Why Do Boards Exist? Governance Design in the Absence of Corporate Law
83 Pages Posted: 25 Apr 2017 Last revised: 18 Dec 2020
Date Written: October 31, 2020
We study when firms choose to install boards and their roles in a historical setting where neither boards nor their duties are mandated by law. Boards arise in firms with large, heterogenous shareholder bases. We propose that an important role of boards is to mediate between heterogenous shareholders with divergent interests. Voting restrictions are common and ensure that boards are representative and not captured by large blockholders. Boards are given significant powers to both mediate and monitor management, but few boards mainly advise. Firms with boards are more prevalent in regions with a greater supply of small-investor finance.
Keywords: Board roles, ownership structure, voting, conflicts of interest, authority
JEL Classification: G3, D23, K2, N80.
Suggested Citation: Suggested Citation