Deadlock on the Board
64 Pages Posted: 7 Dec 2017 Last revised: 5 Aug 2018
Date Written: July 30, 2018
We develop a dynamic model of board decision-making. We show that a board could be unable to make a decision even if all directors agree on what the best decision is. Thus, directors may retain a CEO they agree is bad---a deadlocked board leads to an entrenched CEO. We explore how to compose boards and appoint directors to mitigate deadlock. We find that board diversity and long director tenure can exacerbate deadlock. Moreover, we rationalize why CEOs and incumbent directors have power to appoint new directors: to avoid deadlock. Our model speaks to short-termism, staggered boards, and proxy access.
Keywords: board of directors, dynamic decision-making, deadlock, entrenchment, director elections, CEO turnover, diversity, tenure, staggered boards
JEL Classification: D71, D72, D74, G34
Suggested Citation: Suggested Citation