Co-opted Boards

We develop two measures of board composition to investigate whether directors appointed by the CEO have allegiance to the CEO and decrease their monitoring. <it>Co-option</it> is the fraction of the board comprised of directors appointed after the CEO assumed office. As <it>Co-option</it> increases, board monitoring decreases: turnover-performance sensitivity diminishes, pay increases (without commensurate increase in pay-performance sensitivity), and investment increases. <it>Non-Co-opted Independence</it>—the fraction of directors who are independent and were appointed before the CEO—has more explanatory power for monitoring effectiveness than the conventional measure of…