Monitoring the board: should shareholders have direct proxy access?

Gilberto Loureiro

Quantitative Finance, 2012, vol. 12, issue 6, 943-950

Abstract: Motivated by the current discussion to reform shareholder-nominated director elections, this paper presents a model that shows that, when shareholders have direct access to proxy, the quality of the board of directors improves. This is so because more independent directors—regarded as better monitors of managerial activities—will be elected. In the model, a manager maximizes his expected utility by solving the trade-off between reputation and consumption of private benefits. The board can be of high-type (independent, only cares about reputation) or low-type (non-independent, faces a trade-off similar to the manager's). When the board can signal its type at a relatively small cost, giving shareholders direct access to proxy is better than delegating the nomination of outside directors to managers: in the first alternative, only high-type boards will be kept, whereas in the second, low-type boards will predominate.

Date: 2012
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DOI: 10.1080/14697681003785975

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