Director Independence as Strategic Behavior
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.
|Date of creation:||Apr 2007|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.SwissFinanceInstitute.ch|
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