I need help with the attached question.Read the following academic papers and critically discuss the effectiveness of outside directors. 2000 words.

my professor said that it would be good to talk about things that the 3 articles may agree on, highlight that, maybe mention what an article is missing, why its good or not etc just really approaching the topic from a critical perspective

Co-opted Boards Jeffrey L. Colesa, Naveen D. Danielb, Lalitha Naveenc September 10, 2013 Forthcoming, Review of Financial Studies Abstract We argue that not all independent directors are equally effective in monitoring top management. Specifically, directors who are appointed by the CEO are likely to have stronger allegiance to the CEO and will be weaker monitors. To examine this hypothesis, we propose and empirically deploy two new measures of board composition. Co-option is the fraction of the board comprised of directors appointed after the sitting CEO assumed office. Consistent with Cooption serving to measure board capture, as Co-option increases board monitoring intensity decreases: turnover-performance sensitivity diminishes; pay level increases but without a commensurate increase in pay-performance sensitivity; and investment in hard assets increases. Further analysis suggests that even independent directors who are co-opted are less effective monitors. Non-Co-opted Independence--the fraction of the board comprised of independent directors who were already on the board before the CEO assumed office--has more explanatory power for monitoring effectiveness than the traditional measure of board independence. JEL Classifications: G32; G34; K22 Keywords: Corporate governance; Board co-option; CEO entrenchment; Board composition; Board independence ______________________________________________________________ a W. P. Carey School of Business, Arizona State University, Tempe, AZ., 85287, USA, jeffrey.coles@asu.edu b LeBow College of Business, Drexel University, Philadelphia, PA., 19104, USA, nav@drexel.edu c Fox School of Business, Temple University, Philadelphia, PA., 19122, USA, lnaveen@temple.edu The authors are grateful to an anonymous referee, Renee Adams, Christa Bouwman, Vidhi Chhaochharia, Rachel Diana, Dave Denis, Diane Denis, Ben Hermalin, Yan Li, Antonio Macias, David Maber, John McConnell, Darius Palia, Raghu Rau, David Reeb, Oleg Rytchkov, Partha Sengupta, Mike Weisbach (the editor), Jun Yang, and seminar participants at Case Western Reserve University, Lehigh University, Northeastern University, Purdue University, Rutgers University, the Securities and Exchanges Commission, Villanova University, the 2008 American Financial Association meeting, the 2008 Conference on Corporate Governance and Fraud Prevention at George Mason University, the 2008 Financial Management Association meeting, the 2008 Summer Research Conference at Indian School of Business, the 2010 Weinberg Center for Corporate Governance Conference at the University of Delaware, the 2011 SFS Finance Cavalcade, and the 2011 Finance Down Under Conference at the University of Melbourne for helpful comments. Electronic copy available at: http://ssrn.com/abstract=1699272 1. Introduction The board of directors of a corporation is meant to perform the critical functions of monitoring and advising top management (Mace (1971)). Conventional wisdom holds that monitoring by the board is more effective when the board consists of majority of independent directors. The empirical evidence on the connection between board independence and firm performance, however, is mixed and weak, as is the evidence on the relation between board independence and other organizational and governance attributes, such as managerial ownership.1 One potential reason for the paucity of consistent, significant results is that many directors are co-opted and the board is captured. In practice, CEOs are likely to exert considerable influence on the selection of all board members, including non-employee directors. Carl Icahn, activist investor, asserts quite directly (Business Week Online, 11/18/2005) that \"...members of the boards are cronies appointed by the very CEOs they're supposed to be watching.\" Likewise, Finkelstein and Hambrick (1989) allege that CEOs can co-opt the board by appointing \"sympathetic\" new directors. Hwang and Kim (2009) suggest that CEOs favor appointees who share similar views or social ties or because there is some other basis for alignment with the CEO. Reflecting similar concerns about board capture, subsequent to the Sarbanes Oxley Act of 2002 (SOX) NYSE and Nasdaq adopted listing requirements that substantially reduced the direct influence of the CEO in the nominating process. Nonetheless, CEOs are likely to continue to be able to exert some influence on the board nomination process. At the very least, they approve the slate of directors, and this slate is almost always voted in by shareholders (Hermalin and 1 See Coles, Daniel, and Naveen (2008), Adams, Hermalin, and Weisbach (2010), and Coles, Lemmon, and Wang (2011), for example. 1 Electronic copy available at: http://ssrn.com/abstract=1699272 Weisbach (1998), Cai, Garner, and Walkling (2009)).2 In this paper, we propose and implement two new measures of board composition, which we term Co-option and Non-Co-opted Independence. Co-option is meant to capture board capture. Non-Co-opted Independence, on the other hand, is meant to refine the traditional measure of board independence as a proxy for the monitoring effectiveness of the board. We define Co-option as the ratio of the number of \"co-opted\" (or captured) directors, meaning those appointed after the CEO assumes office, to board size. The idea is that such coopted directors, regardless of whether they are classified as independent using traditional definitions, are more likely to assign their allegiance to the CEO because the CEO was involved in their initial appointment. Our measure is meant to reflect the additional behavioral latitude and managerial discretion afforded a CEO when that CEO has significant influence over some directors on the board. A related interpretation of Co-option is that it captures the disutility to the board from monitoring the CEO. Along these lines, Hermalin and Weisbach (1998), in their model of CEO bargaining with the board, specify director utility as a function of, among other things, a distaste for monitoring ( in their model), which for a director is reflected in a \"... lack of independence, at least in terms of the way he or she behaves\" (p. 101). Co-option can be thought of as capturing director aversion to monitoring and lack of independence aggregated to the board level. Intuitively, Co-option reflects what the CEO can get away with. Co-option ranges from 0 to 1, with higher values indicating greater co-option and board capture and greater insulation of the CEO from various efficiency pressures. In our sample, mean Co-option is 0.47, indicating that on average nearly half of the directors on a board joined the board after the CEO assumed office. 2 Of course, CEO influence on the nomination process is substantially lower in the relatively few instances where directors are put up for election by dissident shareholders in proxy fights. 2 We predict that a CEO who has co-opted a greater fraction of the board will be less likely to be fired following poor performance, will receive higher pay, will have lower sensitivity of pay to performance, and will be able to implement preferred or pet projects even if they are suboptimal from a shareholder-value perspective. Our findings generally are consistent with these hypotheses. First, we find that the sensitivity of forced CEO turnover to firm performance decreases with co-option. For example, our parameter estimates indicate that CEO-turnover-performance sensitivity is attenuated by about two-thirds for a one-standard-deviation increase in Co-option. Second, we find that CEO pay levels increase with board co-option. Of course, higher pay being associated with higher co-option is not symptomatic of entrenchment if it is compensation for higher risk borne by the CEO through higher pay-performance sensitivity. Additional evidence, however, suggests that this is not the case: we find that the sensitivity of CEO pay to firm performance is generally unrelated to board co-option and even is negatively related to co-option in some specifications. Finally, we find that investment in tangible assets (the ratio of capital expenditure to assets) increases with co-option. This is consistent with the idea that CEOs who have co-opted the board can invest in ways they otherwise would not. For example, in the absence of effective board monitoring, executives are likely to satisfy their preferences for scale and span of control, preferences that arise in larger firms for reasons of higher compensation, control over more resources, and enhanced stature in the industry and community (Jensen (1986)). Overall, the evidence on turnover, pay, and investment is consistent with the idea that co-option reduces the monitoring effectiveness of the board. In all specifications we control for the proportion of independent directors on the board 3 (Independence), which traditionally has been understood to be a measure of board monitoring.3 We find that Independence has little power to explain CEO turnover-performance-sensitivity, CEO pay, CEO pay-performance-sensitivity, and investment. If there were a statistical horse race between Co-option and Independence, Co-option would appear to be more successful. In light of this result, a natural question is whether independent directors who are coopted by the CEO are different in monitoring effectiveness from those who are not co-opted. To address this question, we calculate the fraction of the board that is comprised of independent directors appointed after the CEO assumed office (\"Co-opted Independence\"). Our results using this measure as an explanatory variable are similar to what we find with Co-option. Specifically, we find that Co-opted Independence is associated with lower sensitivity of CEO turnover to performance, higher pay levels, lower sensitivity of pay to performance, and greater investment. Thus, co-opted independent directors, though independent of the CEO in the conventional and legal sense, behave as though they are not independent in the function of monitoring management. This is likely to explain why the literature has not found consistent evidence with respect to the monitoring effectiveness of independent directors. To formally test the monitoring effectiveness of independent directors who are not coopted, we introduce a second new measure of board composition: Non-Co-opted Independence. We define this measure as the fraction of the board comprised of independent directors who were already on the board when the CEO assumed office. In our sample, mean Non-Co-opted Independence is 0.35, indicating that on average about a third of the board is comprised of independent directors who are truly independent, having not been co-opted by the CEO. Of 3 See, for example, Weisbach (1988), Byrd and Hickman (1992), Brickley, Coles, and Terry (1994), Dahya, McConnell, and Travlos (2002), Hermalin and Weisbach (2003), Dahya and McConnell (2007), Coles, Daniel, and Naveen (2008), and Dahya, Dimitrov, and McConnell (2008). 