Does the Decision to Retain Retiring Executives on the Board of Directors Help to Control Agency Problems in American and Japanese Firms?

Prospects for promotion provide incentives to lower-level managers in America and Japan. Promotion incentives, however, do not exist for top managers who are at the apex of their firms’ hierarchies. One little explored mechanism that might provide promotion-like incentives to top managers is the prospect of being retained on the board of directors after retirement (e.g., as chairman of the board). Incentives only exist if the retention decision is based on the top manager’s performance during active employment. This paper summarises past and present research on the board retention/performance relation for retiring managers of Japanese and American firms. The evidence suggests a positive and statistically significant relation between retention and performance for retiring managers in both countries. This study extends the existing research by providing new evidence on the importance of relativeperformance evaluation in the retention decision for US firms. We find that absolute performance is more important than performance relative to the market or industry in explaining the retention decision.