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Optimal Corporate Governance Structures

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  • Suarez, Javier
  • Almazan, Andres

Abstract

This paper explores how motivating an incumbent CEO to make investments that improve the effectiveness of the firm organization under his management interacts with the replacement policy of the board of directors. We characterize the optimal compensation package (including severance pay) under governance structures that differ in the power that the incumbent CEO has on the board of directors. We explain why yielding the incumbent CEO some control of the board (entrenchment) can be desirable and offer predictions on when this arrangement is optimal. We also examine the correlation between the elements of his compensation package and the structure of the board.

Suggested Citation

  • Suarez, Javier & Almazan, Andres, 2000. "Optimal Corporate Governance Structures," CEPR Discussion Papers 2391, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2391
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    Cited by:

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    2. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 7-26.

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    More about this item

    Keywords

    Board of directors; Corporate governance; Severance payment; Takeovers;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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