sustaining the view that director co-option reduces product market performance. Our results further show that co-option leads to lower market share gains among firms whose industry rivals intensely change products and have higher borrowing capacity. Compared to their competitors, firms with more co-opted directors also allocate less internal resources to potential product differentiation strategies, but award executives more cash-based pay. Overall, our findings support the agency theory supposition that firms with co-opted boards lose market share ex-post.

Co-Opted Directors and Corporate Social Responsibility

Co-Opted Directors and Corporate Social Responsibility

Co-opted Directors and Board Effectiveness: The Impact of Director Gender

Independent directors are viewed as critical to effective corporate governance. However Coles et al. (2014) introduce the concept of a “co-opted” director, one appointed after the firm’s CEO took office. They argue that, although technically independent, co-opted directors’ interests are more aligned with the CEO who was instrumental in their selection than with shareholders. However, research has shown that woman directors are more conscientious about their board duties than are men. This study investigates whether director gender mitigates the impact of co-option on board effectiveness, as measured by the frequency of board meetings. The results indicate that an increase in the proportion of co-opted male directors on a board is associated with a less effective board. However, no such relation is found for co-opted female directors. Despite incentives to act otherwise, boards with higher percentages of co-opted women directors appear to continue to fulfill their duties to shareholders.

Do analysts’ recommendations reflect co-opted boards?

PurposeThis study aims to examine whether co-opted directors influence analysts’ recommendations. As information intermediaries, financial analysts should incorporate the quality of corporate governance into their valuation because well-governed firms are associated with lower agency costs and better performance. Co-opted directors are those appointed after the incumbent chief executive officer assumes office. The authors investigate whether board co-option has an effect on analyst recommendations.Design/methodology/approachThe present study uses univariate analysis, multi-variate regression analysis and conduct a natural experiment using the Sarbanes-Oxley as an exogenous shock.FindingsThe results show that firms with fewer co-opted directors tend to receive more favorable recommendations, suggesting that analysts favor firms with strong corporate governance. The results hold even after controlling for various firm characteristics, including the traditional measures of board quality, i.e. board size and independent directors.Originality/valueThe paper is the first of its kind and offers evidence on the effect of co-opted directors on analyst recommendations. The results contribute to the literature both in corporate governance and in financial intermediaries, where analysts play a crucial role in providing information to the various participants in financial markets.

Do Co-Opted Directors Influence Corporate Risk-Taking and Credit Ratings?

Motivated by agency theory, we explore the effect of co-opted directors, i.e. directors appointed after the incumbent CEO assumes office, on corporate risk taking. Our results show that a higher proportion of co-opted directors on the board leads to significantly higher corporate risk-taking, as reflected by the substantially higher volatility in stock returns and a higher standard deviation of Tobin’ q. The evidence is consistent with the notion that co-opted directors represent a weakened governance mechanism that allows managers to take more risk. Finally, we show that co-opted directors lead to significantly lower credit ratings.

Do Analysts’ Recommendations Reflect Co-Opted Boards?

Purpose: This study examines whether co-opted directors influence analysts’ recommendations. As information intermediaries, financial analysts should incorporate the quality of corporate governance into their valuation because well-governed firms are associated with lower agency costs and better performance. Co-opted directors are those appointed after the incumbent CEO assumes office. Design/methodology/approach: The present study uses univariate analysis, multi-variate regression analysis, as well as conduct a natural experiment using the Sarbanes-Oxley as an exogenous shock. Findings: The results show that firms with fewer co-opted directors tend to receive more favorable recommendations, suggesting that analysts favor firms with strong corporate governance. The results hold even after controlling for various firm characteristics, including the traditional measures of board quality, i.e. board size and independent directors. Originality: The paper is the first of its kind and offers evidence on the effect of co-opted directors on analyst recommendations. The results contribute to the literature both in corporate governance and in financial intermediaries, where analysts play a crucial role in providing information to the various participants in financial markets.

The effect of co-opted directors on firm risk during a stressful time: Evidence from the financial crisis

Co-opted directors are those appointed after the incumbent CEO assumes office. Prior research shows that co-opted directors affect the quality of board monitoring. We explore how co-opted directors influence firm risk during a stressful time, focusing on the financial crisis of 2008. Firms with more co-opted directors experience significantly lower firm risk during the crisis. The results hold for total risk, idiosyncratic risk, and systematic risk. This corroborates the notion that, managers are inherently risk-averse, particularly so during the crisis. Co-opted directors allow managers to adopt corporate policies that reflect their own risk preferences, resulting in lower firm risk.

