The Independence–Tenure Tradeoff in the Boardroom: The Impact of Excess Board Tenure on Executive Compensation and Accountability

Abstract

The goal of the study is to inquire into how longer tenure on the board may undermine directors’ independence and distort the efficiency of executive compensation mechanisms. Our empirical findings based on an international panel database and static panel regression modeling demonstrate that director tenure is positively associated with executive compensation with the effect being amplified by the degree of managerial capture of the board. Longer director tenure is also shown to reduce the sensitivity of executive compensation to negative earnings surprises while simultaneously contributing to the lower overall probability of management departures even in the event of a negative earnings surprise. Board independence is evidenced to play no significant role in intermediating the studied relationships. Overall, while postulating the existence of an independence–tenure tradeoff, the paper posits a need for revision of the currently applicable formal criteria of board independence in order for them to accommodate the possible impact of director tenure on the quality of corporate oversight. The present study extends upon the existing literature by expanding the geographical scale of the sample and focusing on indirect symptoms of reduced supervisory effectiveness of the boards.

1. Introduction

Board independence is frequently alluded to as an effective mechanism of enforcing stringent corporate oversight and precluding exacerbation of agency conflicts (Knyazeva et al., 2013). Through their impartiality, external expertise and unrelatedness to the incumbent managerial team, independent directors are expected to scrutinize and properly assess managerial decisions (Adams & Ferreira, 2007). The formal criteria of director independence enshrined in regulatory frameworks differ by jurisdiction but are broadly focused on eliminating any pecuniary company–director interrelations, which, if present, would prevent the director from exercising strict external monitoring of the firm’s activities in the interests of shareholders. While gradually enforcing a steady increase in the independent oversight and possibly contributing to the improvement in business efficiency (Vallascas et al., 2017), the evolving regulatory definitions of director independence have been shown to contain substantial lacunas covering informal relatedness, family links, cross-company interlocks, related party transactions, charitable activities and consulting, etc. (Cohen et al., 2011).

The informal relationships between directors and management have been found to be challenging to measure, verify and—as a consequence—codify within the existing regulatory framework. What seems to be even more difficult to assess is how the incumbent directors’ tenure on the board impacts the independence of their judgment and their ability to exercise independent oversight. As director tenures have been steadily increasing across major economies (Nili, 2016) chiefly in response to tightening regulatory requirements with regard to director independence, concerns have been arising with regard to the possible impact of growing director–management links, which could bear detrimental consequences for corporate supervision. As directors spend more time on the board, they appear to be more likely to side with the incumbent managers on the issues of operational, tactical and strategic decision-making. The reasons for such complacency and accord may reside in both the directors’ desire to secure their long-term prospects within the company, keep their place on the board and strengthen pecuniary relationships with the firm, which are permitted within the existing regulatory framework (e.g., consulting, charitable donations, etc.). While longer board tenures may bring a number of advantages in the form of lower management–board information asymmetry, improved communication and better acquaintance with the supervised companies’ core business, the threats of board capture—whereby the board’s decisions are guided by the priorities of the management rather than by the principle of representation of shareholders’ interests—resulting therefrom appear worthy of investigation (N. Li & Wahid, 2017; Kim et al., 2023). Remaining fully independent in accordance with formal definitions, tenured directors may effectively build a long-term relationship with the company, which should qualify as material, but which eludes the current regulatory norms.

The present paper represents an attempt to inquire into the impact of board tenure on the quality of corporate oversight by specifically focusing on the possibly existing tenure–independence tradeoff. We postulate that longer director tenures are likely to result in impeding board members’ ability to exercise impartial monitoring of managerial decisions by allowing time and regulatory space for creating strong informal ties between managers and formally independent directors. Longer tenures appear likely to incentivize directors to side with executives in order to secure their positions on the board as well as to develop material pecuniary relationships with the firm (including related party transactions, consulting fees and charitable donations), which are legally authorized and cleared by compliance. While such informal ties as well as nonperformance related pecuniary rewards are difficult to operationalize, record and quantify, one may try to track the possible impact of higher board tenures on the quality of corporate governance thereby focusing on the repercussions stemming therefrom.

Relying on an international panel dataset and static panel regression modeling, the present study inquires into the impact of board tenures on the efficiency of management remuneration mechanisms. We posit that longer director tenures may introduce distortions to compensation plans by reducing the role of performance-related components and therefore contribute to the decline in managerial accountability. Throughout longer tenures, the directors’ ability to exercise independent oversight may deteriorate thereby potentially exacerbating agency conflicts and precluding an effective application of shareholder protection mechanisms. Our empirical findings seem to uphold this conjecture. To start with, through panel regression models using executive compensation as the explained variable, we demonstrate that excess board tenures are positively associated with the level of executive compensation. The positive effect is evidenced to increase under corporate governance settings favoring board capture by senior management. Secondly, we document a persistent reduction in elasticity of executive compensation with respect to the companies’ posted financial results accompanying longer board tenures. The latter findings suggest that as boards acquire insider links to the management and develop broader relationship with the firm, the performance-related component of executive compensation mechanisms may be weakened. Similarly, the results of binary modeling demonstrate that the likelihood of managerial departure following unsatisfactory earnings results is negatively associated with excess board tenure. At the same time, our empirical findings show that board independence measured as a share of formally independent directors on the board plays no role in intermediating the studied relationships.

Overall, our findings point to the existence of an independence–tenure tradeoff in the boardrooms, whereby the longer-serving directors appear to de facto lose their ability to exercise independent oversight as they develop broad relationships with the executives and material pecuniary relationships with the company. All that happens while the formal independence requirements remain in check and the board continues enjoying the status of an independent body performing advisory and oversight functions.

Several studies (e.g., Goergen & Renneboog, 2011; Zorn et al., 2017; Afzali et al., 2024; S. Li et al., 2024; Matemane et al., 2025) pointed to the possibly ambiguous repercussions that a push for board independence observed internationally could have for executive accountability and remuneration systems. While it is true that the historically observed preponderance of insider presence had a tendency to hinder shareholder-centered oversight and accentuate agency conflicts (Dalton et al., 2007), the currently applicable standards of board independence across most jurisdictions forego the fact that, similarly to formal insiders, the incentives of independent directors may be skewed especially as informal relationships develop between executives and directors.

Based on the findings presented in the paper, we advocate selective and cautious inclusion of tenure criteria into the enforced regulatory standards of board independence or better still the enforcement of such criteria by the markets. This may be achieved by introducing/strictly enforcing caps on director tenures (Vafeas, 2003; Nili, 2016) in order to avoid the erosive effects of board capture on executive accountability. Our empirical findings contribute to the discussion on the role of board independence in shaping effective mechanisms of corporate oversight in three important ways. To start with, by relying on an international panel dataset covering jurisdictions with varying systems of corporate governance, our study allows for a broader generalization of empirical findings. Secondly, we establish and empirically quantify the independence–tenure tradeoff by showing the preponderant role of the latter in shaping corporate remuneration mechanisms at the expense of the former. Thirdly, by inquiring into the impact of director tenures on executive compensation, we advance the discussion on the design of effective compensation mechanisms incentivizing stronger managerial accountability. The remainder of this paper is organized as follows. We start by introducing the theoretical background and highlighting the transmission mechanisms which contribute to the development of independence–tenure tradeoff in the boardrooms. We further develop our testable predictions and introduce the database which was assembled for the purposes of the present study. A discussion of empirical findings and policy recommendations concludes the paper.

