In our paper, The Independent Board Requirement and CEO Connectedness, which was recently made publicly available on SSRN, we investigate unintended consequences of the independent board requirement.  Following highly publicized corporate scandals in 2001 and 2002, firms listed on the NYSE and NASDAQ are required to have a majority of independent directors. The intent is to better protect shareholders by making boards more independent from managerial influence and thereby more effective monitors. However, the majority requirement represents a ceiling on the percentage of dependent directors a firm may have.

If board composition is endogenous, the quota may trigger reactions by firms affected by the regulation. Board composition is but one of many facets of governance. Imposition of a quota on one governance mechanism may spillover to other governing bodies as firms find ways to counteract it. This paper attempts to identify the spillover effects, analyze their consequences, and answer several questions: How do CEOs react to a regulation that may reduce their influence over the board? How do the reactions, if any, manifest in the softer side of governance, namely, CEO connectedness with other key players in governing the firm? How do the spillover effects impact the regulatory intent?

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