The Monitoring Efficiency of Independent Directors: Evidence from Director Co-Option

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Abstract

This paper examines the impact of director co-option on the relationship between board structure and the soundness of the firm’s governance structure. We divide board members into six categories based on co-option and classification to investigate the monitoring efficiency of each group of directors. Though non-co-opted independent directors enhance internal monitoring, co-opted independent directors seem to be the worst monitors. Co-opted independent directors deflate the turnover-performance sensitivity, amplify CEO pay, and increase the likelihood of CEO duality. On the other hand, we do not observe a substantial difference in the monitoring functionality of co-opted and non-co-opted inside board members. Our findings suggest that co-opted independent directors are the main driving factor behind the converse association between co-opted boards and internal monitoring. We conclude that the efficiency of board members’ monitoring function should not be analyzed solely based on director classification or director co-option, but rather a combination of both.

Authors

• Bilal Al Dah, American University of Beirut

• Mustafa Abdullah Dah, Lebanese American University

• Samira Abi Dames, Lebanese American University