Director Independence as Strategic Behavior
AbstractThis paper analyzes the independence of boards of directors as an optimally chosen, non-contractible behavior. A board behaves loyally to a CEO when it agrees to a negative NPV-project, giving the CEO private benefits. While the CEO benefits from competent directors because they help him make better decisions, the analysis reveals that loyalty is endogenously easier to obtain from a less competent board. The model implies that shareholders face a tradeoff between higher CEO pay and more inefficient board loyalty. It also holds predictions for how firm characteristics, other corporate governance features, and the business environment affect endogenous board competence.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-17.
Length: 39 pages
Date of creation: Apr 2007
Date of revision:
Corporate governance; boards of directors; relational contracts;
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- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- M51 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Firm Employment Decisions; Promotions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-20 (All new papers)
- NEP-BEC-2007-10-20 (Business Economics)
- NEP-CSE-2007-10-20 (Economics of Strategic Management)
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