Voting in Corporate Boards with Heterogeneous Preferences
36 Pages Posted: 7 Feb 2011
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
CEO Involvement in the Selection of New Board Members: An Empirical Analysis
By David Yermack and Anil Shivdasani
-
The Uncertain Relationship between Board Composition and Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence and Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence And Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black