Voting in committee: firm value vs. back scratching
In this paper, I study how the CEO's election can be biased if some directors in the board belong to the same network. I use a static Bayesian game. Directors want to elect the best candidate but they also want to vote for the winner. In that context, results show that, when no candidate is part of the network, boards with a network perform better in electing the right candidate. On the other hand, it becomes detrimental for stockholders if one candidate is part of the network. Indeed, compared to a situation where there are no interconnections between directors, the directors who are members of a network vote more often for the candidate they think is best, rather than for the one they think might win. The ones who are not part of the network follow their lead. Thus the network has power on the result of the election and therefore limits the power of the future CEO.
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- Gilat Levy, 2007.
"Decision Making in Committees: Transparency, Reputation, and Voting Rules,"
American Economic Review,
American Economic Association, vol. 97(1), pages 150-168, March.
- Gilat Levy, 2005. "Decision making in committees: transparency, reputation and voting rules," LSE Research Online Documents on Economics 543, London School of Economics and Political Science, LSE Library.
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- Warther, Vincent A., 1998. "Board effectiveness and board dissent: A model of the board's relationship to management and shareholders," Journal of Corporate Finance, Elsevier, vol. 4(1), pages 53-70, March.
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