Deadlock on the Board

Donaldson, Jason; Malenko, Nadya; Piacentino, Giorgia

doi:10.2139/ssrn.3081638

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Deadlock on the Board

Review of Financial Studies, Vol. 33, No. 10, October 2020

European Corporate Governance Institute – Finance Working Paper No. 645/2019

58 Pages Posted: 7 Dec 2017 Last revised: 29 Sep 2020

See all articles by Jason Donaldson

Nadya Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Giorgia Piacentino

Columbia University

There are 3 versions of this paper

Date Written: October 1, 2020

Abstract

We develop a dynamic model of board decision-making akin to dynamic voting models in the political economy literature. We show 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 -- deadlocked boards lead to entrenched CEOs. We explore how to compose boards and appoint directors to mitigate deadlock. We find board diversity and long director tenure can exacerbate deadlock. 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: D72, G34

Suggested Citation: Suggested Citation

Donaldson, Jason and Malenko, Nadya and Piacentino, Giorgia, Deadlock on the Board (October 1, 2020). Review of Financial Studies, Vol. 33, No. 10, October 2020, European Corporate Governance Institute – Finance Working Paper No. 645/2019, Available at SSRN: https://ssrn.com/abstract=3081638 or http://dx.doi.org/10.2139/ssrn.3081638