Strategic Director Appointments and Board Voting Patterns
47 Pages Posted: 2 Jun 2016 Last revised: 27 Jan 2018
Date Written: January 5, 2018
Recent corporate governance scandals have been attributed to lack of board independence and the influence CEOs have over their boards. However, CEOs can also affect board efficacy without compromising independence by choosing directors strategically. We offer a theoretical framework using a model of board voting to examine how director characteristics and strategic director choice affect equilibrium voting strategies. We show that some "passivity" on the part of directors -- such as rubberstamping managers' actions and deferring to other directors on the board without the benefit of information -- can in fact be desirable equilibrium behavior, implying that the board can actually make better decisions by relying on less information (i.e., from fewer directors) some of the time. We show that opportunistic (principled) managers may not always appoint the least (most) able directors to the board, contrary to what we might expect. We also find that "independent" board picks by well-meaning activists and/or institutional investors may not always foster board effectiveness.
Keywords: Board of directors, corporate governance, majority voting, rubberstamping, deferring, abstaining
JEL Classification: D80, G34, M40
Suggested Citation: Suggested Citation