Voting in Corporate Boards with Heterogeneous Preferences

36 Pages Posted: 7 Feb 2011

See all articles by Paolo Balduzzi

Paolo Balduzzi

University of Edinburgh - Economics

Clara Graziano

Università degli Studi di Udine - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Annalisa Luporini

University of Florence - Dipartimento di Scienze Economiche; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 31, 2011

Abstract

We analyze the voting behavior of a board of directors that has to approve (or reject) an investment proposal with uncertain return. We consider three types of directors: insiders, who are biased toward acceptance of the project, independent outsiders who want to maximize the firm’s profit and independent outsiders who care about their reputation. We show that the presence of members with heterogeneous preferences can be beneficial and that the partisan behavior of insiders can be used as a sort of coordinating device by uninformed outsiders. Provided that the size of the board is optimal, there is no gain from increasing the number of outsiders above the strict majority despite the fact that each outsider is informed with positive probability. Substituting profit-maximizing directors with directors concerned about their reputation is not an obstacle to profit maximization provided that an appropriate sequential voting protocol is followed. We also show that a proper board composition makes communication between directors irrelevant in the sense that the same outcome is obtained with and without communication. Finally, as information is costly, our model provides some suggestions on the optimal size of boards.

Keywords: board of directors, voting, corporate governance

JEL Classification: G300, D710

Suggested Citation

Balduzzi, Paolo and Graziano, Clara and Luporini, Annalisa, Voting in Corporate Boards with Heterogeneous Preferences (January 31, 2011). CESifo Working Paper Series No. 3332, Available at SSRN: https://ssrn.com/abstract=1756671 or http://dx.doi.org/10.2139/ssrn.1756671

Paolo Balduzzi

University of Edinburgh - Economics ( email )

50 George Square
Edinburgh, EH8 9JY, Scotland
United Kingdom

Clara Graziano (Contact Author)

Università degli Studi di Udine - Department of Economics ( email )

Via Tomadini 30
33100 Udine
Italy
+0432+249216 (Phone)
+0432+249229 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Annalisa Luporini

University of Florence - Dipartimento di Scienze Economiche ( email )

via delle Pandette 9
Florence 50127
Italy

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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