Board Independence, Executive Pay, and the Adoption of Pet Projects*
Year: 2011
Type: article
Abstract: Recent concerns about executive actions and pay have shone a bright light on corporate governance practices and the role of boards in compensation design. In this vein, conventional wisdom vilifies boards with ties to executives and/or comprised of insiders, citing them for rubber stamping executive pet projects and approving lavish pay. In this paper, we model the relationship between board dependence, pay, and project adoption and demonstrate that the connections among the three can be more subtle than conventional views suggest. In particular, we show that board dependence results in more efficient project choices (less frequent adoption of the CEO's pet projects), but at the cost of excessive rents for the CEO in the form of steep incentives. The excessive rents can point to board dependence being value destroying. On the other hand, modest board dependence can also be beneficial when the steep incentives that come from a dependent board alleviate potential hold-up problems and motivate the CEO to "think outside the box" and find alternatives to his pet project in the first place.
Source: Contemporary Accounting Research
Authors: Volker Laux, Brian Mittendorf
Institutions: The University of Texas at Austin, The Ohio State University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2132437405