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Should I stay or should I go? Former CEOs as monitors

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  • Andres, Christian
  • Fernau, Erik
  • Theissen, Erik

Abstract

In the German two-tiered system of corporate governance, it is not uncommon for chief executive officers (CEOs) to become the chairman of the supervisory board of the same company upon retirement. This practice has been discussed controversially because of potential conflicts of interest. As a member of the supervisory board the former CEO has to monitor his successor and former colleagues, and he is involved in setting their pay. We analyze a panel covering 150 listed firms over a 10-year period. Consistent with the existence of a leniency bias, we show that firms in which a former CEO serves on the supervisory board pay their executives significantly more. We further find weak evidence that the compensation of the members of the supervisory board is also higher. Short-run event study results indicate that the announcement of the transition of a retiring CEO to the supervisory board is considered as good news. Thus, despite the increases in executive compensation we document, CEO transitions are not a cause of concern for shareholders.

Suggested Citation

  • Andres, Christian & Fernau, Erik & Theissen, Erik, 2013. "Should I stay or should I go? Former CEOs as monitors," CFR Working Papers 12-02 [rev.], University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1202r
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    Cited by:

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    2. Goergen, Marc & Limbach, Peter & Scholz, Meik, 2015. "Mind the gap: The age dissimilarity between the chair and the CEO," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 136-158.
    3. Zhou, Yifan & Kara, Alper & Molyneux, Philip, 2019. "Chair-CEO generation gap and bank risk-taking," The British Accounting Review, Elsevier, vol. 51(4), pages 352-372.
    4. Ye, Miaomiao & Li, Mengzhe & Zeng, Qiannan, 2022. "Former CEO director and executive-employee pay gap," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
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    6. Ogoe, Satoshi & Suzuki, Katsushi, 2023. "Former CEO advisors and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    7. Crespí-Cladera, Rafel & Pascual-Fuster, Bartolomé, 2014. "Does the independence of independent directors matter?," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 116-134.
    8. Borokhovich, Kenneth A. & Boulton, Thomas J. & Brunarski, Kelly R. & Harman, Yvette S., 2014. "The incentives of grey directors: Evidence from unexpected executive and board chair turnover," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 102-115.
    9. Balletta, Luigi & Modica, Salvatore, 2018. "Selection by committee: Anonymity and gratitude," Research in Economics, Elsevier, vol. 72(4), pages 511-517.
    10. Balsam, Steven & Kwack, So Yean & Lee, Jae Young, 2017. "Network connections, CEO compensation and involuntary turnover: The impact of a friend of a friend," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 220-244.

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    Keywords

    Executive compensation; board structure; two-tiered board;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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