This study expands upon the extant literature in the domain of corporate governance and oversight. In particular, it expands the geographical scope of the sample, relies on excess tenure metric in order to identify companies which are more likely to suffer from the problems described in the paper. Finally, it relies on data for managerial departures and compensation in order to test the impact of board tenure on effectiveness of corporate remuneration mechanisms. The combination of the above features constitute the contribution of the paper compared to prior studies.

2. Literature Review and Hypothesis Development

The presence of an independent supervisory board is conventionally perceived as a way of protecting and advancing shareholders’ interests under agency-based managerial structures (Anand et al., 2010). By means of scrutinizing day-to-day discretionary managerial decisions, boards are supposed to preclude the breakage of incentive compatibility that should normally align the interests of owners and agents. It is thus of primordial importance that the boards be able to exercise independent judgment and take the necessary corrective action in order to maintain incentive compatibility. Along with that, the board is expected to provide the necessary guidance and bring external expertise to ameliorate the operational activities of firms.

The corporate governance crises of the past two decades largely contributed to the fact that the center of gravity of boards’ responsibilities gradually shifted toward oversight rather than advisory-related functions. The public as well as shareholders expect the boards to flag opportunistic managerial behavior and proactively seek to preclude adverse or unethical decision-making (Fahlenbrach et al., 2017). Under pressure of reputational risks, directors have become more likely to dissociate themselves from the activities of firms raising their concerns or suspicions. Directors’ independence in this context becomes an important factor influencing board members’ ability to step up and object to managerial decisions which are perceived as detrimental to shareholders’ interests. A paradigm shift emphasizing director independence as a mechanism of enhancing shareholder value is a part of a broader process encompassing all areas of corporate governance, which aims at providing shareholders with more potent tools of exercising control over managerial action and thus at increasing executives’ accountability (Mallin & Melis, 2012; Dahya et al., 2023). That shift contributed to a complete refactoring of board structures through a comprehensive legislative action, which translated into predominance of independent directors on the boards across all major developed economies (Moore & Petrin, 2017). Stringent regulatory frameworks (akin to Sarbanes–Oxley and Dodd–Frank Acts in the US) established formal criteria of director independence, enforced changes to the compensation mechanisms shaping the incentives of board members and set the requirements posed toward effective monitoring throughout the main stages of company development. Despite those substantial changes, the notion of director independence still suffers from considerable interpretative breadth, and, depending on the jurisdiction, may take on many forms and origins. The common requirement toward independent directors is for them to have no material pecuniary relationship with the firm outside of directorship. The scope of application of this criterion as well as the legal content of the term, however, remain geographically divergent (Neville et al., 2019).

Explicitly quantifiable monetary director–firm links are taken into consideration thereby potentially creating an important regulatory void, which may undermine the substance of independence. Longer board tenures have both advantages and disadvantages. On one hand, the longer-serving boards may exercise their functions more efficiently as directors are becoming better-acquainted with the firms’ activities and get into the details of operational and tactical decision-making. On the other hand, entrenchment and informal relationships with executives may ultimately start undermining the boards’ ability to properly exercise independent oversight and track the discretionary managerial decision-making (Huang & Hilary, 2018). Increased board tenure may similarly contribute to homogenization of views and recommendations voiced during board meetings as conformism and group identity gradually take hold over individual perspectives and expertise (Bernile et al., 2018). In combination, stronger board capture by executives through informal relationship networks and uniformization of directors’ views through long-term interaction could cause longer tenures to undermine directors’ independence.

The board compensation mechanisms in their current form across developed economies may also fail to properly account for incentive compatibility of director–shareholder interests under longer board tenures. Fixed board sitting fees may incentivize directors to soften monitoring activities in quest of stable engagement with the company (Adithipyangkul & Leung, 2018). The compensation package featuring performance-tracking components may potentially encourage non-executive directors to exercise better oversight if such actions are anticipated to have a beneficial impact on the variable part of remuneration (Schöndube-Pirchegger & Schöndube, 2010). At the same time, accumulation of equity holdings by tenured directors may also engender a conflict of interest whereby the board may intentionally refrain from any scrutiny, remedial action or internal controls, which could harm the short-term returns on their equity stakes (Nili, 2016). In quest of higher valuations, executives may benefit from tacit directors’ approval to recur to techniques of manipulative performance management and creative accounting. While performance-based pay has a role to play in aligning the interests of shareholders and supervisory boards, it similarly aligns the interests of supervisory and management boards if the latter’s compensation is heavily skewed toward equity instruments. Hence, independent judgment of an entrenched and equity-loaded board may be imperiled. Neither the purely fixed director compensation nor mixed packages seem to make supervisory boards immune to the potentially existing conflicts of interest.

Putting regulatory caps on director tenures by introducing statutory limitations on re-elections could present both benefits and costs in terms of directors’ ability to exercise their advisory and supervisory functions efficiently. On one hand, longer tenures paired with rare shareholder dissent on re-election voting (Aggarwal et al., 2019) make directors’ careers more dependent upon their informal links to the executives and managers. Aware of the higher likelihood to be repeatedly nominated to the board by friendly CEOs, directors may choose to be complacent with regard to discretionary managerial decisions which they are supposed to monitor. Limitations on re-elections reduce the need to build informal networks and allow directors to focus on diligent oversight in quest of reputation necessary to run for nominations in other companies. Scrutinizing and favoring decisions which are aligned with shareholders’ interests have been shown to positively impact the likelihood of gaining additional directorships supporting the presence of reputation-driven incentives (Field & Mkrtchyan, 2017). The latter may bear detrimental consequences on long-term shareholder value as non-executive directors may prefer to dissociate themselves from the activities of supervised firms if such activities are perceived as a potential threat to directors’ reputation: presaging anticipated negative shifts in corporate performance, some reputation-motivated directors may resign without addressing the known managerial issues (Bar-Hava et al., 2018; Gao et al., 2017).

At the same time, it is argued that the longer-serving directors may sometimes be likelier to exercise independent oversight as they acquire informal relationships and relevant understanding of companies’ operations. The latter may especially be the case if the board remains free of executives’ capture. If directors serve for longer periods than CEOs, the former may possess stronger informal networks and sometimes even superior access to information, which may allow for higher supervisory efficiency. However, the concomitant long tenures of both non-executive directors and CEOs appear likelier to result in undermining the boards’ ability of oversight and control (Byrd et al., 2010). At times, turnover on the board may become the necessary precondition for departure or replacement of inefficient managerial teams.

Aware of the potential problems that longer director tenure may bring about, shareholders—particularly activist investors and large institutional blockholders—have been using their voting power to facilitate director turnover (Gow et al., 2014). Some are advocating the implementation of stricter internal corporate governance procedures, which would constrain possibilities of re-election and enforce a minimum retirement age for the longest-serving directors. Despite the currently observed shift in perception of tenure as a possible threat to boards’ supervisory functions, the overarching trend on many markets points toward to an overall reduction in director turnover (Nili, 2016). Concomitantly, the age of incumbents increases thus delaying the generational changes in the boardrooms and precluding internal managerial succession. Many directors run for re-election unopposed with a favorable nomination of chief executives who become increasingly intertwined with entrenched boards by means of informal social ties. Limits on re-elections and caps on tenure remain relatively rarely implemented with voices of concern that such caps may improperly incentivize short-termism in directors’ decision-making as well as growing directors’ distraction (Dou et al., 2015). One possible solution to increase directors’ accountability would be to enforce a more robust system of systematic performance evaluation (Fenwick & Vermeulen, 2018) both for the entire board as well as for individual incumbent directors. Regular review could increase the sensitivity of board departures with respect to firms’ performance and facilitate performance-based decision-making on the board. In this respect, shareholder value creation may serve as a useful performance indicator (Kuoppamäki, 2018). As the considerations of board diversity and representativeness have been gaining importance in recent years, respective changes to board compositions have been perceived as a possible way of alleviating the problem of rising tenures and rigid board structures. Flattening the informal hierarchies, improving the style of communication and bringing in new backgrounds and expertise may all contribute to the amelioration of board performance as an advisory and supervisory body (Cleary et al., 2019).

