Bottom-Up Corporate Governance

Abstract

In many instances, “independently-minded” top-ranking execu-tives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate gov-ernance. We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We em-pirically label as “independent from the CEO” a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions.