Does Independent Directors’ CEO Experience Matter?

Abstract

We find the confluence of CEO-same industry experience makes independent directors particularly helpful in enhancing value-added growth and we identify a channel: guidance toward higher value-added R&D investments and higher quality innovations. Further corroborating these inferences, we find greater improvement in value-added growth when (1) independent directors with industry–CEO experience (IDICEs) have experience in more similar industries; (2) they create more shareholder value as CEO; and (3) they are current CEOs. In addition, IDICEs contribute to value-added growth most when firm environments and characteristics are conducive for active board-management interaction; namely, when product markets are more competitive and dynamic, when outsiders can more easily acquire firm-specific information, and when firms are younger and smaller. Consistent with our inferences on how IDICEs contribute to value-added growth, firms growing faster, less successfully innovating, and/or under strong governance tend to be matched with IDICEs.