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An International Meeting of American Accounting
Association
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Director Networks, Executive Compensation, and Firm Performance |
David F Larcker
Stanford University
Scott A Richardson
University of Pennsylvania
Andrew Seary
Simon Fraser University
Irem Tuna
Wharton School
Abstract: This study uses network methods to develop measures for the existence, strength, and breadth of communication channels that can be used by members of the board of directors to socially influence one another. These director links are constructed for all associations between inside and outside board members. Each link is classified as either “friendly” (“independent”) depending on whether the outsider was appointed to the board after (before) the inside board members. Using a sample of 22,074 directors for 3,114 firms, we document that CEO total compensation is substantially higher at firms where there exists a relatively large number of short, friendly director links. We also find that future operating performance exhibits an inverse relation with friendly reciprocal director link measures. Our results are consistent with recent claims that the monitoring by the board of directors is hampered by social relationships between directors.