Deadlock on the Board

Abstract

We develop a dynamic model of board decision-making. We show that a board could retain a policy all directors agree is worse than an available alternative. 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