Director tenure and the compensation of bank CEOs

John Byrd, Elizabeth S. Cooperman, Glenn A. Wolfe|
Managerial Finance, Vol. 36 Issue 2, pp. 86 – 102

Purpose – The purpose of this paper is to examine how board tenure affects the compensation of CEOs using a sample of 93 publicly traded US banks.

Design/methodology/approach – The paper proposes a CEO allegiance hypothesis whereby long-term relationships with executives and other directors will shift allegiance from shareholders to executives vs a more traditional expertise hypothesis that predicts superior monitoring of executives by directors with longer tenure. A generalized least squares regression methodology is used to examine the relationship between CEO compensation and outside director tenure.

Findings – For the full sample, board tenure variables were found to be insignificant. However, when examining a subsample of firms with CEO tenure of greater than six years or more, the relationship between CEO pay and the median tenure of outside directors becomes positive, supporting a CEO allegiance hypothesis.

Research limitations/implications – On a caveat, since this study relies on data for large bank holding companies over a short period of time, further research is needed to determine if the results carry over to a broader sample of firms and across time.

Practical implications – The results suggest that the independence of outside directors may be compromised when they serve for longer tenure periods together with the same CEO; an important consideration for better corporate governance.

Originality/value – The study provides a unique examination of outside director independence from the perspective of board tenure and the long-term relationships with executives and other directors that may result in allegiance shifts away from shareholders and towards managers.