Two essays on corporate boards

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2013-05

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Essay1: On the Compensation and Activity of Corporate Boards (Job Market Paper) Within the nexus of contracts that makes up the firm, relatively little is known about the relationship between firms and their directors. Using a unique dataset comprising director compensation and activity, I focus on how different components of compensation (level, equity-based compensation, and meeting fees) interact and how these components are associated with different types of activity (monitoring and advising). I find that firms use meeting fees and equity-based compensation as substitutes and that they have different effects on different types of activity. In particular, I find that paying directors for attending board/committee meetings is associated with more active boards and committees, both monitoring and advising. In contrast, a higher proportion of equity-based compensation is positively associated with monitoring activity but negatively associated with advising activity. Furthermore, while firms paying meeting fees pay lower total compensation, more active boards and committees are paid more. Finally, I also find that the variation of director compensation and activity generally reflects trade-offs between the costs and benefits of director effort, consistent with prior work. All of the results are robust to controlling for endogeneity.

Essay2: Information and Board Effectiveness Board effectiveness remains a central question in corporate governance. Arguably, board effectiveness is determined largely by how informed the board is. Thus, I develop empirical proxies for the extent to which boards are informed (with regard to information available to the board and its committees in performing their duties) and examine whether or not these empirical proxies are associated with board effectiveness. I find that board committee overlap, board activity, and the presence of non-CEO executive directors vary as a function of firm characteristics in economically sensible ways. In particular, where firm characteristics suggest that boards need more information, there is more committee overlap, greater board and committee activity, and a higher likelihood of including non-CEO executive directors on the board. Moreover, the association between these proxies and the outcomes of board decision making, e.g., restatements, material internal control weaknesses, merger and acquisition announcement stock returns, is consistent with more informed boards being more effective.

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Keywords

Board of directors, Director compensation, Director activity, Committee structure, Board performance

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