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Strong Managers, Weak Boards?

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  • Renée B. Adams
  • Daniel Ferreira

Abstract

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. (JEL codes: G34, L22, J41, J44) Copyright The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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  • Renée B. Adams & Daniel Ferreira, 2009. "Strong Managers, Weak Boards?," CESifo Economic Studies, CESifo Group, vol. 55(3-4), pages 482-514.
    • Handle: RePEc:oup:cesifo:v:55:y:2009:i:3-4:p:482-514
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifp023
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    2. Nguyen, Nga Q., 2014. "On the compensation and activity of corporate boards," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 1-19.
    3. Belot, François & Ginglinger, Edith & Slovin, Myron B. & Sushka, Marie E., 2014. "Freedom of choice between unitary and two-tier boards: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 112(3), pages 364-385.
    4. Øyvind Bøhren & Siv Staubo, 2016. "Mandatory Gender Balance and Board Independence," European Financial Management, European Financial Management Association, vol. 22(1), pages 3-30, January.
    5. Waseem Akhter & Arshad Hassan, 2024. "Does corporate social responsibility mediate the relationship between corporate governance and firm performance? Empirical evidence from BRICS countries," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 566-578, January.
    6. Khwaja Naveed & Cosmina L. Voinea & Zahid Ali & Fawad Rauf & Cosmin Fratostiteanu, 2021. "Board Gender Diversity and Corporate Social Performance in Different Industry Groups: Evidence from China," Sustainability, MDPI, vol. 13(6), pages 1-15, March.
    7. Kevin Koh & Li Li & Xuejiao Liu & Chunfei Wang, 2023. "The Effect of Audit Partner Diversity on Audit Quality: Evidence from China," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 340-380, March.
    8. Shkendije Himaj, 2014. "Corporate Governance in Banks and its Impact on Risk and Performance: Review of Literature on the Selected Governance Mechanisms," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 3(3), pages 53-85.
    9. Easterwood, John C. & İnce, Özgür Ş. & Raheja, Charu G., 2012. "The evolution of boards and CEOs following performance declines," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 727-744.
    10. Barrédy, Céline, 2023. "The paradox between monitoring and entrenchment in a two-tier family business: The contribution of the external commitment theory," Journal of Business Research, Elsevier, vol. 155(PB).

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    More about this item

    JEL classification:

    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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