The regulatory changes that took place during the last two–three decades in most developed countries putting emphasis on board independence appear irreversible. The share of independent board members has been on the rise. At the same time, lengthening tenures engender a viable danger that formal independence will be hollowed out as informal ties, pecuniary and non-monetary incentives cause tenured directors to become overly forbearing with regard to incumbent management. The remedies which are put in place with the goal of better aligning the interests of shareholders and directors (like regular re-elections and caps on tenure) appear to frequently have ambiguous impact on directors’ behavior and their commitment to thorough monitoring. At present, the most appropriate strategy to deal with the threats to board independence appears to be close scrutiny on the part of shareholders and regular re-assessments of possible conflicts which could arise within longer-serving boards. Institutional investors exhibit an increasing awareness of the problems that reduced board turnovers may cause to the companies’ long-term performance (Solomon et al., 2008) but also acknowledge that a ‘one size fits all’ approach toward solving this issue through putting stringent caps and mandating re-elections may backfire by eliminating experienced and well-performing directors.

The problem of operationalization and measurement of the possible impact that lengthier board tenures exercise on corporate performance is complicated by the unobservability of direct transmission mechanisms. The possible negative repercussions for bottom lines or strategic decision-making are hidden behind a plethora of confounding variables. The best strategy to tackle this problem, therefore, seems to consist in searching for possible symptoms of agency conflict manifesting themselves through board capture by executives. Therefore, executive compensation mechanisms have been selected as the focus of the present study. Relying on empirical data, we investigate whether longer board tenures may contribute to the distortions in remuneration mechanisms thereby reducing managerial accountability and weakening performance–compensation nexus. Further sections of the paper present our research design and empirical findings.

The present paper puts forward two main research hypotheses:

H1. 

Excess board tenure is associated with higher executive compensation and lower sensitivity of executive compensation to negative earnings dynamics.

H2. 

Excess board tenure reduces the likelihood of managerial turnover.

Positive verification of both hypotheses would indicate the presence of symptoms of board tenure undermining its ability to exercise independent oversight over the company’s management. The detailed methodology used to verify the presented hypotheses is presented in the next section of the paper.

3. Dataset and Research Design

For the purposes of present study, we chose to empirically verify the impact of board tenure on executive compensation mechanisms relying on an international panel dataset of listed companies. We compiled a sample of 3141 public firms observed over the period of 2003–2018 on an annual basis. The sample is broadly representative in terms of industries (60 unique GIC codes represented in the sample) and geographies (59 countries). We started from the universe of public companies for which financial data are available in Thomson Reuters Database. The subsequent filtering of the database consisted in the following steps. First, we eliminated companies, for which basic financial data were unavailable. At the same time, firms which terminated their operations during the observation span were not excluded. Secondly, we filtered out any companies which disclosed negative/zero values of sales or total assets during any of the observation years. Thirdly, in order to ensure consistency from the standpoint of research design, we limited the sample only to companies which separately disclosed remunerations paid to supervisory boards and senior executives and which were subsequently available in Thomson Reuters. Finally, only firms which disclosed board tenure figures as well as board independence indicators and other supplementary board characteristics used in the present study were considered for inclusion. Each firm also disclosed mandatory term limits (if applicable) imposed upon the board of directors. Overall, filtering the sample considerably curtailed its size due to divergence of reporting standards across jurisdictions as well disclosure limitations precluding the availability of viable corporate governance data from some geographies. Disclosure of executive compensations remains sparse with regulatory indications diverging across geographies. While some firms report executive compensation with a detailed decomposition into performance-linked and flat parts, other firms refrain from fully reporting equity-based pay thereby reducing the comparability of data. The present study focuses only on firms which disclosed full executive compensation. The resulting sample features 20,815 unique firm-year observations. Due to the specificity of data used in the study, the time series for some companies contain breaks. The number of observations for different variables may differ. As a result, the number of observations, on which some of the regressions presented in the paper are based, may differ. The heterogeneity of the sample is controlled through inclusion of control variables for time-invariant effects (Greene, 2008).

The descriptive statistics and full list of variables utilized in the present study along with their respective definitions are presented in

Table 1. Descriptive statistics.

Variable	Mean	Median	St. Deviation	Min	Max
INDEBTEDNESS	0.261	0.249	0.176	-	0.780
TANGIBILITY	0.309	0.228	0.266	0.000	0.937
CASH.RESERVES	0.121	0.077	0.134	0.000	0.706
DIVIDEND	0.025	0.016	0.033	-	0.197
EXC. TENURE	5.486	5.000	3.965	−7.607	27.861
Executive Compensation (USD)	14,041,897	8,926,554	15,683,029	86,524	87,677,543
IND.BOARD	64.419	70.000	23.402	0.000	100.000
NET.INCOME.SURPRISE	1.080	0.951	31.906	−133.863	129.878

Source: Own elaboration.

and

Table 2. Definitions of variables.

Variable	Definition
FIRM.SIZE	Natural logarithm of the company’s total assets
INDEBTEDNESS	Ratio of total interest-bearing debt to total assets
CASH.RESERVES	Ratio of cash and cash equivalent to the contemporaneous value of total assets
TANGIBILITY	Ratio of net property, plant and equipment to total assets
DIVIDEND	Ratio of total gross dividends paid to common shareholders to total assets
EXC.TEN	Difference between the average tenure of the board members and the board member term duration as reported by Thomson Reuters
EXC.TEN.HIGH.X	Binary variable where ‘1’ encodes the firm-year observations with EXC.TEN variable being higher than the Xth percentile of the distribution of EXC.TEN variable
EXC.TEN.LOW.Y	Binary variable where ‘1’ encodes the firm-year observations with EXC.TEN variable being lower than the Yth percentile of the distribution of EXC.TEN variable
NEG.NI.SURPRISE	Binary variable where ‘1’ encodes the firm-year observations with negative values of NET.INCOME.SURPRISE as reported by Thomson Reuters
POS.NI.SURPRISE	Binary variable where ‘1’ encodes the firm-year observations with non-negative values of NET.INCOME.SURPRISE
IND.BOARD	Share of independent directors on the board
IND.BOARD.LOW.X	Binary variable where ‘1’ encodes the firm-year observations with IND.BOARD variable being lower than the Xth percentile of the distribution of IND.BOARD variable
IND.BOARD.HIGH.Y	Binary variable where ‘1’ encodes the firm-year observations with IND.BOARD variable being higher than the Yth percentile of the distribution of IND.BOARD variable
UNITARY.BOARD	Binary variable where ‘1’ encodes companies with a unitary board structure
TWO-TIER.BOARD	Binary variable where ‘1’ encodes companies with a two-tier board structure
CEO.BOARD.MEMBER	Binary variable where ‘1’ encodes companies with CEOs occupying the position of a board member
CHAIR.EX.CEO	Binary variable where ‘1’ encodes companies with former CEOs occupying the position of board chairman
MGM.DEPARTURE	Binary variable where ‘1’ encodes firm-year observations in which a departure of a senior manager occurred

Source: Own elaboration.

respectively. Nominal variables were first scaled and then winsorized at 1% and 99% levels to eliminate the distortionary impact of outliers. Executive compensation is measured in US dollars and logarithmized for the purposes of econometric modeling. The log-transformed variable (EX.COMP) is the key explained variable used in quantitative analysis.

