Board composition as the outcome of an internal bargaining process: empirical evidence |
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| Institution: | 1. CORPNET, University of Amsterdam, Amsterdam, The Netherlands;2. LIACS, Leiden University, Leiden, The Netherlands;1. 70 Lien Hai RD, Department of Business Management, National Sun Yat-sen University, Kaohsiung 80424, Taiwan;2. 700 University RD Department of Finance, National University of Kaohsiung, Kaohsiung 81148, Taiwan;3. 415 Chien Kung RD, Department of Wealth and Taxation Management, National Kaohsiung University of Applied Sciences, Kaohsiung 80778, Taiwan;1. University of Colorado Colorado Springs, 1420 Austin Bluffs Pkwy, Colorado Springs, CO 80918, USA;2. Georgia Institute of Technology, Scheller College of Business, 800 West Peachtree Street NW, Atlanta, GA 30332, USA;3. Illinois State University, 420 State Farm Hall of Business, Normal, IL 61790, USA |
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| Abstract: | The traditional financial economics view of the determinants of board composition is based on outside shareholders' demand for external monitoring of management. In comparison, Hermalin and Weisbach (American Economic Review, 88 (1998) 96) model board composition as the outcome of a bargaining process between the CEO and the rest of the board. The model predicts, inter alia, that the bargaining power of the CEO relative to the rest of the board of directors will determine the level of independence of the board and the extent of board monitoring. This study tests Hermalin and Weisbach's model using a random sample of companies that are subject to limited regulatory constraints in relation to board composition and a common set of corporations regulations that may indirectly affect board composition. There is strong evidence that representation by outside directors varies inversely with CEO bargaining power, which is proxied by CEO tenure and inside shareholdings. An extension of the argument of Hermalin and Weisbach to board leadership is also tested. The results indicate that the appointment of the chairman of the board is also the outcome of a bargaining process between the CEO and the rest of the board with more powerful CEOs likely to hold the position of Chairman of the board. Together, these results suggest that more “powerful” CEOs are relatively entrenched and face fewer constraints and less monitoring than other CEOs. This evidence has potential relevance to current debates in relation to the need to control the number or proportion of outside directors. |
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