Abstract

We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection. A BOARD OF DIRECTORS SERVES AS THE PIVOTAL mechanism for monitoring the managers of a public corporation. Directors are voted into office by stockholders and have a fiduciary responsibility to protect stockholders ’ interests. Along with their legal duties of reviewing the corporation’s major plans and actions, directors are charged with selecting, compensating, evaluating, and, when appropriate, dismissing top managers.

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