4 course, on most issues the board faces, the majority rules, so there is a significant possibility that the subset of independent directors who are not co-opted is not influential. Nonetheless, consistent with our conjecture that independent directors who are not co-opted are the monitors that matter, we find Non-Co-opted Independence is associated with higher sensitivity of CEO turnover to performance, lower pay levels, higher sensitivity of pay to performance, and lower investment. In sum, not all independent directors are equally effective at monitoring. Those who are co-opted by the CEO are associated with weaker monitoring, while the independent directors who join the board before the CEO assumes office, that is, the directors who hired the CEO, are associated with stronger monitoring. Our results on board capture are robust to two alternative definitions of Co-option. Our first alternative proxy, Tenure-Weighted Co-option (TW Co-option), accounts for the possibility that directors appointed by the CEO become even more co-opted through time and that the influence of co-opted directors increases with their tenure on the board.4 We define TW Cooption as the sum of the tenure of co-opted directors divided by the total tenure of all directors, so an increase likely indicates higher board co-option. Our second alternative proxy is designed to address the possible concern that co-option increases mechanically with CEO tenure and that our results on co-option may be capturing the effect of CEO tenure. We estimate Residual Cooption as the residual from a regression of Co-option on CEO tenure. We similarly estimate Residual TW Co-option as the residual from a regression of TW Co-option on CEO tenure. By construction, these residual measures are uncorrelated with CEO tenure. We find qualitatively similar results using these alternative definitions of co-option. 4 Per Nell Minow, quoted in Hymowitz and Green (2013), \"What you want from directors is for them to really push the CEO for answers and, just by human nature, that gets harder the longer they're on a board.\" 5 Our results also are robust to our best attempts to address endogeneity. All of our basecase regressions include firm-fixed effects to control for biases introduced by unobserved, firmspecific, time-invariant, omitted variables that are correlated with co-option. Endogeneity could still arise, however, either because the omitted variable is not firm-specific or varies through time, or because reverse causation runs from our firm policy variables, such as pay, to co-option. We exploit exchange-rule changes enacted in 2002 to address such concerns. Since these rules were adopted shortly after the passage of Sarbanes-Oxley (SOX), we refer to the post-rules period as the post-SOX period. Firms that pre-SOX were not compliant with subsequent listing requirements to have a majority of independent directors on the board chose to appoint new independent directors (Linck, Netter, and Yang (2009)), thereby causing an exogenous increase in board co-option for such firms. To isolate the causal impact of co-option, we apply a modified difference-in-difference approach. We continue to find results on the effects of cooption that by-and-large are consistent with the evidence described above. 2. Motivation, Related Literature, and Hypotheses Development 2.1. CEO turnover-performance sensitivity One of the key functions of the board is to evaluate the CEO and to replace him if his performance is poor (Mace (1971)). While early studies find that the likelihood of CEO turnover decreases in firm performance, subsequent studies suggest that this relation between turnover and performance is weaker when the firm's governance is weaker.5 Along similar lines, Hermalin and Weisbach (2003) suggest that turnover-performance sensitivity is weaker if the CEO captures the board. This implies that, for a given level of performance, CEOs of firms with 5 See Coughlan and Schmidt (1985), Warner, Watts, and Wruck (1988), Weisbach (1988), Huson, Parrino, and Starks (2001), Kang and Shivdasani (2005), and Kaplan and Minton (2012). 6 more co-opted boards should be less likely to be fired. Thus, we expect that: H1: All else equal, the sensitivity of forced CEO turnover to firm performance decreases with co-option. 