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

ABSTRACT

We 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.

KEYWORDS:

• Co-opted directors
• co-option
• CEO power
• powerful CEOs
• corporate governance

JEL CLASSIFICATION:

• G30
• G34

Acknowledgements

We sincerely thank Lalitha Naveen at Temple University for providing the data on co-opted directors. Part of this research was carried out while Pornsit Jiraporn served as Visiting Researcher at the National Institute of Development Administration (NIDA) in Bangkok, Thailand.

Disclosure statement

No potential conflict of interest was reported by the authors.