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Board Efficiency and Internal Corporate Control Mechanisms

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  • Clara Graziano
  • Annalisa Luporini

Abstract

We analyze the interactions between internal and external control mechanisms in a framework in which the board selects the CEO and then decides whether to retain or dismiss him after observing a signal regarding his ability. The novel aspect of our paper is that we consider both the hiring and the firing of the CEO by the board. The type of board is defined by its ability to select a good CEO, so that the quality of the CEO depends on the type of board. Then, the dismissal-retention decision provides information not only on the quality of the CEO but also on the board's type. We show that the board's behavior depends on the pressure from the takeover market and on whether its type is publicly known. When the pressure from the takeover market is high and the type of board is private information, the board prefers not to dismiss the manager even if it has received a very low signal regarding his quality. Hence, our model endogenously derives a collusion between board and CEO in which the board does not fire a bad CEO. This behavior emerges as an attempt to hide the board's inability to accomplish the first task, CEO selection, by distorting the second task, the CEO retention-dismissal decision. Copyright (c) 2003 Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 12 (2003)
Issue (Month): 4 (December)
Pages: 495-530

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Handle: RePEc:bla:jemstr:v:12:y:2003:i:4:p:495-530

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1

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Cited by:
  1. Miriam Schwartz-Ziv & Michael Weisbach, 2011. "What do Boards Really Do? Evidence from Minutes of Board Meetings," NBER Working Papers 17509, National Bureau of Economic Research, Inc.
  2. Clara Graziano & Annalisa Luporini, 2012. "Ownership concentration, monitoring, and optimal board structure," Economics Bulletin, AccessEcon, vol. 32(4), pages 3333-3346.
  3. Stéphane Hallegatte, 2005. "Accounting for Extreme Events in the Economic Assessment of Climate Change," Working Papers 2005.1, Fondazione Eni Enrico Mattei.
  4. Schwartz-Ziv, Miriam & Weisbach, Michael S., 2013. "What do boards really do? Evidence from minutes of board meetings☆☆Miriam Schwartz-Ziv is from Harvard University and Northeastern University, e-mail: miriam.schwartz@mail.huji.ac.il. Michael S. W," Journal of Financial Economics, Elsevier, vol. 108(2), pages 349-366.
  5. Annalisa Luporini & Clara Graziano, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," Working Papers - Economics wp2010_05.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  6. Silvia Dominguez Martinez & Otto H. Swank & Bauke Visser, 2006. "Disciplining and Screening Top Executives," Tinbergen Institute Discussion Papers 06-054/1, Tinbergen Institute.

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