Director co-option and monitoring efficiency. (c2017)

Abstract

This paper examines the impact of director co-option on the relationship between board structures and monitoring efficiency. We show that co-opted independent directors deflate the turnover-performance sensitivity, amplify CEO pay, and increase the likelihood of CEO duality. While non-co-opted independent directors enhance internal monitoring, co-opted independent board members are the worst monitors. We generally do not observe a substantial difference in the monitoring functionality of co-opted and non-co-opted inside board members. Our findings suggest that co-opted independent directors are the main driving factor behind the converse association between co-opted boards and internal monitoring. In addition, we suggest that independent directors appointed after the CEO resumes office are particularly costly to firms since they promote a non-efficient board monitoring environment.