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Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

Author

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  • Benjamin E. Hermalin
  • Michael S. Weisbach

Abstract

This paper develops a model in which the effectiveness of the board's monitoring of the CEO depends on the board's independence. The independence of new directors is determined through negotiations (implicit or explicit) between the existing directors and the CEO. The CEO's bargaining position, and thus his influence over the board-selection process, depends on an updated estimate of the CEO's ability based on his prior performance. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model. We also explore the implications of this model for proposed regulations of corporate governance structures.

Suggested Citation

  • Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
  • Handle: RePEc:wop:calbha:_004
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    File URL: http://haas.berkeley.edu/~hermalin/boards.PS
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    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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