The costs of a (nearly) fully independent board |
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| Institution: | 1. International Monetary Fund, United States;2. School of Economics and Finance, Queensland University of Technology, Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Australia;1. School of Business and Economics, Loughborough University, Sir Richard Morris Building, Leicestershire LE11 3TU, UK;2. Department of Economics, University of Bath, Claverton Down, Bath BA2 7AY, UK;3. RSJ Algorithmic Trading, Na Florenci 2116/15, 110 00 Prague 1, Czech Republic;4. Economic Research Department, Czech National Bank, Na Příkopě 28, 115 03 Prague 1, Czech Republic;1. CitiGroup Global Markets Prime Finance Risk, London, UK;2. International College of Economics and Finance, NRU — Higher School of Economics, Moscow, Russia |
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| 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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