A Theory of Corporate Boards with Endogenous Information Collection, Optimal Compensation and Strategic Voting: When Do Independent Boards Dominate Rubberstamping Ones?
41 Pages Posted: 24 Mar 2008
Date Written: March 18, 2008
Abstract
This paper presents a model of the collective decision making of corporate boards. Each director collects costly private information and votes to maximize his welfare given his compensation. We derive optimal contracts that induce first-best outcomes for shareholders despite directors' incentive to free-ride on each others' information and votes. Our model highlights important frictions between information collection and information sharing, and between board accountability and independence. We identify conditions under which a rubber-stamping or captive board achieve higher shareholder value than an independent or active board and conditions under which the reverse is true. Our findings hold whether board decisions are made through majority, supermajority or unanimity voting rules and whether balloting is open or secret.
Keywords: corporate boards, corporate governance, executive compensation
JEL Classification: G34, L22
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
CEO Involvement in the Selection of New Board Members: An Empirical Analysis
By David Yermack and Anil Shivdasani
-
The Uncertain Relationship between Board Composition and Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence and Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence And Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black