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Voting in committee: firm value vs. back scratching

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  • Ravanel, M.

Abstract

In this paper, I study how the CEO's election can be biased if some directors in the board belong to the same network. I use a static Bayesian game. Directors want to elect the best candidate but they also want to vote for the winner. In that context, results show that, when no candidate is part of the network, boards with a network perform better in electing the right candidate. On the other hand, it becomes detrimental for stockholders if one candidate is part of the network. Indeed, compared to a situation where there are no interconnections between directors, the directors who are members of a network vote more often for the candidate they think is best, rather than for the one they think might win. The ones who are not part of the network follow their lead. Thus the network has power on the result of the election and therefore limits the power of the future CEO.

Suggested Citation

  • Ravanel, M., 2013. "Voting in committee: firm value vs. back scratching," Working papers 459, Banque de France.
    • Handle: RePEc:bfr:banfra:459
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    References listed on IDEAS

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    More about this item

    Keywords

    Networks; corporate governance.;

    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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