Multidimensional Corporate Governance: Board Design, Executive Compensation, and Information Sharing

38 Pages Posted: 6 May 2020 Last revised: 27 Feb 2021

See all articles by Kevin D. Chen

Kevin D. Chen

University of Pennsylvania - Accounting Department

Wayne R. Guay

University of Pennsylvania - Accounting Department

Richard Lambert

The Wharton School

Date Written: April 24, 2020

Abstract

Corporate governance is a multidimensional construct, with many interactive mechanisms that must be simultaneously managed for efficiency. We develop a model where multiple governance mechanisms (board independence, board expertise, and CEO equity incentives) are endogenously selected to encourage information sharing by the CEO, which in turn optimizes the board’s ability to monitor and advise the CEO’s project selection. In equilibrium, we find that boards with greater independence also have higher expertise; board expertise and equity incentives are substitutes (complements) when the board has high (low) independence; and equity incentives may be positively or negatively related to board independence, depending on the benefit of expert advice. The analysis offers new predictions about the correlations between board independence, board expertise, and incentive compensation.

Keywords: Board independence, board expertise, equity incentives, corporate governance, information sharing

JEL Classification: G30, G34, D83

Suggested Citation

Chen, Kevin and Guay, Wayne R. and Lambert, Richard, Multidimensional Corporate Governance: Board Design, Executive Compensation, and Information Sharing (April 24, 2020). Available at SSRN: https://ssrn.com/abstract=3584848 or http://dx.doi.org/10.2139/ssrn.3584848

Kevin Chen (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Richard Lambert

The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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