Director awards and board effectiveness

Abstract

AbstractWe explore the impact of prestigious director awards on effectiveness in setting CEO compensation. Consistent with the positive announcement effect for firms with awardees, CEO compensation aligns more closely with shareholder interest and includes enhanced risk‐taking incentives for boards with awardees. The effect is most pronounced when the awardee is on the compensation committee or a committee chair, and results are robust to a 2SLS estimation using an instrumental variable based on connections to prior award winners. We find evidence that both additional prestigious board appointments and enhanced scrutiny of firms with awardees are channels for improvements in CEO compensation.