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Executive Suite Independence: Is It Related to Board Independence?

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  • E. Han Kim

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Yao Lu

    (School of Economics and Management, Tsinghua University, Beijing 100084, China)

Abstract

The executive suite and the board are closely bound to each other through their fiduciary responsibility to the same shareholders. With chief executive officers’ (CEOs) prominent role in both governing bodies, their independence from CEOs’ self-serving behavior might be related to each other. We explore the interdependence using an external shock increasing board independence. The shock weakens executive suite independence by increasing CEO connectedness within executive suites through appointments and preexisting social ties. We also uncover interesting dynamics between the two governing bodies: (1) the spillover does not occur when treated firms increase CEO-independent director social ties, suggesting CEO-executive connections and CEO-director connections are substitutes; (2) consistent with theories of board independence, when an information environment calls for dependent boards, increasing CEO-executive connections, which helps negate the shock effect on the board, has positive marginal effects on firm performance. Our findings are not driven by the Sarbanes–Oxley Act and are robust to a battery of other tests. We conclude that independence in the board and executive suite are inversely related; inferring the overall independence from board independence alone can be highly misleading.

Suggested Citation

  • E. Han Kim & Yao Lu, 2018. "Executive Suite Independence: Is It Related to Board Independence?," Management Science, INFORMS, vol. 64(3), pages 1015-1033, March.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:3:p:1015-1033
    DOI: 10.1287/mnsc.2016.2603
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