The principal investigated regressor is excess board tenure (EXC.TEN) defined as the difference between average tenure of incumbent directors and the duration of one term. Within the entire sample, term durations reported by companies vary from zero to nine years. By adopting this measure of board tenure as regressor instead of raw average tenure indicator, we wanted to underscore the records of firms with the longest-serving boards. Other independent and control variables may be broadly classified into two groups: (1) normalized firm-level financial data and performance measures including earnings volatility; (2) corporate governance proxies describing the companies’ board and internal oversight structures (including those measuring the degree of board capture by executives and managerial turnover/departures).

The empirical part of the paper is divided into three stages. We start by establishing the interrelation between excess board tenure and executive compensation relying on the baseline model of the following specification:

$${EX.COMP}_{it}=f\left({EX.TEN}_{it}; {NET.INCOME. SURPRISE}_{it}; {BOARD.CAPTURE}_{it}; {CONTROLS}_{it}\right),$$

(1)

where ${NET.INCOME. SURPRISE}_{it}$—measure of earnings fluctuations with respect to benchmark dynamics reported by Thomson Reuters and included as a proxy for corporate performance; ${BOARD.CAPTURE}_{it}$—vector of corporate governance proxies designed to operationalize the degree of board capture by executives, ${CONTROLS}_{it}$—vector of firm-level controls. The goal of model (1) is to verify the presence of a nexus between directors’ tenure and managerial compensation mechanisms. In particular, we separately test for the sensitivity of executive compensation to earnings shocks measured by net income surprises. We differentiate between positive and negative earnings variations with upside movements regarded as a valid reason for higher performance-linked compensation but with our attention particularly focused on repercussions of earnings undershooting for subsequent executive pay. The degree of pay–performance elasticity serves as a good indicator of managerial accountability and alignment of owner–agent interests. We subsequently interact EXC.TEN with a number of corporate governance proxies to verify whether the degree of board capture plays a role in intermediating the nexus between managerial remuneration and director tenure. The vector of these proxies incorporates a number of commonly used proxy dummies encountered in empirical studies on board oversight such as board structure type, binary variables encoding the presence of former or an incumbent CEO on the board as a member or chair, which may contribute to laxer corporate oversight and board leniency (Fedaseyeu et al., 2018). In order to elucidate the possibly existing non-monotonicity in the empirical relationship between board tenure and executive remuneration, we recur to stratifying the research sample into subsamples based on excess board tenure (thus creating dummy variables EXC.TEN.HIGH.X and EXC.TEN.LOW.Y encoding firms with diverging levels of director experience) and re-running our regression analysis. Separate inclusion of subsample dummies into further analysis serves to corroborate our initial empirical findings.

At the second stage of the study, we replace EXC.TEN in model specification (1) with board independence variable (IND.BOARD) measured as a percentage of formally independent directors on the firms’ boards. Thereby, we intend to verify whether the impact of independence on managerial compensation would substitute for the explanatory power of board tenure. Likewise, we test whether a higher proportion of independent director contributes to strengthening the link between corporate performance and executive compensation as the conventional corporate governance guidelines would suggest. We further create interaction terms between IND.BOARD and board capture proxies mentioned above to test for the possible distortions that board capture by executives may introduce to the compensation mechanisms by skewing directors’ incentives to monitor. Lack of independent checks on incumbent management aggravated by their control of the board may substantially weaken the role of formal director independence in shaping the latter’s ability to exercise diligent supervision. Finally, to check for the presence of tradeoff between board independence and excess tenure in terms of effectiveness of corporate supervision, we assessed the interaction between the two studied experimental variables (one of which—independence—is binary-coded to flag subsamples of firms with majority-independent and majority-insider boards). We subsequently check whether the predominance of independent directors alters the previously discovered impact of director tenure on executive remuneration and performance–compensation elasticity.

Together, the two stages of analysis allow for verification of hypothesis H1.

At stage three, as a further corroboration of our preceding tests on the interrelations between board tenure and managerial accountability, we estimate the associative links between corporate performance and the probability of managerial departures contingent upon excess director tenure and the share of independent directors. We intend to verify whether excessive board terms may curb the responsiveness of executive turnover to negative earnings results and whether higher proportion of independent directors may contribute to alleviating such a detrimental repercussion to the effectiveness of corporate monitoring. Overall, we attempt to verify hypothesis H2 and comprehensively assess the impact of both director tenures and formal board independence on the efficiency of executive remuneration mechanisms and identify any possibly existing distortions, which may be detrimental to shareholders’ interests. We rely on binary logit regression analysis with the likelihood of senior executive turnover within a given company being the key explained variable:

$$logit\left({MGM.DEPARTURE}_{it}\right)=f\left({EX.TEN}_{it}; {IND.BOARD}_{it} {NET.INCOME.SURPRISE}_{it}; {BOARD.CAPTURE}_{it}; {CONTROLS}_{it}\right)$$

(2)

where ${MGM.DEPARTURE}_{it}$—binary variable encoding an event of senior executive departure from company i during year t.

4. Empirical Findings

This section presents the main results of our econometric analysis. We relied on static panel regression modeling with random within–between effects. All reported models exhibit adequate econometric properties.

Table 3. The impact of excess tenure on executive remuneration: baseline model.

Regressand	EX.COMP		EX.COMP		EX.COMP		EX.COMP		EX.COMP
Model No	1		2		3		4		5
no. of observations	20,815		20,815		20,815		20,815		20,815
Wald (joint)	2015	***	2023	***	2011	***	2013	***	2012	***
$R^2$	0.8574498		0.8576011		0.8574303		0.8573951		0.857415
AR(1) test	22.24	***	22.24	***	22.24	***	22.24	***	22.26	***
AR(2) test	5.817	***	5.823	***	5.873	***	5.855	***	5.884	***
Constant	6.3567	***	6.37177	***	6.38565	***	6.4045	***	6.35481	***
	(0.249)		(0.249)		(0.250)		(0.250)		(0.249)
FIRM.SIZE	0.391	***	0.391	***	0.391	***	0.391	***	0.392	***
	(0.009)		(0.009)		(0.009)		(0.009)		(0.009)
INDEBTEDNESS	−0.312161	***	−0.310254	***	−0.315911	***	−0.315304	***	−0.316745	***
	(0.057)		(0.057)		(0.057)		(0.057)		(0.057)
TANGIBILITY	−0.144089	***	−0.140117	***	−0.14178	***	−0.143614	***	−0.143406	***
	(0.047)		(0.047)		(0.047)		(0.047)		(0.047)
CASH.RESERVES	0.491	***	0.491	***	0.486	***	0.487	***	0.487	***
	(0.077)		(0.077)		(0.077)		(0.077)		(0.077)
DIVIDEND	1.67442	***	1.67308	***	1.69569	***	1.68691	***	1.70373	***
	(0.263)		(0.263)		(0.263)		(0.263)		(0.263)
NET.INCOME.SURPRISE	0.000231628				0.00023321		0.000234329		0.000229846
	(000)				(000)		(000)		(000)
EXC.TEN	0.007	***	0.007	***
	(0.003)		(0.003)
NEG.NI.SURPRISE			−0.0336144	***
			(0.012)
EXC.TEN.LOW.25					−0.0381436	**
					(0.018)
EXC.TEN.LOW.50							−0.0418057	**
							(0.017)
EXC.TEN.HIGH.25									0.043	**
									(0.019)

