Do the Foxes Guard the Hen House? A Note on Agency Costs

Abstract

It is a fairly common practice for the CEOs of onecorporation to serve on the Board of Directors of another corporation. The question addressed here is the effect that the presence of outside CEOs on the Board of Directors has on the compensation of the firm’s CEO. There are two alternative views that emerge from the literature. One view is that CEOs are selected to serve as directors because they will back management, including proposals for increased compensation. The other possibility is that a CEO knows the techniques that another CEO may use to obtain increased compensation and will thus serve as a better watch dog than a non‐CEO. Using a sample of the Fortune 1000, we find that for non regulated firms there is a negative relationship between the proportion of outside CEOs serving on the board and three different measures of CEO compensation after controlling for firm performance in four different ways.

Citation

Dowen, R.J. and Mann, T.L. (1995), "Do the Foxes Guard the Hen House? A Note on Agency Costs", American Journal of Business, Vol. 10 No. 1, pp. 21-30. https://doi.org/10.1108/19355181199500003