Dark side of corporate donations affiliated with independent directors

What is it about?

Corporate donations to charities affiliated with the board’s independent directors (affiliated donations) are large and mostly undetected due to lack of formal disclosure. Affiliated donations may impair independent directors’ monitoring incentives. CEO compensation is on average 9.4% higher at firms making affiliated donations than at other firms, and it is much higher when the compensation committee chair or a large fraction of compensation committee members are involved. We find suggestive evidence that CEOs are unlikely to be replaced for poor performance when firms donate to charities affiliated with a large fraction of the board or when they donate large amounts.

Featured Image

Why is it important?

Our findings help investors understand the dark side of corporate donations affiliated with independent directors. Such donations compromise directors' incentive to monitor and discipline executives.