IDEAS home Printed from https://ideas.repec.org/a/bla/finrev/v61y2026i2p359-382.html

The Effects of Foreign Directors on CEO and Director Compensation

Author

Listed:
  • Madison Borrelli
  • Douglas Cumming
  • Melissa B. Frye
  • Ann Marie Whyte

Abstract

This study examines how the background of foreign directors (FDs) influences executive and director compensation. We find that civil law FDs are linked to increased CEO cash compensation while common law FDs are associated with higher equity‐based CEO pay, reflecting a stronger emphasis on shareholder alignment. These patterns are also evident when considering the economic freedoms and the cultural individualism of the directors’ country of origin. Specifically, boards with higher average institutional quality and individualism are linked to more equity‐based CEO compensation. In addition, FDs serving on compensation committees that originate from common law systems, economically free countries, and highly individualistic cultures are more likely to structure both CEO and director pay in ways that align with shareholder interests. Overall, our findings suggest that the institutional, legal, and cultural backgrounds of FDs play a key role in shaping CEO and director pay structures.

Suggested Citation

  • Madison Borrelli & Douglas Cumming & Melissa B. Frye & Ann Marie Whyte, 2026. "The Effects of Foreign Directors on CEO and Director Compensation," The Financial Review, Eastern Finance Association, vol. 61(2), pages 359-382, May.
    • Handle: RePEc:bla:finrev:v:61:y:2026:i:2:p:359-382
    DOI: 10.1111/fire.70023
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/fire.70023
    Download Restriction: no
    File URL: https://libkey.io/10.1111/fire.70023?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ghosh, Chinmoy & He, Fan & Zhou, Haoyong, 2021. "On the role of foreign directors: Evidence from cross-listed firms," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 177-202.
    2. Chen, Ruiyuan (Ryan) & Guedhami, Omrane & Yang, Yang & Zaynutdinova, Gulnara R., 2020. "Corporate governance and cash holdings: Evidence from worldwide board reforms," Journal of Corporate Finance, Elsevier, vol. 65(C).
    3. Masulis, Ronald W. & Wang, Cong & Xie, Fei, 2012. "Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 527-554.
    4. John M. Barrios & Pietro A. Bianchi & Helena Isidro & Dhananjay Nanda, 2022. "Boards of a Feather: Homophily in Foreign Director Appointments Around the World," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 60(4), pages 1293-1335, September.
    5. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
    6. Wen, Wen & Cui, Huijie & Ke, Yun, 2020. "Directors with foreign experience and corporate tax avoidance," Journal of Corporate Finance, Elsevier, vol. 62(C).
    7. Mathias Siems & Simon Deakin, 2010. "Comparative Law and Finance: Past, Present, and Future Research," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(1), pages 120-140, March.
    8. Prince, Nicholas R. & Bruce Prince, J. & Kabst, Rüediger, 2020. "National culture and incentives: Are incentive practices always good?," Journal of World Business, Elsevier, vol. 55(3).
    9. Griffin, Dale & Guedhami, Omrane & Li, Kai & Lu, Guangli, 2021. "National culture and the valueto implications of corporate environmental and social performance," Journal of Corporate Finance, Elsevier, vol. 71(C).
    10. Iliev, Peter & Roth, Lukas, 2018. "Learning from directors' foreign board experiences," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 1-19.
    11. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    12. Bryan, Stephen & Nash, Robert & Patel, Ajay, 2015. "The effect of cultural distance on contracting decisions: The case of executive compensation," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 180-195.
    13. Estélyi, Kristína Sághy & Nisar, Tahir M., 2016. "Diverse boards: Why do firms get foreign nationals on their boards?," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 174-192.
    14. Mao, Connie X. & Zhang, Chi, 2018. "Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(2), pages 867-898, April.
