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

See all articles by Zsuzsanna Fluck

Zsuzsanna Fluck

Michigan State University - Department of Finance

Naveen Khanna

Michigan State University

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

Fluck, Zsuzsanna and Khanna, Naveen, A Theory of Corporate Boards with Endogenous Information Collection, Optimal Compensation and Strategic Voting: When Do Independent Boards Dominate Rubberstamping Ones? (March 18, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108841 or http://dx.doi.org/10.2139/ssrn.1108841

Zsuzsanna Fluck (Contact Author)

Michigan State University - Department of Finance ( email )

Eli Broad Graduate School of Management
315 Eppley Center
East Lansing, MI 48824-1122
United States
517-353-3019 (Phone)
517-432-1080 (Fax)

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
271
Abstract Views
1,220
rank
111,625
PlumX Metrics