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

Abstract

We explore the effect of co-opted directors on 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