2.2. CEO pay level A second important function of the board is to set the structure of CEO pay. Many studies argue that entrenched CEOs and CEOs of firms with weaker monitoring receive higher pay (Borokhovich, Brunarski, and Parrino (1997) and Core, Holthausen, and Larcker (1999)). We extend this reasoning to argue that if co-opted boards are more sympathetic to the CEO, then CEO pay should increase with co-option. This leads to our second hypothesis: H2: All else equal, CEO pay level increases with co-option. 2.3. CEO pay-performance sensitivity Pay contingent on performance is a means to align executive incentives with shareholder interests (e.g., Jensen and Murphy (1990), Bizjak, Brickley, and Coles (1993)). Thus, we also examine the impact of co-option on CEO pay-performance sensitivity (PPS or \"delta\"). Hartzell and Starks (2003) show that the CEO pay-performance sensitivity is higher when institutions hold more shares and argue that this is consistent with higher institutional holdings being good for shareholders. Faleye (2007) finds lower PPS for CEOs of firms with staggered boards and argues that staggered boards are associated with CEO entrenchment. Thus, we expect that, if cooption results in lower efficiency pressures on the management team, then pay-performance sensitivity should decrease in co-option.6 6 Empirically, the papers mentioned in this subsection use varying methodologies to capture PPS. For example, Hartzell and Starks (2003) use PPS from new option grants only as the dependent variable. Coles, Lemmon, and 7 H3: All else equal, CEO pay-performance sensitivity decreases with co-option. 2.4. Investment policy A long literature addresses managerial incentives to overinvest and to engage in empire building. Jensen (1986, pg. 323), for example, notes that \"growth increases managers' power by increasing the resources under their control. It is also associated with increases in managers' compensation, because changes in compensation are positively related to the growth (see Kevin Murphy (1985)).\" Moreover, scale and span of control can enhance the stature of the CEO in the industry and community. When the CEO has significant influence over some directors on the board and, accordingly, is permitted additional behavioral latitude and managerial discretion, such overinvestment is more likely. All else equal, co-option will be associated positively with investment. H4: All else equal, firm investment increases with co-option. 3. Data and Summary Statistics We start with the RiskMetrics database, with coverage of directors of S&P 500, S&P MidCap, and S&P SmallCap firms over the period 1996-2010. RiskMetrics does not provide a unique firm-level or director-level identifier over the entire time period. In the Appendix we describe how we associate unique identifiers with each record on RiskMetrics.7 We obtain Wang (2011) use the pay performance sensitivity derived from the total portfolio of accumulated stock and option holdings net of dispositions. Falaye (2007) uses Aggarwal and Samwick (1999) type regressions of changes in annual pay on dollar returns and interprets the coefficient on dollar returns as PPS. 7 RiskMetrics provides two different director identifiers, neither of which is fully populated for all directors. Between 23 - 27% of director-years have missing identifiers. We combine both to create a unique identifier for all director-year observations. Importantly, if only one of these identifiers is used, it will result in incorrect estimates of 8 compensation data from Execucomp, accounting data from Compustat, and stock return data from CRSP. We exclude firms incorporated outside the U.S. We define below our key variables. 3.1. CEO forced turnover The logic underlying our measure of co-option is most applicable for forced turnover. Unfortunately, it is difficult to classify turnover as forced or voluntary. Very often, even forced turnovers are reported to the press as voluntary. Nevertheless, we use an approximate classification scheme, similar to that used in other papers (such as Denis and Denis (1995)) to separate turnovers into forced or voluntary. We define Forced Turnover as one if the departing CEO is less than 60 years old, and zero otherwise. 3.2. CEO pay Our measure of CEO pay is total annual compensation (Execucomp variable TDC1). This includes the value of annual stock option grants, salary and bonus, value of annual restricted stock grants, other annual compensation, long-term incentive payouts, and all other compensation. We discuss in the Appendix how the changes in compensation reporting following FAS 123R and new SEC disclosure requirements affect the reporting of pay. We compute an adjusted pay measure (discussed in more detail in the Appendix) that accounts for these changes in reporting. Our results are similar using this adjusted pay measure. 3.3. CEO pay-performance sensitivity Pay-performance sensitivity is estimated as the sensitivity of CEO wealth to stock price, otherwise termed as CEO delta, based on the entire portfolio of stock and options held by the CEO. Specifically, the semi-elasticity form of delta is the expected $ change in CEO wealth for board size, independence, co-option etc. Upon request, the authors can provide the unique director identifier that we create as well as the unique firm identifiers (GVKEY and PERMNO) for each record on RiskMetrics. 