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Larcker, Richardson, Seary, and Tuna ask whether links between inside and outside directors have an impact on CEO compensation.

Larcker, Richardson, Seary, and Tuna ask whether links between inside and outside directors have an impact on CEO compensation. Using a comprehensive sample of 22,074 directors for 3,114 firms, the authors develop a measure of the "back door" distance between each pair of directors on a company's board. Specifically, using the entire network of directors and firms, they compute the minimum number of other company boards that are required to establish a connection between each pair of directors (ignoring the obvious link that occurs when directors are on the same board). The back door distance is one measure of the existence and strength of the communication channel between board members that can be used to influence decisions by the full board. The authors show that CEOs at firms with a relatively short back door distance between inside and outside directors, or between the CEO and the members of the compensation committee, earn substantially higher levels of total compensation (after controlling for standard economic determinants and other personal characteristics of the CEO and the structure for board of directors). This statistical association is consistent with recent claims that the monitoring ability of the board is hampered by "cozy" and possibly difficult to observe relationships between directors.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Jun 22, 2005
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