TITLE

Board Independence, Executive Pay, and the Adoption of Pet Projects

AUTHOR(S)
Laux, Volker; Mittendorf, Brian
PUB. DATE
December 2011
SOURCE
Contemporary Accounting Research;Winter2011, Vol. 28 Issue 5, p1467
SOURCE TYPE
Academic Journal
DOC. 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 comprising 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 chief executive officer’s [CEO] pet projects), but at the cost of excessive rents for the CEO in the form of steep incentives. Though the excessive rents point to board dependence being value destroying, we show in an incomplete contracting setting that board dependence can actually be beneficial because it alleviates potential hold-up problems when the CEO takes costly actions to expand the set of available projects ex ante.
ACCESSION #
67698100

 

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