The Nominating Committee As An Antecedent of Effective Corporate Governance

Abstract

In this paper, we examine a possible antecedent to board effectiveness – the presence of a nominating committee. We argue that director cooptation by CEOs, and therefore ineffectual governance, may result from allowing CEOs to appoint sympathetic directors. Thus, because outside independent board members are more likely to be effective in their roles as monitors of the CEO, and because such members are more likely to have been selected by nominating committees, measures of board effectiveness should be positively associated with the presence of a nominating committee. Our results are largely consistent with our hypotheses, and are thus instructive in the design of optimal governance mechanisms. We find that firm profitability, frequency of compensation committee meetings, compensation committee size, and CEO experience of compensation committee members are all higher among firms with nominating committees.