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Compensating Outside Directors with Stock: The Impact on Non-Primary Stakeholders

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Abstract

Two obvious trends in corporate governance include broadening board accountability beyond shareholders’ interests and paying outside directors with equity compensation (stock and stock options). By integrating common agency and instrumental stakeholder theories, we examine the effect of stock compensation on secondary stakeholders and a firm’s participation in social issues, two areas where interests are less aligned with shareholder value. Consistent with our predictions, we found that while stock compensation may be an effective way to align directors’ goals to those of shareholders, it has adverse effects on important non-shareholder constituencies in the company’s operating environment.

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Acknowledgments

The authors gratefully acknowledge helpful comments from Ellen Auster, Sabrina Deutsch Salamon, Eileen Fischer, and Christine Oliver. The authors also acknowledge the financial support of the Social Science and Humanities Research Council (SSHRC) of Canada.

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  1. Schulich School of Business, York University, 4700 Keele Street, Toronto, ON, M3J 1P3, Canada

    Yuval Deutsch

  2. Richard Ivey School of Business, University of Western Ontario, 1151 Richmond Street North, London, ON, N6A 3K7, Canada

    Mike Valente

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Deutsch, Y., Valente, M. Compensating Outside Directors with Stock: The Impact on Non-Primary Stakeholders. J Bus Ethics 116, 67–85 (2013). https://doi.org/10.1007/s10551-012-1447-7

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