Co-opted directors, covenant intensity, and covenant violations

This study investigates how the level of board co-option might affect a borrowing firm's ex ante covenant intensity and ex post covenant violations. As the fraction of co-opted directors (those who joined the board after the CEO assumed office) increases, creditors include more covenant restrictions in their loan contracts, indicating that more co-opted boards are considered as weaker monitors. The results remain robust to various approaches accounting for endogeneity, and are not driven by alternative explanations such as CEO tenure, director inexperience, or CEO's involvement in the nominating committee. Ex post tests reveal that firms with more co-opted boards are more likely to violate loan covenants after controlling for covenant intensity. Non-co-opted independent directors appear to be the most effective monitors in mitigating covenant violations among revolving loans and loans to unrated borrowers.

Co-opted directors, gender diversity, and crash risk: evidence from China

This study examines how the composition of the board of directors at Chinese firms affects crash risk. The results indicate that co-opted directors (i.e., directors appointed after the CEO assumed office) have a positive and significant effect on crash risk; the positive relation between board directors and crash risk is primarily driven by co-opted male directors, implying a gender difference on crash risk. Non-co-opted independent directors mitigate crash risk, but the negative relation between gender and crash risk is much stronger for female directors than for male directors. The results indicate that co-option/non-co-opted independence along with gender diversity on the board plays an important role in shaping crash risk behaviors. The director-crash risk linkage disappears at state-owned enterprises, suggesting that ownership structure affects board behaviors and board members play the role of rubber-stamp. Finally, the relation between gender and crash risk is more pronounced at crash-risk prone firms with high earnings management and high financial leverage.

Do Co-Opted Directors Influence Dividend Policy?

We explore how co-opted directors affect dividend policy. Co-opted directors are those appointed after the incumbent CEO assumes office. Our results show that co-opted directors lead to a weaker propensity to pay dividends and, for dividend-paying firms, significantly lower dividend payouts. We also show that board co-option has more explanatory power for dividend policy than does the traditional measure of board effectiveness, that is, board independence. Exploiting the passage of the Sarbanes-Oxley Act as a natural experiment, we show that the effect of board co-option on dividend policy is more likely causal, rather than merely an association.

Co-opted directors and powerful CEOs: evidence from the CEO pay slice (CPS)

ABSTRACTWe explore the effect of co-opted directors on chief executive officer (CEO) power. Co-opted directors are those appointed after the incumbent CEO assumes office and are found by prior research to represent a weakened governance mechanism. Our evidence reveals that co-opted directors lead to less powerful CEOs, consistent with the substitution effect. Because co-opted directors impose less stringent oversight, the CEO is able to exercise a great deal of latitude in running the firm. Therefore, it is less necessary for the CEO to command so much power where more directors are co-opted, hence leading to less powerful CEOs. In other words, co-opted directors substitute for strong CEO power. Crucially, we find that board co-option exhibits much more explanatory power than does board independence, which has been the primary measure of board effectiveness in the literature.

Co-Opted Directors and Powerful CEOs: Evidence from the CEO Pay Slice (CPS)

Co-Opted Directors and Powerful CEOs: Evidence from the CEO Pay Slice (CPS)

Do co-opted directors mitigate managerial myopia? Evidence from R&D investments

We explore the effect of co-opted directors on R&D investments. Co-opted directors are those appointed after the incumbent CEO assumes office. Because a co-opted board represents a weakened governance mechanism that diminishes the probability of executive removal, managers are less likely to be removed and are more motivated to make long-term investments. Our evidence shows that board co-option leads to significantly higher R&D investments. To draw a causal inference, we execute a quasi-natural experiment using an exogenous regulatory shock from the Sarbanes-Oxley Act (SOX). Our results reveal that the effect of board co-option on R&D is more likely causal.

Do Co-Opted Directors Mitigate Managerial Myopia? Evidence from R&D Investments

We explore the effect of co-opted directors on R&D investments. Co-opted directors are those appointed after the incumbent CEO assumes office. Because a co-opted board represents a weakened governance mechanism that diminishes the probability of executive removal, managers are less likely to be removed and are more motivated to make long-term investments. Our evidence shows that board co-option leads to significantly higher R&D investments. To draw a causal inference, we execute a quasi-natural experiment using an exogenous regulatory shock from the Sarbanes-Oxley Act (SOX). Our results reveal that the effect of board co-option on R&D is more likely causal.