Why Do Boards Exist? Governance Design in the Absence of Corporate Law
71 Pages Posted: 25 Apr 2017 Last revised: 11 Sep 2017
Date Written: July 1, 2017
We study how owners trade off costs and benefits of establishing a board in a historical setting, where boards are optional and authority over corporate decisions can freely be allocated across the general meeting, the board, and management. We find that large owners and boards are substitutes, and that boards exist in firms most prone to have collective action problems. Boards monitor, advise, and mediate among shareholders, and these different roles entail different allocations of authority. Boards also arise to balance the need for small shareholder protection with the need to curb managerial discretion.
Keywords: Boards, Corporate Governance, Authority Allocation, Private Contracting
JEL Classification: G3, D23, K2, N80
Suggested Citation: Suggested Citation