When Bonnie Buchanan and her research team analyzed nearly 6,400 firm-year observations across 942 U.S. companies between 2006 and 2019, they discovered something that challenges a persistent skepticism about corporate boards: independent directors actually do push back against risky executive pay structures—and they do it decisively.
The study, published in European Financial Management, focused on a type of compensation most investors never hear about: "inside debt," which includes pensions and deferred compensation awarded to chief executives. Unlike stock options or bonuses that can encourage reckless short-term risk-taking, inside debt works differently. These payments tie a CEO's personal wealth directly to the company's long-term financial stability, making executives naturally more cautious about their decisions. When designed poorly, though, even inside debt can create incentive problems that expose shareholders to unnecessary danger.
What makes this research remarkable is not the compensation mechanism itself, but how boards respond to it. The researchers calculated an "optimal" level of CEO inside debt for each company, factoring in firm size, debt levels, growth opportunities, financial risk, and CEO characteristics. Then they tracked how quickly boards adjusted actual pay packages back toward that benchmark. The data revealed a clear pattern: companies with higher proportions of independent directors adjusted CEO compensation more quickly toward the optimal level than firms with less independent boards.
The effect was particularly pronounced in the riskier scenarios—precisely where shareholder protection matters most. Companies with high growth opportunities, financially secure firms without borrowing constraints, and businesses led by overconfident chief executives all showed stronger board intervention. These are exactly the situations where weak pay incentives could create the biggest problems.
Perhaps most intriguingly, the researchers discovered that independent directors were not making crude, automatic decisions. Instead, boards appeared to weigh trade-offs carefully. When the risks associated with a CEO's inside debt package were lower, independent boards moved more slowly to change the compensation structure. This suggests directors are thinking strategically rather than simply reacting to headlines or pressure—they adjust when it matters most and hold steady when the stakes are lower.
Buchanan, an Associate Dean and professor of finance at the University of Surrey, summarized the finding: "There is a common perception that boards are often powerless when it comes to executive pay, particularly when dealing with influential CEOs. What we found is much more nuanced. Independent directors appear willing to step in and adjust compensation structures when they believe shareholders could be exposed to unnecessary risk."
The research pushes back against a widespread assumption that boards rubber-stamp whatever executives propose. Instead, it suggests that when boards have genuine independence—when directors are not handpicked by the CEO or entangled in conflicts of interest—they function as an active check on excessive risk. The 942 companies studied represent a substantial portion of the U.S. corporate landscape, lending credibility to the findings. For investors concerned about corporate governance and for boards wrestling with how to structure executive pay fairly, this research offers evidence that institutional safeguards can work when they are properly designed and genuinely independent.