Working Paper: CEPR ID: DP12503
Authors: Jason Roderick Donaldson; Nadya Malenko; Giorgia Piacentino
Abstract: We develop a dynamic model of board decision making. We show that directors may knowingly retain the policy they all think is the worst just because they fear they may disagree about what policy is best in the future—the fear of deadlock begets deadlock. Board diversity can exacerbate deadlock. Hence, shareholders may optimally appoint a biased director to avoid deadlock. On the other hand, the CEO may appoint unbiased directors, or even directors biased against him, to create deadlock and thereby entrench himself. Still, shareholders may optimally give the CEO some power to appoint directors. Our theory thus gives a new explanation for CEO entrenchment. It also gives a new perspective on director tenure, staggered boards, and short-termism.
Keywords: corporate boards; deadlock; entrenchment; CEO turnover; director elections
JEL Codes: G34; M12; M14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fear of deadlock (D74) | deadlock (Y70) |
| board diversity (G34) | deadlock (Y70) |
| composition of the board (G34) | likelihood of deadlock (C69) |
| power dynamics between CEO and shareholders (G34) | likelihood of deadlock (C69) |
| directors' fear of future disagreements (G34) | retention of suboptimal policy (D78) |
| directors' consensus on replacement (G34) | CEO remains in place (M12) |
| boardroom diversity (M14) | heightened deadlock (D74) |
| differing biases among directors (D91) | prevent consensus (D70) |
| directors strategically blocking alternatives (D74) | maintain bargaining power (J52) |
| unbiased directors (G34) | contribute to deadlock (D74) |
| board dynamics (C69) | policy outcomes (D78) |