Powerful Independent Directors
Shareholder valuations are economically and statistically positively correlated with independent director power, gauged by a composite of social network power centrality measures. Powerful independent directors’ sudden deaths reduce shareholder value significantly; other independent directors’ deaths do not, consistent with powerful independent directors increasing firm valuations. Further tests associate more powerful independent directors with less value-destroying M&A, less free cash flow retention, more CEO accountability, and less earnings management. We interpret these findings as more powerful independent directors better detecting and countering CEO missteps because of better access to information, greater credibility in challenging errant top managers, or both.
We are grateful for helpful comments by Olubunmi Faleye, Wayne Lee, Tomas Jandik, Johanna Palmberg, Michael Weisbach, Jingxian Wu, Tim Yeager, seminar participants at Bentley University, Colegio de Estudios Superiores de AdministraciÃ³n in Bogota, National University of Singapore, Oklahoma State University, UniversitÃ© Laval, University of Alberta, University of Arkansas, University of Illinois at Urbana-Champaign, University of New Hampshire, University of Nevada; and conference participants at the Board Options 2014 Seat at the Table Program, 2014 Boston Area Finance Symposium, 2014 Management Association, the Ratio Colloquium for Young Social Scientists, the Southern Finance Association 2013 meetings ("Outstanding Paper in Corporate Finance" award), Sunbelt XXXIV meeting of the International Network for Social Network Analysis Annual Conference; Financial Research Network Conference at the University of New South Wales. The authors gratefully acknowledge financial support from the Bank of Canada, Social Sciences and Humanities Research Council, National Science Foundation and Arkansas Science and Technology Authority, with resources managed by the Arkansas High Performance Computing Center. These are the views of the authors and do not necessarily reflect the views of the Bank of Canada or the National Bureau of Economic Research.
Kathy Fogel & Liping Ma & Randall Morck, 2021. "Powerful independent directors," Financial Management, vol 50(4), pages 935-983. citation courtesy of