    15. Feng Cao & Jian Sun & Rongli Yuan, 2019. "Board directors with foreign experience and stock price crash risk: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 46(9-10), pages 1144-1170, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wunhong Su & Xingxing Hu & Liuzhen Zhang, 2023. "Association Between Directors With Foreign Experience and Firms’ Environmental Disclosure," SAGE Open, , vol. 13(4), pages 21582440231, December.
    2. Yu, Xinyu & Wang, Ping, 2025. "Directors with foreign experience and corporate cash holdings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 104(C).
    3. Badar Nadeem Ashraf & Ningyu Qian, 2021. "The Impact of Board Internationalization on Real Earnings Management: Evidence From China," SAGE Open, , vol. 11(3), pages 21582440211, July.
    4. El Moujahid, Oussama & Frijns, Bart & Ravid, S. Abraham & Sekerci, Naciye, 2025. "Foreign ownership and board cultural diversity," Journal of Corporate Finance, Elsevier, vol. 92(C).
    5. Abdelfattah, Tarek & Aboud, Ahmed, 2020. "Tax avoidance, corporate governance, and corporate social responsibility: The case of the Egyptian capital market," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 38(C).
    6. Liwei Shan & Albert Tsang & Xiaoxue Zhang, 2024. "Transporting Audit Quality Across Countries: Returnee CEOs and Audit Fees," Journal of Business Ethics, Springer, vol. 192(4), pages 845-874, July.
    7. Xiaofeng Quan & Yun Ke & Yuting Qian & Yao Zhang, 2023. "CEO Foreign Experience and Green Innovation: Evidence from China," Journal of Business Ethics, Springer, vol. 182(2), pages 535-557, January.
    8. Wang, Shaoyi, 2026. "National identity and foreign directors' access to private information," Journal of Corporate Finance, Elsevier, vol. 96(C).
    9. Kasiet M. Kambaralieva, 2025. "Foreign Directors in Russian Public Companies: Determinants of Presence and Impact on Performance," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 24(2), pages 622-653.
    10. Shu, Ao & Lian, Ziru & Jiu, Lili & Zhang, Wei & Chen, Fengwen, 2025. "The impact of US experience on financial reporting comparability between Chinese firms and their US industry peers," International Review of Financial Analysis, Elsevier, vol. 107(C).
    11. Muhammad Jameel Hussain & Tian Gaoliang & Khalil Hussain & Adeeb Alhebri & Fadoua Kouki, 2025. "Impact of female directors' foreign experience on green innovation: Evidence from China," Business Ethics, the Environment & Responsibility, John Wiley & Sons, Ltd., vol. 34(4), pages 1768-1786, October.
    12. Sisi Zheng & Shanyue Jin, 2023. "Can Enterprises in China Achieve Sustainable Development through Green Investment?," IJERPH, MDPI, vol. 20(3), pages 1-25, January.
    13. Belaounia, Samia & Tao, Ran & Zhao, Hong, 2024. "Director foreign experience: Geographic specificity and value implication," International Review of Financial Analysis, Elsevier, vol. 91(C).
    14. Muhammad Usman & Ernest Gyapong & Henry Agyei-Boapeah & Junming Yin, 2025. "Returnee directors and corporate fraud," Review of Accounting Studies, Springer, vol. 30(3), pages 2822-2867, September.
    15. Conyon, Martin J. & Haß, Lars Helge & Vergauwe, Skrålan & Zhang, Zhifang, 2019. "Foreign experience and CEO compensation," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 102-121.
    16. Liang, Shangkun & Niu, Yuhao & Xin, Fu & Jiang, Lixian, 2024. "CEO foreign experience and corporate financial investment," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 929-946.
    17. Shu-Fen Chuah & Char-Lee Lok & Chee-Wooi Hooy, 2025. "Brain-Gain Directors, Board Gender Diversity, and Firm Performance," SAGE Open, , vol. 15(2), pages 21582440251, May.
    18. Hickfang, Michael & Holder, Ulrike, 2018. "The impact of stock options on risk-taking: Founder-CEOs and innovation," Discussion Papers of the Institute for Organisational Economics 12/2018, University of Münster, Institute for Organisational Economics.
    19. Ndaman Abdullahi & Bello Lawal, 2023. "Directors’ Diversity and the Economic Value of Equity," Applied Economics and Finance, Redfame publishing, vol. 10(2), pages 23-36, May.
    20. Haoyuan Ding & Bo Pu & Tong Qi & Kai Wang, 2022. "Valuation effects of the US–China trade war: The effects of foreign managers and foreign exposure," Journal of Economic Surveys, Wiley Blackwell, vol. 36(3), pages 662-683, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finrev:v:61:y:2026:i:2:p:359-382. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.