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Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

Author

Listed:
  • Benjamin E. Hermalin

    (University of California at Berkeley)

  • Michael S. Weisbach

    (University of Arizona)

Abstract

A fundamental issue in governance research is how boards can be chosen through a process partially controlled by the CEO but yet can still be somewhat effective in monitoring the CEO. We offer an answer based on a model in which board effectiveness is a function of the board's independence. This, in turn, is a function of negotiations (implicit or explicit) between the existing directors and the CEO over who will fill vacancies on the board. We show how the CEO's bargaining power over the board-selection process depends on his perceived ability. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model.

Suggested Citation

  • Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Microeconomics 9602001, University Library of Munich, Germany, revised 09 Oct 1996.
    • Handle: RePEc:wpa:wuwpmi:9602001
    Note: Type of Document - Postscript; prepared on IBM PC -- Scientific Workplace; pages: 42 ; figures: none
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    Keywords

    Boards of Directors; Endogenous Monitoring;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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