Are Interlocked Directors Effective Monitors?

Authors


  • The authors thank participants at the 2005 Financial Management Association annual meeting, especially the discussant Ken Ayotte, and an anonymous referee for invaluable comments and suggestions. The authors gratefully acknowledge financial assistance from College of Business (Ohio University) research seed grant program and the Gardner Fellowship.

Abstract

This paper examines whether the presence of interlocked directors on a board is associated with weak governance. For a sample of 3,566 firm-years spanning 2001 to 2003, we find that firms with lower industry-adjusted firm performance are more likely to have interlocked directors. We document that shareholders react negatively to the formation of director interlocks and find that the presence of interlocked directors is associated with lower than optimal pay-performance sensitivity of CEO incentive compensation and reduced sensitivity of CEO turnover to firm performance. Collectively, our results suggest that the presence of interlocked directors is indicative of weak governance.

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