Source: Own elaboration. This table presents the random-effect static panel model estimates. The heteroscedasticity robust standard errors are provided in parentheses. *** and ** indicate significance at the 1% and 5% levels, respectively.

presents the results of our baseline regression with executive compensation being the key regressand. We document a strong and statistically significant (at 1% level) link between excess board tenure and executive remuneration. After controlling for firm-level fundamentals, each incremental year of directors’ average time on the board exceeding one cycle is found to be associated with an average increase in executive pay of 0.7 percentage points (pp.). While not being a red flag by itself, such a significant associative relationship between executive remuneration and a performance-unrelated indicator of board tenure is suggestive of presence of an implicit transmission path, which may undermine the efficiency of compensation mechanisms. The tenure–compensation relationship is found to exhibit non-monotonicity across our research sample with the highest excess tenures being associated with disproportionately higher executive pay than the average in the sample. A total of 25% of firms with the highest excess director tenures (the average director in such firms surpasses one term by an average of 11 years with excess tenure varying between 7.78 and 27.87 years past re-election) disclose total executive compensation which is 4.3% higher than an average sampled company (the respective regression coefficient in model (5) of Table 3 is persistently significant at 1% level). In line with expectations, we find that negative net income variations defined as a deviation in reported earning in a given year exercise a significant negative impact on executive compensation. A negative net income surprise typically contributes to a decline in the total pay package of 3.3%, which interestingly is commensurate with the economic magnitude that excess tenures exercise on managerial compensations. The latter finding points to economic significance of the discovered tenure–compensation nexus prompting the need of further investigation of the nature of the latter.

In

Table 4. The impact of board capture and excess board tenure on executive compensation.

Regressand	EX.COMP		EX.COMP		EX.COMP		EX.COMP
Model No	1		2		3		4
no. of observations	20,815		20,815		20,815		20,815
Wald (joint)	2013	***	2011	***	2011	***	2007	***
$R^2$	0.8574747		0.8574211		0.8574351		0.8574327
AR(1) test	22.22	***	22.25	***	22.24	***	22.29	***
AR(2) test	5.8	***	5.833	***	5.87	***	5.892	***
Constant	6.36688	***	6.36803	***	6.37208	***	6.35626	***
	(0.249)		(0.250)		(0.250)		(0.250)
FIRM.SIZE	0.391	***	0.391	***	0.391	***	0.392	***
	(0.009)		(0.009)		(0.009)		(0.009)
INDEBTEDNESS	−0.313616	***	−0.313422	***	−0.313424	***	−0.31727	***
	(0.057)		(0.057)		(0.057)		(0.057)
TANGIBILITY	−0.144226	***	−0.143833	***	−0.145752	***	−0.143836	***
	(0.047)		(0.047)		(0.047)		(0.047)
CASH.RESERVES	0.489	***	0.488	***	0.485	***	0.482	***
	(0.077)		(0.077)		(0.077)		(0.077)
DIVIDEND	1.68466	***	1.69697	***	1.70965	***	1.72655	***
	(0.263)		(0.263)		(0.263)		(0.263)
EXC.TEN*UNITARY.BOARD	0.007	***
	(0.003)
EXC.TEN*CEO.BOARD.MEMBER			0.00588224	**
			(0.003)
EXC.TEN*CHAIR.EX.CEO					0.00485421	**
					(0.002)
EXC.TEN*MGM.DEPARTURE							0.00475967
							(0.004)

Source: Own elaboration. This table presents the random-effect static panel model estimates. The heteroscedasticity robust standard errors are provided in parentheses. ***, ** indicate significance at the 1% and 5% levels, respectively.

, we present the results of inquiry into the impact of the perceived board capture on tenure–compensation link. Generally, we find strong support for the hypothesis of friendly boards (Cohen et al., 2011). In the presence of factors which may contribute to strengthening the informal ties between the incumbent managers and formally independent directors, compensation mechanisms may become distorted by inherent conflicts of interest. We find that unitary board structure, which by design puts a stronger emphasis on managerial perspective, amplifies the positive link between excess board tenure and executive remuneration: an incremental year of average director tenure past the first re-election translates into an increase in total executive pay by 0.7 pp. The presence of incumbent CEO on the board, which is also likely to result in better alignment of directors’ perspective with that of management, is documented to contribute 0.5 pp. to executive remuneration per one additional year of average director tenure after re-election. Boards chaired by former CEOs manifest a similar pattern: total executive pay is on average higher by 0.4 pp. per additional year of excess director tenure than within firms where the board is chaired by a non-executive director. Overall, further advancing our conjecture about the negative impact of longer director stay on boards’ impartiality and ability to exercise independent oversight, we confirm that stronger executive capture of the board may deepen the problem by further skewing the compensation mechanisms away from purely performance-based determinants.

The findings point to the validity of hypothesis H1—excess board tenure is associated with higher executive compensation and lower sensitivity of the latter to negative operating dynamics.

Interestingly, we find that the tenure–compensation link vanishes within firms where management departures occurred over the studied observation span. A further investigation of this subsample of firms revealed a high turnover of directors there being frequently associated with negative contemporaneous performance. The average director tenure following one full cycle in this subsample stands at 4.95 years, which is half of sample average, while more 12% of them completely overhauled their boards over the observation span (all directors were replaced or departed with tenure dropping to zero). We regard this finding as an indirect corroboration of the hypothesis postulating the existence of transmission mechanism between excess director tenure and managerial compensation mechanisms. A shock to the key experimental variable clearly changes the pattern established across the sample propping our prior empirical findings.

In quest of clarifying the transmission mechanisms by which director tenure may undermine the impartiality of corporate governance, we turn to the study of performance sensitivity of executive compensation. Models 1 and 2 in

Table 5. The sensitivity of executive compensation to earnings surprises: an intra-sample analysis.

