Unintended Consequences of the Independent Board Requirement on CEO Power

NYSE and NASDAQ listed firms are required to have a majority of independent directors starting 2004. Since the regulation can weaken CEO influence over the board, affected CEOs may counter it by building a closely aligned team of top executives to strengthen their structural power. Using a differences-indifferences approach, we find that affected CEOs fill their executive suites with significantly higher abnormal fractions of top executives hired or promoted during their tenure, and with executives with previous employment ties. This finding is not due to greater executive turnovers, confounding effects, corporate frauds, or appointing new CEOs. The accumulation of CEO power at affected firms is associated with less profitable acquisition bids and lower firm valuation. And the power increases at affected firms are observed only when they are subject to weak external governance. These findings raise the question of whether the benefits of the regulation justify its unintended consequences. First draft: October 18, 2010 JEL classification: G34