Corporate Governance When Founders Are Directors

We examine the role of founders as directors by examining executive compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a nonfounder CEO (founder-director). We find that founder-director firms offer a different mix of incentives to their CEO than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is almost twice that of CEOs in non-founder firms. CEO turnover sensitivity to firm performance is also significantly higher. CEOs of founder-director firms are 85% more likely to be replaced than CEOs of non-founder firms for a decline from the top to the bottom decile in performance. However, we do not find any difference in M&A behavior between founder-director and non-founder firms. Finally, directors appear to be more diligent in founderdirector companies. Non-founder directors in founder-director firms have a better board meeting attendance record than in other firms. The evidence that boards in founder-director firms provide more powerful incentives in the form of pay and retention policies than the average board provides a useful benchmark to measure board performance in U.S. firms. Our findings identify compensation and CEO turnover as two governance mechanisms that may drive the founder value premium documented by prior research. We thank Phil Berger, Aiyesha Dey, Joseph Gerakos, Krishna Palepu, Doug Skinner, Abbie Smith, Jerry Zimmerman and workshop participants at University of Toronto and Washington University, St. Louis for helpful suggestions. We thank our respective schools for financial support. The research was funded in part by the Ewing Marion Kauffman Foundation. The views expressed in this paper are the views of the authors and not necessarily the views of the Ewing Marion Kauffman Foundation. Kei Kondo and Maxwell Tang provided excellent research assistance. Corporate Governance when Founders are Directors