9 a 1% change in stock price. We calculate delta using the approach of Core and Guay (2002) but with adjustments to Execucomp data as specified in the Appendix. Also see Coles, Daniel, and Naveen (2013) for details on data and on calculation of incentive measures in the presence of changing financial reporting requirements and formats. 3.4. Investment Our proxy for investment is capital expenditures scaled by book value of assets. 3.5. Co-option Our principal measure of co-option is based on the number of directors elected after the CEO takes office. We refer to such directors as \"co-opted\" directors. Co option # Co opted directors Board size This variable ranges from 0 to 1, with higher values indicating greater co-option.8 In some specifications, we use an alternative measure of co-option, Tenure-weighted Cooption (TW Co-option), which is the sum of the tenure of co-opted directors divided by the total tenure of all directors. Thus, board size TW Co option Tenure Co opted Director Dummy i 1 i i board size Tenure i 1 i where Co-opted Director Dummyi equals 1 if the director 'i' is a co-opted director, and equals 0 otherwise. Tenurei refers to the tenure of the director 'i' on the board. This alternative measure 8 In contemporaneous work independent of ours, Morse, Nanda, and Seru (2011) develop a measure of CEO power based on three elements, one of which is similar to our measure of co-option. They show that more powerful CEOs (CEOs who have titles of Chairman, CEO, and President, CEOs of firms with insider-dominated boards, or CEOs with a greater proportion of directors appointed during their tenure) rig their pay contracts by increasing the weights on the better performing measures. 10 accounts for the increase of influence of co-opted directors on board decisions through time, as such directors work alongside the CEO and previously appointed directors. This measure assumes that the greater the tenure of co-opted directors, the greater their influence on board decisions. Again, this measure can vary from 0 to 1, with a higher value indicating greater board capture. Our third measure of co-option is Residual Co-option, which is defined as the residual from a regression of Co-option on CEO tenure. Our final measure of co-option is Residual TW Co-option, which is the residual from a regression of TW Co-option on CEO tenure. These two measures remove the positive correlation between CEO tenure and co-option. For each firm-year, RiskMetrics provides the date of the annual meeting and the slate of directors up for election. The directors on the slate almost always obtain sufficient support to be elected (Hermalin and Weisbach (1998) and Cai, Garner, and Walking (2009)). The majority of the sample firms hold their annual meeting during the first 3 - 4 months of the fiscal year. Thus, because these directors constitute the board for the majority of the fiscal year, we assign directors on the slate at the annual meeting in a given fiscal year as the directors for that year. For CEO turnover events, we are careful to identify the board in place before the CEO was dismissed since this board is the one responsible for replacing the CEO. Thus the CEO turnover date relative to the meeting date is important for our purpose. Figure 1 illustrates the timeline. If a CEO turnover occurred after the annual meeting date, then the board that determined the replacement was the board elected for that year. That is, turnover and co-option are measured contemporaneously. If a CEO turnover occurred before the annual meeting date, then the board responsible for replacing the CEO is the one elected in the previous year so we use lagged measures of co-option in the turnover regression. In non-turnover years, since both 11 the lagged and contemporaneous boards decide on the CEO's 'non-replacement,' we use the average of the lagged and contemporaneous values of co-option. For regressions explaining variation in CEO pay, CEO delta, and investment, we use the contemporaneous co-option measure, because this is based on the board that is in place for the majority of the year and also because performance-based pay (which is a significant component of overall pay) will be decided by the board at the end of the fiscal year. 3.6. Independence Independence is the ratio of the number of independent directors on the board to total board size. Independent directors are those who are neither inside nor grey directors (Weisbach (1988), Byrd and Hickman (1992), Brickley, Coles, and Terry (1994)). 3.7. Summary statistics Table 1 provides the summary statistics. To minimize the influence of outliers, throughout the paper we winsorize all variables at the 1st and 99th percentiles.9 The average firm in the sample is large, with sales of $5.3 billion. This is not surprising given that our sample is S&P 1500 firms. The average board has about 10 directors. Co-option has a mean value of 0.47, while mean Independence is 0.69. Thus, on average, although more than two-thirds of the directors are technically independent, our calculations indicate that nearly half of the board has been co-opted by the CEO. Average Tenure-Weighted (TW) Co-option is 0.31, implying that while co-opted directors make up nearly half the board, their influence, after accounting for their tenure on the board, is a bit lower at 31%. Not surprisingly, Co-option and TW Co-option are similar, with a correlation of 0.93 (p