Strong managers, weak boards?

Renee Adams and Daniel Ferreira

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Many governance reform proposals are based on the view that boards have been too friendly to executives, for example, by awarding them excessive pay. Although boards are often on friendly terms with executives, it is less clear that they have systematically failed to function in the interests of shareholders. Understanding board monitoring requires a theory of boards that takes into account how firms provide incentives for their Chief Executive Officer's (CEOs) through other means. We develop a model in which a CEO's ownership stake and private benefits have opposite effects on his willingness to share private information with an independent board of directors. To encourage the CEO to communicate, the board may optimally commit to a low monitoring intensity when either CEO ownership is low or private benefits are high. Our model suggests that the existing cross-section evidence on the correlation between board composition and CEO ownership and tenure needs re-evaluation. Using a new proxy for board monitoring, we provide new evidence that this cross-sectional correlation appears to be non-monotonic, with board independence first decreasing and then increasing in CEO ownership and tenure. We discuss the implications of our model for the design and evaluation of governance structures.

Keywords: ISI; board composition; corporate governance; board monitoring; private benefits; ownership structure (search for similar items in EconPapers)
JEL-codes: G34 J41 J44 L22 (search for similar items in EconPapers)
Date: 2009-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in CESifo Economic Studies, September, 2009, 55(3-4), pp. 482-514. ISSN: 1610-241X

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Journal Article: Strong Managers, Weak Boards? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:25857

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