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The costs of a (nearly) fully independent board

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  • Faleye, Olubunmi

Abstract

A significant and growing percentage of U.S. firms now have boards where the CEO is the only employee director (hereinafter fully independent boards). This paper studies whether and how this practice impacts board effectiveness. I find that fully independent boards are associated with a significant reduction in firm performance. Further tests suggest two channels for this effect. First, full independence deprives the board of spontaneous and regular access to the firm-specific information of other senior executives. Second, full independence eliminates the first-hand exposure of future CEOs to board-level discussions of strategy, which steepens the learning curve for eventually promoted candidates.

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  • Faleye, Olubunmi, 2015. "The costs of a (nearly) fully independent board," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 49-62.
    • Handle: RePEc:eee:empfin:v:32:y:2015:i:c:p:49-62
    DOI: 10.1016/j.jempfin.2014.12.001
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    5. Majid Jamal Khan & Faiza Saleem & Shahab Ud Din & Muhammad Yar Khan, 2024. "Nexus between boardroom independence and firm financial performance: evidence from South Asian emerging market," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-10, December.
    6. Ng, Anthony C. & Rezaee, Zabihollah, 2015. "Business sustainability performance and cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 128-149.
    7. Xiaoyan Cheng & David Smith & Paul Tanyi, 2018. "An analysis of proxy statement leadership structure justification disclosures," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 1071-1106, November.
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    9. Pamela Brandes & Ravi Dharwadkar & Jonathan F. Ross & Linna Shi, 2022. "Time is of the Essence!: Retired Independent Directors’ Contributions to Board Effectiveness," Journal of Business Ethics, Springer, vol. 179(3), pages 767-793, September.
    10. Sun, Liang, 2021. "Does the location of directors' additional positions matter? A new dimension of board structure," Global Finance Journal, Elsevier, vol. 49(C).
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    More about this item

    Keywords

    Board independence; Employee directors; CEO-only boards; Firm performance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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