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Director Independence as Strategic Behavior

Author

Listed:
  • Alexander F. WAGNER

    (University of Zurich and Swiss Finance Institute)

Abstract

This 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.

Suggested Citation

  • Alexander F. WAGNER, 2007. "Director Independence as Strategic Behavior," Swiss Finance Institute Research Paper Series 07-17, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0717
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    File URL: http://ssrn.com/abstract=1001206
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    More about this item

    Keywords

    Corporate governance; boards of directors; relational contracts;

    JEL classification:

    • 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 - - Personnel Economics - - - Firm Employment Decisions; Promotions

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