Regressand	EX.COMP		EX.COMP		EX.COMP		EX.COMP
Model No	1		2		3		4
Sample Partition	Complete Research Sample				First Tercile *
no. of observations	20,815		20,815		6648		6648
Wald (joint)	2014	***	2005	***	627.1	***	618.4	***
$R^2$	0.8574371		0.8572906		0.8652078		0.8645271
AR(1) test	22.22	***	22.26	***	7.939	***	7.885	***
AR(2) test	5.867	***	5.906	***	−1.815	*	−1.82	*
Constant	6.34838	***	6.34237	***	7.04032	***	7.04256	***
	−0.249		−0.249		−0.409		−0.411
FIRM.SIZE	0.392	***	0.392	***	0.360	***	0.359	***
	−0.009		−0.009		−0.015		−0.015
INDEBTEDNESS	−0.313473	***	−0.317039	***	−0.324541	***	−0.320948	***
	−0.057		−0.057		−0.103		−0.103
TANGIBILITY	−0.141457	***	−0.142411	***	−0.188488	**	−0.194524	**
	−0.047		−0.047		−0.079		−0.079
CASH.RESERVES	0.486	***	0.482	***	0.463	***	0.457	***
	−0.077		−0.077		−0.137		−0.137
DIVIDEND	1.70548	***	1.73111	***	1.14916	**	1.10622	**
	−0.263		−0.263		−0.46		−0.462
NEG.NI.SURPRISE					−0.0612765	***
					−0.023
NEG.NI.SURPRISE*NET.INCOME.SURPRISE							0.001
							−0.001
EXC.TEN*POS.NI.SURPRISE	0.00463064	***
	−0.002
EXC.TEN*NEG.NI.SURPRISE			−0.00188288
			−0.002
Regressand	EX.COMP		EX.COMP		EX.COMP		EX.COMP
Model No	5		6		7		8
Sample Partition	Second Tercile *				Third Tercile *
no. of observations	6578		6578		6778		6778
Wald (joint)	930.4	***	930.4	***	930.7	***	934.6	***
$R^2$	0.868354		0.8683729		0.8869361		0.8871839
AR(1) test	7.534	***	7.518	***	8.975	***	8.937	***
AR(2) test	−2.393	**	−2.389	**	−1.244		−1.297
Constant	6.20724	***	6.2095	***	5.42969	***	5.46392	***
	−0.391		−0.392		−0.493		−0.492
FIRM.SIZE	0.409	***	0.409	***	0.437	***	0.435	***
	−0.014		−0.014		−0.014		−0.014
INDEBTEDNESS	−0.447833	***	−0.447466	***	−0.406658	***	−0.395484	***
	−0.099		−0.099		−0.094		−0.094
TANGIBILITY	−0.180941	**	−0.181041	**	−0.132682	*	−0.126871	*
	−0.075		−0.075		−0.073		−0.073
CASH.RESERVES	0.533	***	0.534	***	0.459	***	0.470	***
	−0.13		−0.13		−0.129		−0.129
DIVIDEND	2.14854	***	2.13557	***	1.44957	***	1.3533	***
	−0.454		−0.456		−0.446		−0.447
NEG.NI.SURPRISE	−0.0125682				−0.0426295	**
	−0.021				−0.019
NEG.NI.SURPRISE*NET.INCOME.SURPRISE			0.000				0.001	***
			−0.001				−0.001

Source: Own elaboration. This table presents the random-effect static panel model estimates. The heteroscedasticity robust standard errors are provided in parentheses. ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively.

demonstrate that the relationship between excess director tenure and managerial remuneration is contingent upon contemporaneous corporate performance. In the event of positive income surprises across the entire research sample, longer director tenures are found to be associated with higher executive pay (0.4 pp. increase in total payout per incremental year of director tenure after the first re-election). However, no similar relationship is observed in the event of negative net earnings fluctuations: under negative operating shocks, the link between director tenure and executive remuneration breaks. While one should not expect such a statistically significant symmetric relationship to exist, a lack thereof under negative profit shifts instead of a strong negative relationship suggests that the more experienced boards are not attempting to introduce mechanisms, which would penalize inferior performance.

We further subdivide our research sample into three equal subsamples (terciles) based on EXC.TEN distribution (with the first tercile containing firms with the lowest and the third containing firms with the highest excess board tenure). In order to observe cross-firm variation in the studies relationships, we re-run regressions for pay–performance sensitivity across all three subsamples (models 3–8 in Table 5) specifically focusing on the responsiveness of total executive pay to the downside earnings volatility. We find that negative earnings surprises (NEG.NI.SURPRISE) exercise a statistically significant downward pressure on executive compensation only in two out of three subsamples. In the subsample with the shortest director tenures, an event of negative variation in reported net earnings is associated with a reduction in total senior management remuneration by an average of 6.13%. While still observable in the third subsample, where tenures are much higher, the relationship becomes much weaker with compensations dropping by ca. 4.26% under negative earnings surprises. Weakening links between unsatisfactory bottom lines and contemporaneous managerial compensations may be symptomatic of an acute agency conflict and attest to the ineffectiveness of the corporate governance system in enforcing managerial accountability. More importantly, we document that the third tercile exhibits a persistent positive associative link between excess director tenure and executive compensation even under negative earnings surprises.

At the second phase of empirical study, we shift attention to the role of board independence as a factor shaping executive compensation mechanisms. Normally, one should expect to discover no statistically significant links between the degree of director independence and executive pay as the former does not constitute a relevant performance-related driver of the latter. In contrast, as suggested by prior empirical studies, board capture by incumbent management may be associated with higher remuneration. We interacted the variable measuring director independence (IND.BOARD) with a number of proxies for board capture.

Table 6. The nexus between board independence and executive compensation.

Regressand	EX.COMP		EX.COMP		EX.COMP		EX.COMP
Model No	1		2		3		4
no. of observations	20,815		20,815		20,815		20,815
Wald (joint)	2005	***	2018	***	2020	***	2009	***
$R^2$	0.8573243		0.8581846		0.857666		0.8573619
AR(1) test	22.27	***	22.36	***	22.24	***	22.31	***
AR(2) test	5.896	***	5.949	***	5.858	***	5.869	***
Constant	6.33606	***	6.37196	***	6.38427	***	6.36924	***
	(0.250)		(0.249)		(0.249)		(0.250)
FIRM.SIZE	0.392	***	0.391	***	0.390	***	0.391	***
	(0.009)		(0.009)		(0.009)		(0.009)
INDEBTEDNESS	−0.317678	***	−0.315321	***	−0.313022	***	−0.317531	***
	(0.057)		(0.057)		(0.057)		(0.057)
TANGIBILITY	−0.143287	***	−0.143152	***	−0.144296	***	−0.143154	***
	(0.047)		(0.047)		(0.047)		(0.047)
CASH.RESERVES	0.483	***	0.482	***	0.484	***	0.481	***
	(0.077)		(0.077)		(0.077)		(0.077)
DIVIDEND	1.72576	***	1.73066	***	1.70955	***	1.72942	***
	(0.263)		(0.262)		(0.262)		(0.263)
IND.BOARD*TWO-TIER.BOARD	0.00031302
	(0.001)
IND.BOARD*CEO.BOARD.MEMBER			0.00075713	*
			(000)
IND.BOARD*CHAIR.EX.CEO					0.00082622	***
					(000)
IND.BOARD*MGM.DEPARTURE							0.00077313	**
							(000)

Source: Own elaboration. This table presents the random-effect static panel model estimates. The heteroscedasticity robust standard errors are provided in parentheses. ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively.

demonstrates that the share of outsider directors positively correlates with an executive pay in the presence of factors amplifying management’s voice on the board. In particular, within a subsample of firms where either incumbent or former CEO is on the board, executive pay rises by ca. 0.07% per one-unit increase in representation of non-executive directors. These findings suggest that formal director independence as defined by the current standards plays but a non-significant role in shaping the compensation mechanisms with detrimental board capture effects clearly prevailing economically. If anything, the appointment of formally independent directors serves the purpose of curtailing such effects and controlling for possible managerial opportunism. We further test for the links between director independence and executive remuneration under performance shocks (models 1 and 2 in

Table 7. Analysis of intermediary impact of board independence on the nexus between excess tenure and executive compensation.

