The Design of Corporate Boards: Composition, Compensation, Factions, and Turnover

Abstract

In this paper we develop a framework for examining the effectiveness of boards in controlling self-interested managerial behavior. We show that, even if outside directors are uninformed and are unable to monitor management, they are crucial to implementing efficient corporate policies. Outside directors are effective when they possess sufficient votes to block management proposals and are able to coordinate their actions. In some cases, outside directors can be effective even if they receive no performance-contingent compensation from the firm. Finally, even when insiders have identical interests, efficiency can be increased by including multiple insiders on the board.

JEL Classification: G30, G34