Monitoring Managers: Does it Matter?

Abstract

We study how well-incentivized boards monitor CEOs and whether such monitoring improves performance. Using unique, detailed data on boards’ information sets and decisions for a large sample of private-equity-backed firms, we find that gathering information helps boards learn about CEO ability. ‘Soft’ information plays a much larger role than hard data, such as the performance metrics that prior literature focuses on, and helps avoid firing the CEO for bad luck or in response to adverse external shocks. We show that governance reforms increase the effectiveness of board monitoring and establish a causal link between forced CEO turnover and performance improvements.

Keywords: Corporate governance, large shareholders, boards of directors, active monitoring, CEO turnover, legal reforms, transition economies, private equity

JEL Classification: G34, G24, G32, K22, O16, P21