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In October 2009, the United States Treasury Department and Congress considered new regulations requiring executives and directors to receive much of their compensation in the form of long-term stock. One concern with this is that it may have negative consequences by entrenching managers and directors over the long term. This study compares the potential benefits of long-term director ownership with the potential costs of entrenchment. Using the dollar amount of stock owned by independent directors, the results suggest that the incentive effect dominates any costs related to entrenchment: firms with greater stock ownership outperform other firms, regardless of the degree of managerial entrenchment that may be present. The implication for policy-makers is that providing directors with incentives through stock ownership can be a very effective corporate governance mechanism.

Keywords: Corporate governance, agency problems, boards, directors, incentive alignment, entrenchment, ownership

How to cite this paper: Bolton, B. (2009). The long-term benefits of director stock ownership. Corporate Board: role, duties and composition, 5(3), 6-16.