Empirical evidence on the relations between board independence and key board decisions, CEO incentives and firm performance is generally confounded by major endogeneity issues. We circumvent these endogeneity problems by demonstrating the strong impact of the local director labor market on corporate board structure for all but the largest quartile of S&P 1500 firms. Specifically, we show that proximity to larger pools of local director talent leads to significantly more independent boards. Using local director pools as an instrument for board independence in small and medium-sized firms, we reexamine the effects of board independence on firm value, operating performance and CEO incentives. Empirically, we document that board independence has a significant positive impact on firm value and operating performance, and increases CEO pay and turnover sensitivity to performance. JEL: G30, G34

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