Download this Paper Open PDF in Browser

Boards of Directors as an Endogenously Determined Institution:
A Survey of the Economic Literature

39 Pages Posted: 29 Jun 2000  

Benjamin E. Hermalin

University of California, Berkeley

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: June 15, 2000

Abstract

This paper surveys the economic literature on boards of directors. Although a legal requirement for many organizations, boards are also an endogenously determined governance mechanism for addressing agency problems inherent to many organizations. Formal theory on boards of directors has been quite limited to this point. Most empirical work on boards has been aimed at answering one of three questions:
1) How do board characteristics such as composition or size related to profitability?
2) How do board characteristics affect the observable actions of the board?
3) What factors affect the makeup of boards and how they evolve over time?
The primary findings from the empirical literature on boards are: Board composition is not related to corporate performance, while board size is negatively related to corporate performance. Both board composition and size are correlated with the quality of the board's decisions regarding CEO replacement, acquisitions, poison pills, and executive compensation. Finally, boards appear to evolve over time as a function of the bargaining power of the CEO relative to the existing directors. Firm performance, CEO turnover, and changes in ownership structure appear to be important factors affecting changes to boards.

Keywords: boards of directors, corporate governance

JEL Classification: G3, L2

Suggested Citation

Hermalin, Benjamin E. and Weisbach, Michael S., Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature (June 15, 2000). Available at SSRN: https://ssrn.com/abstract=233111 or http://dx.doi.org/10.2139/ssrn.233111

Benjamin E. Hermalin

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
3,546
Rank
2,086
Abstract Views
11,636