Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

Benjamin Hermalin () and Michael Steven Weisbach ()

Microeconomics from EconWPA

Abstract: A fundamental issue in governance research is how boards can be chosen through a process partially controlled by the CEO but yet can still be somewhat effective in monitoring the CEO. We offer an answer based on a model in which board effectiveness is a function of the board's independence. This, in turn, is a function of negotiations (implicit or explicit) between the existing directors and the CEO over who will fill vacancies on the board. We show how the CEO's bargaining power over the board-selection process depends on his perceived ability. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model.

Keywords: Boards of Directors; Endogenous Monitoring (search for similar items in EconPapers)
JEL-codes: D21 D23 G30 L20 (search for similar items in EconPapers)
Date: 1996-02-16, Revised 1996-10-09
Note: Type of Document - Postscript; prepared on IBM PC -- Scientific Workplace; pages: 42 ; figures: none

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Related works:
Working Paper: Endogenously Chosen Boards of Directors and Their Monitoring of the CEO (1995)
Working Paper: Endogenously Chosen Boards of Directors and Their Monitoring of the CEO (1996)
Journal Article: Endogenously Chosen Boards of Directors and Their Monitoring of the CEO (1998)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpmi:9602001

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