CEOs under Fire: The Effect of Competition from Talented Inside Directors on Corporate Social Responsibility

The presence of talented inside directors on board could enhance governance performance as it serves a credible CEO replacement mechanism. This study examines the effect of talented inside directors on CSR using a sample consisting of 18,256 U.S. firm-year observations from 1998 to 2016. Our result shows a significantly negative association between the presence of talented inside directors and CSR, suggesting that the presence of talented inside directors discourages CEOs to undertake CSR for their own interests. Our main result remains unchanged after correcting for endogeneity issues by using propensity matching (PSM) method, instrumental variable (IV) approach and different-in-difference (DID) method. Additionally, cross-sectional analyses show that presence of talented inside directors reduces CSR especially in firms where agency problems are more salient and inside directors are more likely to replace CEOs, supporting the monitoring role of inside directors. Finally, we show that the presence of talented inside directors improves the valuation of CSR. Taken together, this study suggests that electing talented inside directors on board is an effective mechanism to monitor a firm’s CSR and enhance the value of CSR.