Board-CEO Power Dynamics Explained

New study links CEO tenure to reduction in board independence.

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kid-reaching-upWant to figure out how independent corporate boards are? Just look at how long the CEO has been in place.

According to a team of academics from Duke and Cornell universities, the independence of corporate boards decreases with every year a CEO holds power according to a new study.

Boards are likely at their most independent during the first year a CEO is in place however, underscoring the fact that, during the early days of a new CEO’s tenure, their bargaining power is on the low side. The study, called “CEO Power and Board Dynamics”, also shows that long-tenure CEOs become more powerful every year they’re in the job – and they tend to be more successful at becoming board chair and earning more money.

The power dynamic can shift however — a CEO’s hold over the board can decline during specific circumstances that create uncertainty. Recessions for example, or the arrival of activist investors.

By contrast, strong performance or a general decline in uncertainty about a CEO’s ability to perform can weaken a board’s incentives to monitor her or him.

The paper also looks at specific scenarios of CEO turnover events finding that boards become less independent when an external CEO is hired and that boards are likely to fire a powerful CEO based on poor performance.

The authors add that while regulations like Sarbanes-Oxley have succeeded in boosting board independence in some areas, they have not prevented other outcomes such as a CEO being appointed board chair.

Download the paper.

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