Reputation Incentives of Independent Directors: Impacts on Board Monitoring and Adverse Corporate Actions

We find a large body of evidence that independent director reputation incentives can vary across directors and can significantly influence important board decisions and firm outcomes. Firms with a greater proportion of independent directors where the board is one of their most prestigious are associated with a lower likelihood of firm actions known to hurt director reputations including exchange initiated delisting, bond covenant violations, earnings management or restatements, being subject to shareholder class action lawsuits, dividend reductions and CEO option back dating. These firms are also associated with CEO compensation contracts that are more sensitive to stock performance, but also higher CEO total compensation. We find evidence that greater reputation incentives are associated with a propensity to grow and defend the empire, which provides some evidence of the countervailing incentives arising from reputation concerns. These results are generally robust to various methods of filtering out firm size effects from our primary reputation measures. The evidence indicates that director reputation concerns can have significant influence on key board decisions important to shareholders.