Voting in Corporate Boards with Heterogeneous Preferences
AbstractWe analyze the voting behavior of a board of directors that has to approve (or reject) an investment proposal with uncertain return. We consider three types of directors: insiders, who are biased toward acceptance of the project, independent outsiders who want to maximize the firm’s profit and independent outsiders who care about their reputation. We show that the presence of members with heterogeneous preferences can be beneficial and that the partisan behavior of insiders can be used as a sort of coordinating device by uninformed outsiders. Provided that the size of the board is optimal, there is no gain from increasing the number of outsiders above the strict majority despite the fact that each outsider is informed with positive probability. Substituting profit-maximizing directors with directors concerned about their reputation is not an obstacle to profit maximization provided that an appropriate sequential voting protocol is followed. We also show that a proper board composition makes communication between directors irrelevant in the sense that the same outcome is obtained with and without communication. Finally, as information is costly, our model provides some suggestions on the optimal size of boards.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3332.
Date of creation: 2011
Date of revision:
board of directors; voting; corporate governance;
Other versions of this item:
- Paolo Balduzzi & Clara Graziano & Annalisa Luporini, 2011. "Voting in Corporate Boards with Heterogeneous Preferences," Working Papers - Economics wp2011_02.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
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- Suurmond, Guido & Swank, Otto H. & Visser, Bauke, 2004. "On the bad reputation of reputational concerns," Journal of Public Economics, Elsevier, vol. 88(12), pages 2817-2838, December.
- Paolo Balduzzi & Clara Graziano & Annalisa Luporini, 2012.
"Voting in Small Committees,"
CESifo Working Paper Series
3732, CESifo Group Munich.
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