Advising and Monitoring CEOs: The Dual Role of Boards

49 Pages Posted: 22 Aug 2010

See all articles by Tim Baldenius

Tim Baldenius

Columbia Buiness School

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation

Xiaojing Meng

Columbia Business School

Date Written: August 16, 2010

Abstract

The board of directors performs the dual role of monitoring and advising the firm’s management. At times it makes certain key decisions itself. We study the optimal board composition (of monitoring and advisory “types”) within a cheap-talk framework where the CEO and the board each may have private information about an impending investment decision, and their incentives are imperfectly aligned. When shareholders choose both the board composition and the allocation of decision rights between CEO and board, a non-monotonic relationship between CEO bias and board composition emerges. A key concern to practitioners and regulators is “CEO power”. Counter to conventional wisdom, we show that powerful CEOs who nominate board members themselves may in fact prefer a greater degree of monitoring intensity on the board than do shareholders. As a result, regulatory interventions (such as the Sarbanes-Oxley Act) that attempt to strengthen the monitoring role of boards, may in fact be harmful in precisely those cases where agency problems are the most severe. Lastly, CEOs may be able to entrench themselves by choosing “complex” projects involving greater information advantage. In response, shareholders may commit to an advisor-heavy board to preempt entrenchment.

Keywords: board of directors, corporate governance, CEO power, CEO entrenchment

JEL Classification: D82, G34, M40

Suggested Citation

Baldenius, Tim and Melumad, Nahum D. and Meng, Xiaojing, Advising and Monitoring CEOs: The Dual Role of Boards (August 16, 2010). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1662633 or http://dx.doi.org/10.2139/ssrn.1662633

Tim Baldenius (Contact Author)

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

Xiaojing Meng

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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