Executive Suite Independence: Is It Related to Board Independence?

Abstract

The executive suite and the board are closely bound to each other through their fiduciary responsibility to same shareholders. With CEOs’ prominent role in both governing bodies, their independence from CEOs’ self-serving behavior might be related to each other. We explore the interdependence using an external shock increasing board independence. The shock weakens executive suite independence by increasing CEO connectedness within executive suites through appointments and pre-existing social ties. We also uncover interesting dynamics between the two governing bodies: (1) the spillover does not occur when treated firms increase CEO-independent director social ties, suggesting CEO-executive connections and CEO-director connections are substitutes; (2) consistent with theories of board independence, when information environment calls for dependent boards, increasing CEO-executive connections, which helps negate the shock effect on the board, has positive marginal effects on firm performance. Our findings are not driven by the Sarbanes-Oxley Act and are robust to a battery of other tests. We conclude that independence in the board and executive suite are inversely related; inferring the overall independence from board independence alone can be highly misleading.