Regressand	EX.COMP		EX.COMP		EX.COMP		EX.COMP
Model No	1		2		3		4
no. of observations	20,815		20,815		20,815		20,815
Wald (joint)	2015	***	2006	***	2009	***	2012	***
$R^2$	0.8577466		0.8573036		0.8573012		0.8573408
AR(1) test	22.3	***	22.28	***	22.27	***	22.2	***
AR(2) test	5.916	***	5.895	***	5.899	***	5.851	***
Constant	6.34731	***	6.34291	***	6.32401	***	6.37991	***
	(0.249)		(0.249)		(0.250)		(0.250)
FIRM.SIZE	0.392	***	0.392	***	0.392	***	0.391	***
	(0.009)		(0.009)		(0.009)		(0.009)
INDEBTEDNESS	−0.315257	***	−0.316596	***	−0.316068	***	−0.316052	***
	(0.057)		(0.057)		(0.057)		(0.057)
TANGIBILITY	−0.139793	***	−0.141503	***	−0.142791	***	−0.144198	***
	(0.047)		(0.047)		(0.047)		(0.047)
CASH.RESERVES	0.483	***	0.483	***	0.485	***	0.486	***
	(0.077)		(0.077)		(0.077)		(0.077)
DIVIDEND	1.7221	***	1.72704	***	1.72081	***	1.70166	***
	(0.262)		(0.263)		(0.263)		(0.263)
IND.BOARD*POS.NI.SURPRISE	0.00040509	**
	(000)
IND.BOARD*NEG.NI.SURPRISE			−0.00023116
			(000)
IND.BOARD.LOW.50*EXC.TEN					0.007	**
					(0.003)
IND.BOARD.HIGH.25*EXC.TEN							0.00658645	***
							(0.002)

Source: Own elaboration. This table presents the random-effect static panel model estimates. The heteroscedasticity robust standard errors are provided in parentheses. *** and ** indicate significance at the 1% and 5% levels, respectively.

). Similarly to excess tenure, director independence appears to amplify positive sensitivity of managerial compensation to upside earnings fluctuations: in an event of outperforming the average historical net earnings, a cross-firm unit increase in the share of non-executives is found to be associated with a 0.04% rise in total compensation. Crucially, no impact on compensations’ responsiveness to downside earnings surprises was found. While being more inclined to reward outperformance, the more independent boards appear less likely to penalize underperformance as the casual empiricism would suggest.

Prompted by preliminary findings regarding the interrelations between board independence and managerial compensation, we assessed the interaction between excess board tenure and the percentage of non-executive directors to verify the presence of a substitution effect between the two. Relevant findings are presented in Table 7 (models 3, 4). We stratify the sample into two subsamples based on the share of independent directors on the board with a cut-off point of 70% (a subsample is encoded with a dummy variable IND.BOARD.LOW.50 denoting half of the sampled firms, which are all below the cutoff). A second experimental subsample comprises the top quartile of firms with the highest proportion of formally independent directors (firms encoded with a dummy IND.BOARD.HIGH.25 with a minimum independence of 83%). Both binaries are subsequently interacted with EXC.TENURE. The positive link between excess board tenure and executive compensation which was previously corroborated for the entire sample is documented to persist both qualitatively and quantitatively regardless of the degree of board independence. A one-year increase in board tenure after the first re-election is found to contribute to an average cross-firm difference in executive pay of 0.07% and 0.066% within both lower-independence (representation of independent directors below 70%) and higher-independence (representation of independent directors above 83%) subsamples. These findings suggest that enforcement of independence requirements may fail to efficiently control for the negative effects that excess tenure exercises on boards’ ability to monitor. The economic effect of director tenure is found to consistently prevail over independence, pointing to the existence of independence–tenure tradeoffs in the boardrooms.

At the concluding stage of empirical study, we inquire into the impact of higher board tenures on executive turnover. An efficient system of corporate governance ousts teams, which generate unsatisfactory performance, should that appear to be aligned with the long-term shareholders’ interests. However, directors’ complacency with incumbent management and development of informal social networks, which accompany longer board tenures, may cause the abandonment of this approach. We empirically verify this conjecture by estimating the contribution of director tenures to the likelihood of executive departures under different firm performance outcomes. Model 1 in

Table 8. The impact of board tenure on the sensitivity of management departures to negative earnings surprises.

Regressand	MGM.DEPARTURE		MGM.DEPARTURE		MGM.DEPARTURE		MGM.DEPARTURE
Model No	1		2		3		4
	Coefficient		Coefficient		Coefficient		Coefficient
Constant	−11.4629	***	−11.4693	***	−11.7473	***	−11.6352	***
	(0.4599)		(0.4597)		(0.4601)		(0.4600)
FIRM.SIZE	0.389681	***	0.390079	***	0.391524	***	0.389415	***
	(0.01945)		(0.01944)		(0.01949)		(0.01951)
INDEBTEDNESS	−0.407170	**	−0.414276	**	−0.420119	**	−0.411294	**
	(0.1902)		(0.1902)		(0.1897)		(0.1900)
TANGIBILITY	0.0140855		0.0100888		−0.0140700		0.0210011
	(0.1197)		(0.1198)		(0.1198)		(0.1195)
CASH.RESERVES	1.24856	***	1.25116	***	1.24597	***	1.23796	***
	(0.2500)		(0.2501)		(0.2493)		(0.2497)
DIVIDEND	2.02489	**	2.03143	**	1.94447	**	1.99217	**
	(0.9128)		(0.9124)		(0.9171)		(0.9179)
EXC.TEN	−0.0397612	***	−0.0395518	***
	(0.007947)		(0.007948)
NET.INCOME.SURPRISE			−0.00153975
			(0.001025)
NEG.NI.SURPRISE					0.119163	**
					(0.05996)
EXC.TEN*NEG.NI.SURPRISE							−0.0143263	*
							(0.008602)
Log-likelihood	−4574.89729		−4573.77086		−4585.8788		−4586.41763
No of observations	21,547		21,547		21,547		21,547
${Chi}^2$	432.96	***	435.21	***	411	***	409.92	***

Source: Own elaboration. Note: the table presents the maximum likelihood estimates of a binary logit model. Asymptotic standard errors are reported in parentheses under the coefficients. ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively.

presents the results of tests of equation specification (2) with the probability of senior executive departure during a given year being the explained variable. We confirm that higher excess board tenure is associated with a lower overall likelihood of management turnover (OR: 0.96) which may be suggestive of director–management interlocks. In line with expectations, model 2 shows that an occurrence of negative earnings variations are likely to precipitate managerial departures. Undershooting earnings trends increase the likelihood of senior managers’ leaves by ca. 12.66%. Strikingly, we demonstrate the latter link to weaken in the presence of longer-serving boards. Even under negative net earnings surprises, an incremental increase in excess board tenure by one year is found to reduce the likelihood of management departure by ca. 1.42%. Certainly, this sensitivity factor is lower than that for the entire sample, as unsatisfactory performance plays a significant role in prompting management turnover. However, the very fact that longer board tenures may reduce that sensitivity point to the possibly detrimental role that unchecked long-serving boards may play in undermining managerial accountability.

A further analysis of intra-sample non-linearities in the relationship between excess board tenure and the likelihood of executive departures (

Table 9. The impact of board independence and tenure on the probability of management departures.

