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Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

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  • Hermalin, Benjamin E
  • Weisbach, Michael S

Abstract

How can boards be chosen through a process partially controlled by the CEO, yet, in many instances, still be effective monitors of him? The authors offer an answer based on a model in which board effectiveness is a function of its independence. This, in turn, is a function of negotiations (implicit or explicit) between existing directors and the CEO over who will fill vacancies on the board. The CEO'S bargaining power over the board-selection process comes from his perceived ability relative to potential successors. Many empirical findings about board structure and performance arise as equilibrium phenomena of this model. Copyright 1998 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 88 (1998)
Issue (Month): 1 (March)
Pages: 96-118

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Handle: RePEc:aea:aecrev:v:88:y:1998:i:1:p:96-118

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