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

Pradit Withisuphakorn and Pornsit Jiraporn

Applied Economics Letters, 2017, vol. 24, issue 6, 381-386

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.

Date: 2017
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DOI: 10.1080/13504851.2016.1194960

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