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Strong managers, weak boards?

Adams, Renee B. and Ferreira, Daniel (2009) Strong managers, weak boards? CESifo Economic Studies, 55 (3-4). pp. 482-514. ISSN 1610-241X

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Identification Number: 10.1093/cesifo/ifp023


Many governance reform proposals are based on the view that boards have been too friendly to executives, for example, by awarding them excessive pay. Although boards are often on friendly terms with executives, it is less clear that they have systematically failed to function in the interests of shareholders. Understanding board monitoring requires a theory of boards that takes into account how firms provide incentives for their Chief Executive Officer's (CEOs) through other means. We develop a model in which a CEO's ownership stake and private benefits have opposite effects on his willingness to share private information with an independent board of directors. To encourage the CEO to communicate, the board may optimally commit to a low monitoring intensity when either CEO ownership is low or private benefits are high. Our model suggests that the existing cross-section evidence on the correlation between board composition and CEO ownership and tenure needs re-evaluation. Using a new proxy for board monitoring, we provide new evidence that this cross-sectional correlation appears to be non-monotonic, with board independence first decreasing and then increasing in CEO ownership and tenure. We discuss the implications of our model for the design and evaluation of governance structures.

Item Type: Article
Official URL:
Additional Information: © 2009 CESifo Group
Divisions: Finance
Financial Markets Group
Subjects: H Social Sciences > HG Finance
JEL classification: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J44 - Professional Labor Markets and Occupations
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Date Deposited: 28 Nov 2009 14:53
Last Modified: 16 May 2024 00:52

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