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Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

Listed author(s):
  • Benjamin E. Hermalin

    (University of California at Berkeley)

  • Michael S. Weisbach

    (University of Arizona)

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.

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Paper provided by EconWPA in its series Microeconomics with number 9602001.

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Length: 42 pages
Date of creation: 16 Feb 1996
Date of revision: 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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