Why Do Boards Exist? Governance Design in the Absence of Corporate Law

71 Pages Posted: 25 Apr 2017 Last revised: 11 Sep 2017

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Salvatore Miglietta

BI Norwegian Business School, Department of Finance

Charlotte Ostergaard

BI Norwegian Business School, Department of Finance; European Corporate Governance Institute (ECGI)

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Date Written: July 1, 2017

Abstract

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

Burkart, Mike C. and Miglietta, Salvatore and Ostergaard, Charlotte, Why Do Boards Exist? Governance Design in the Absence of Corporate Law (July 1, 2017). Swedish House of Finance Research Paper No. 17-8; 12th Annual Mid-Atlantic Research Conference in Finance (MARC); 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 504/2017. Available at SSRN: https://ssrn.com/abstract=2902617 or http://dx.doi.org/10.2139/ssrn.2902617

Mike C. Burkart

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Salvatore Miglietta

BI Norwegian Business School, Department of Finance ( email )

Nydalsveien 37
Oslo, NO-0442
Norway

Charlotte Ostergaard (Contact Author)

BI Norwegian Business School, Department of Finance ( email )

Nydalsveien 37
Oslo, 0442
Norway
+4746410520 (Phone)

HOME PAGE: http://home.bi.no/charlotte.ostergaard/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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