poor performance. In addition, Denis and Denis (1995) document that firm performance generally improves following a CEO turnover, especially a forced turnover. An important issue in all of these studies is the distinction between voluntary and involuntary turnovers, which is usually difficult to make. To better identify the role played by the Board, Weisbach (1988) interacts Board composition and firm performance in a CEO turnover equation. His results indicate that when Boards are dominated by outside directors, CEO turnover is more sensitive to firm performance than it is in firms with insider-dominated Boards.

This result is consistent with the view that outsider-dominated Boards—those a priori likely to be independent of management—are responding to corporate performance when they make CEO retention decisions. In contrast, turnover in insider-dominated Boards is not performance-driven, suggesting that insider-dominated Boards make turnover decisions for reasons unrelated to corporate performance.

The most plausible interpretation of this finding is that Boards controlled by outside directors do a better job of monitoring the CEO than do Boards controlled by inside directors. Inside directors’ careers tend to be tied to the CEO’s, which gives them incentives to advance the CEO’s career regardless of the stock price. Moreover, any potential inside information that inside directors use to justify a firing has to reflect negatively on the CEO without reflecting negatively on them. Consistent with this point is evidence from Borokhovich et al. (1996) and Huson et al. (2000), who find that outsider-dominated Boards are more likely than insider dominated Boards to replace a CEO with someone from outside the firm.

Yermack (1996) and Wu (2000) perform a similar analysis of CEO turnover, measuring the impact of Board size on the relationship between CEO turnover and firm performance. Both Yermack and Wu find a positive and significant coefficient on this interaction term, which indicates that firms with smaller Boards have a stronger relationship between firm performance and CEO turnover than firms with larger Boards.

Perry (2000) breaks down the cross-sectional relationship between CEO turnover and firm performance by whether the outside directors are paid using incentives. He finds that the relationship between CEO turnover and firm performance is stronger when Boards have incentives. This finding suggests that providing explicit incentives to directors leads them to make better decisions. It is also consistent with the view that outside directors who receive incentive pay tend to have a professional rather than a personal relationship with the CEO and thus are relatively more independent.

Yet because a Board dominated by a CEO will not monitor regardless of its visible characteristics, we tend to see independence as the true causal variable, with size, compensation, and Board composition as correlates. A Board made up of directors who wish to be independent of management will prefer to be paid with incentives and to arrange themselves, in terms of size and composition, in a way that best facilitates oversight of management.

Another role of the Board is to set and oversee the firm’s policies for compensating management. A view, prevalent since at least Berle and Means (1932), is that CEOs exert control or influence over their Boards to extract “excessive” levels of compensation. To examine this view, Core _et al._ (1999) study the relationships among Board composition, ownership structure, and CEO pay.

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