CEO Involvement in the Selection of New Board Members: An Empirical Analysis

Authors

  • Anil Shivdasani,

    1. Kenan–Flagler Business School, University of North Carolina, Chapel Hill
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  • David Yermack

    1. Stern School of Business, New York University
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    • Shivdasani is at the Kenan-Flagler Business School, University of North Carolina, Chapel Hill, and Yermack is at the Stern School of Business, New York University. We appreciate helpful comments from David Denis, Scott Harrington, Greg Niehaus, Tod Perry, Henri Servaes, Clifford Smith, René Stulz, Sunil Wahal, Marc Zenner, an anonymous referee, and seminar participants at the University of North Carolina, the University of South Carolina, the University of Oregon, Virginia Polytechnic Institute, and the American Finance Association annual meeting, 1999. We thank Urs Peyer for capable research assistance. An earlier version of this paper was titled “The Hand-Picked Board.”

Abstract

We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection.

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