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In 2002, U.S. stock exchanges and the Sarbanes-Oxley Act established minimum standards for director independence. An unintended consequence of these director rules was to alter firm choice of other tools for mitigating agency problems. This unintended consequence is studied on a new dataset with a much larger range of firm size. Firms most treated by the director rules decrease CEO stock ownership (6 percent) and decrease the share of compensation in the form of stock (30-60 percent). This is consistent with CEO stock ownership as a substitute for outside director supervision. The average treated firm also increased interlocking directorships, the number of other boards its directors serve, by two interlocking directorships. Additionally, the rules failed to reduce CEO misbehavior like excess compensation, heavy use of incentive-compensation, or low turnover. Because treated firms do not outperform the market, these results are more consistent with governance reoptimization than either managerial entrenchment or governance improvement explanations. |
