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Director tenure and the compensation of bank CEOs

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Author Info

  • John Byrd
  • Elizabeth S. Cooperman
  • Glenn A. Wolfe
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    Abstract

    Purpose – The purpose of this paper is to examine how board tenure affects the compensation of CEOs using a sample of 93 publicly traded US banks. Design/methodology/approach – The paper proposes a CEO allegiance hypothesis whereby long-term relationships with executives and other directors will shift allegiance from shareholders to executives vs a more traditional expertise hypothesis that predicts superior monitoring of executives by directors with longer tenure. A generalized least squares regression methodology is used to examine the relationship between CEO compensation and outside director tenure. Findings – For the full sample, board tenure variables were found to be insignificant. However, when examining a subsample of firms with CEO tenure of greater than six years or more, the relationship between CEO pay and the median tenure of outside directors becomes positive, supporting a CEO allegiance hypothesis. Research limitations/implications – On a caveat, since this study relies on data for large bank holding companies over a short period of time, further research is needed to determine if the results carry over to a broader sample of firms and across time. Practical implications – The results suggest that the independence of outside directors may be compromised when they serve for longer tenure periods together with the same CEO; an important consideration for better corporate governance. Originality/value – The study provides a unique examination of outside director independence from the perspective of board tenure and the long-term relationships with executives and other directors that may result in allegiance shifts away from shareholders and towards managers.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 2 (February)
    Pages: 86-102

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:2:p:86-102

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    Related research

    Keywords: Banking; Chief executives; Corporate governance; Regulation; Remuneration; United States of America;

    References

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    1. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
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    Cited by:
    1. Elizabeth W. Cooper, 2011. "Determinants of off-balance sheet usage in private banks," Studies in Economics and Finance, Emerald Group Publishing, vol. 28(4), pages 248-259, October.

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