The Advisors' Blog

– Broc Romanek

Here’s the intro from this blog by Cooley’s Cydney Posner:

At more than half of the companies in the S&P 1500, the CEO is the lone board insider, according to this study and the related article in the WSJ. Isn’t that a good thing? Maybe not, say the authors, whose study showed that lone-insider boards can lead to lower profits, excessive CEO pay and more financial fraud.

The authors looked at data for companies in the S&P 1500 from 2003 to 2014 to examine the consequences of lone-insider boards. They found that lone-insider CEOs received on average “excess CEO pay,” that is, “pay above what objective factors, such as firm size and performance, would predict.” More specifically, they concluded that, “[o]n average, lone-insider CEOs received roughly 81% more pay a year than their peers. That’s an additional $4.6 million a year, which is money that could have been retained to fund growth strategies or returned to shareholders as dividends.”

They also found that CEO pay at companies with lone-insider boards was disproportionately higher than the pay of other key executives. CEOs who were lone insiders on their boards earned an average $7.39 million more than the average of the next four highest-paid executives, while CEOs who were not lone insiders made only $4.4 million a year more on average than the other executives. And here’s the stunner: according to the authors, “companies with lone-insider boards were 27% more likely to commit financial misconduct and…their profits were roughly 10% lower on average.” So much for good corporate governance?