Director tenure and the compensation of bank CEOs

Abstract Purpose – The purpose of this paper is to examine how board tenure affects the compensation of CEOs using a sample of 93 publicly traded US banks. Design/methodology/approach – The paper proposes a CEO allegiance hypothesis whereby long‐term relationships with executives and other directors will shift allegiance from shareholders to executives vs a more traditional expertise hypothesis that predicts superior monitoring of executives by directors with longer tenure. A generalized least squares regression methodology is used to examine the relationship between CEO compensation and outside director tenure. Findings – For the full sample, board tenure variables were found to be insignificant. However, when examining a subsample of firms with CEO tenure of greater than six years or more, the relationship between CEO pay and the median tenure of outside directors becomes positive, supporting a CEO allegiance hypothesis. Research limitations/implications – On a caveat, since this study relies on data for large bank holding companies over a short period of time, further research is needed to determine if the results carry over to a broader sample of firms and across time. Practical implications – The results suggest that the independence of outside directors may be compromised when they serve for longer tenure periods together with the same CEO; an important consideration for better corporate governance. Originality/value – The study provides a unique examination of outside director independence from the perspective of board tenure and the long‐term relationships with executives and other directors that may result in allegiance shifts away from shareholders and towards managers.