[18:14 26/3/2014 RFS-hhu011.tex] Page: 1 1–46 Co-opted Boards

We develop two measures of board composition to investigate whether directors appointed by the CEO have allegiance to the CEO and decrease their monitoring. Co-option is the fraction of the board comprised of directors appointed after the CEO assumed office. As Co-option increases, board monitoring decreases: turnover-performance sensitivity diminishes, pay increases (without commensurate increase in pay-performance sensitivity), and investment increases. Non-Co-opted Independence—the fraction of directors who are independent and were appointed before the CEO—has more explanatory power for monitoring effectiveness than the conventional measure of board independence. Our results suggest that not all independent directors are effective monitors. (JEL G32, G34. K22) The board of directors of a corporation is meant to perform the critical functions of monitoring and advising top management (Mace 1971). Conventional wisdom holds that monitoring by the board is more effective when the board consists of majority of independent directors. The empirical evidence on the connection between board independence and firm performance, however, is mixed and weak, as is the evidence on the relation between boar