Regressand	MGM.DEPARTURE		MGM.DEPARTURE		MGM.DEPARTURE		MGM.DEPARTURE
Model No	1		2		3		4
	Coefficient		Coefficient		Coefficient		Coefficient
Constant	−11.904	***	−11.6206	***	−11.5637	***	−11.5025	***
	−0.4614		−0.459		−0.4589		−0.4631
FIRM.SIZE	0.392811	***	0.389953	***	0.38687	***	0.389062	***
	−0.01948		−0.01947		−0.01947		−0.01947
INDEBTEDNESS	−0.405299	**	−0.392163	**	−0.416018	**	−0.412452	**
	−0.1902		−0.1903		−0.1904		−0.1904
TANGIBILITY	0.0179865		0.0205727		0.0208876		0.0115538
	−0.1199		−0.1196		−0.1194		−0.1197
CASH.RESERVES	1.26033	***	1.26343	***	1.26408	***	1.24978	***
	−0.25		−0.2499		−0.2499		−0.2498
DIVIDEND	2.01243	**	1.97323	**	1.98855	**	2.06101	**
	−0.9146		−0.9164		−0.9169		−0.9146
EXC.TEN							−0.0409813	***
							−0.008135
EXC.TEN.LOW.50	0.301705	***
	−0.05925
EXC.TEN.HIGH.25			−0.275425	***
			−0.07242
EXC.TEN.HIGH.10					−0.568784	***
					−0.1237
IND.BOARD							0.000942
							−0.001274
IND.BOARD.LOW.50*EXC.TEN
IND.BOARD.HIGH.25*EXC.TEN
IND.BOARD.HIGH.10*EXC.TEN
Log-likelihood	−4574.77257		−4580.2765		−4575.5298		−4574.6226
No of observations	21,547		21,547		21,547		21,547
${Chi}^2$	433.21	***	422.2	***	431.69	***	433.51	***
Regressand	MGM.DEPARTURE		MGM.DEPARTURE		MGM.DEPARTURE
Model No	5		6		7
	Coefficient		Coefficient		Coefficient
Constant	−11.6069	***	−11.7112	***	−11.8149	***
	−0.4592		−0.4589		−0.4601
FIRM.SIZE	0.389067	***	0.394018	***	0.398019	***
	−0.01948		−0.01952		−0.01959
INDEBTEDNESS	−0.444054	**	−0.386658	**	−0.4014	**
	−0.19		−0.19		−0.1893
TANGIBILITY	−0.0134765		0.0210431		−0.0008379
	−0.119		−0.1197		−0.1194
CASH.RESERVES	1.24306	***	1.251	***	1.21181	***
	−0.2487		−0.2501		−0.25
DIVIDEND	2.13467	**	1.86042	**	1.97786	**
	−0.919		−0.9159		−0.9155
IND.BOARD.LOW.50*EXC.TEN	−0.0372084	***
	−0.01257
IND.BOARD.HIGH.25*EXC.TEN			−0.0238694	***
			−0.008089
IND.BOARD.HIGH.10*EXC.TEN					−0.0494569	***
					−0.01417
Log-likelihood	−4583.0427		−4583.3357		−4581.1253
No of observations	21,547		21,547		21,547
${Chi}^2$	416.67	***	416.08	***	420.5	***

Source: Own elaboration. Note: the table presents the maximum likelihood estimates of a binary logit model. Asymptotic standard errors are reported in parentheses under the coefficients. *** and ** indicate significance at the 1% and 5% levels, respectively.

) corroborate our prior conjectures regarding strengthening director–management ties over the course of longer board tenures. Generally, our findings show that management departures are much more likely to occur within firms with shorter-serving boards. Within those where excess tenure after the first re-election does not exceed five years (comprising 50% of the research sample and encoded with EXC.TEN.LOW.50 binary variable), the likelihood of management turnover during a given year is ca. 35% higher than in the remainder of the sample. In contrast, within the top quartile of companies with the longest excess tenure (exceeding 7.78 years), the probability of departures is ca. 25% lower than average. Increasing excess tenure to 10.63 years and above (characterizing the top decile of EXC.TEN distribution) reduces the respective likelihood by ca. 43%. This clearly observable non-monotonicity points to the increasing magnitude of the effect longer tenures may exercise on the effectiveness of corporate oversight. The indicator of board independence is shown to play no role in altering or weakening this effect (model 4 in Table 9). We examine additional independent variables interacting with director independence and excess board tenure. Regardless of the disclosed share of independent directors on the board, excess tenure is shown to persistently be associated with a lower likelihood of managerial turnover. The magnitude of the effect is slightly lower than that observed for the entire research sample (OR: 0.963 documented with a subsample of firms with a share of independent directors below 70%; OR: 0.976 documented for a subsample with a share of independent directors above 83%, pointing to a modest effect of increased board independence). At the same time, we note a substantially stronger effect within a subsample of firms where 90% or more of directors are formally independent. Within this subsample, a cross-firm increase in excess director tenure of one year is linked to a reduction in likelihood of executive departure by ca. 5%. Overall, we demonstrate the preponderance of tenure effect in shaping the corporate governance mechanisms through two transmission channels: (1) design of executive compensations; (2) executive turnover. In both cases, longer tenures appear to undermine managerial accountability to the detriment of shareholders’ interest.

In summary, we find evidence in favor of hypothesis H2—excess board tenure is associated with lower managerial turnover.

5. Conclusions

The goal of the present paper was to empirically verify the existence of an independence–tenure tradeoff within supervisory boards. We demonstrate that longer director tenures are associated with higher executive compensations, lower responsiveness of managerial remuneration to negative earnings outcomes and lower sensitivity of management turnover to unsatisfactory operating results. At the same time, formal director independence appears to play no role in intermediating these relationships or in mitigating the possible threats to independent oversight stemming from longer board tenures. The negative repercussions of the potentially existing conflicts of interests instigated by longer-serving boards should prompt a discussion on the possible ways of accounting for independence–tenure tradeoff in the current regulatory standards concerning director independence.

Several measures could potentially alleviate the problems posed by lengthening tenures of formally independent directors without imposing an excessive burden on firms or compromising the boards’ ability to effectively exercise their advisory functions. To start with, since one of the discovered transmission mechanisms possibly engendering tenure-related conflicts of interest is executive compensation, the tenure of the members of remuneration committees could be limited in order to minimize possible distortions in the design of compensation packages. Assuring a turnover of directors within this particular committee should allow for a more efficient oversight. Secondly, further measures could be taken to reduce the possible scale of board capture by primarily reducing the share of insider/executive directors. These changes would constitute a continuation of an already evolving trend putting an ever stronger emphasis on the preponderance of independent directors. We demonstrate, empirically, that the presence of insiders (incumbent or former CEOs) on the board may skew the compensation mechanisms. Stakeholders should be aware of the possibility of such distortions and scrutinize the appointments of insiders to the board carefully.

A question remains as to whether any such alterations to the corporate governance codes aimed at curbing the potentially detrimental consequences of excess tenure should be legislated or rather adopted through enforcement of market discipline by investors. The latter appears to be a more attractive option as it allows us to approach the problem on a case-by-case basis without imposing a one-size-fits-all regulatory solution. Institutional investors should closely track the tenure of independent directors and scrutinize it for the possible presence of conflicts of interest of both pecuniary (consulting, donations, interlocks) and social (informal connections to the incumbent managers) origin.