Length of Board Tenure and Outside Director Independence

Authors

  • Nikos Vafeas

    Corresponding author
      †Nikos Vafeas, Department of Public and Business Administration, School of Economics and Management, University of Cyprus, 75 Kallipoleos Avenue, PO Box 20537, CY 1678 Nicosia, Cyprus.
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      The author is from the University of Cyprus. He has benefited from comments by participants at the 1999 Conference on ‘Contemporary Issues in the Capital Markets’ held at the University of Cyprus, and from comments and suggestions made by an anonymous referee. Eleftheria Ioannou and Stavroulla Michael provided competent research assistance. This research was partly funded by the HERMES Center of Excellence on Computational Finance & Economics. (Paper received March 2002, revised and accepted May 2002)


†Nikos Vafeas, Department of Public and Business Administration, School of Economics and Management, University of Cyprus, 75 Kallipoleos Avenue, PO Box 20537, CY 1678 Nicosia, Cyprus.
e-mail: bavafeas@ucy.ac.cy

Abstract

I posit and test two competing views on the significance of outside director tenure lengths; the expertise hypothesis suggesting that extended board service time is a sign of director commitment, experience, and competence and the management-friendliness hypothesis suggesting that extended board service time marks directors who befriend management at the expense of shareholders. I find evidence that Senior directors, defined as directors with twenty or more years of board service, are almost twice as likely to occupy a ‘management-affiliated’ profession compared to the rest, and that they are also more likely to staff the firm's nominating and compensation committees. Senior director participation in the compensation committee is associated with higher pay for the CEO, especially when the CEO is more powerful in the firm. These results are consistent with the management-friendliness hypothesis, and highlight a need for setting term limits for directors.

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