Working Paper: NBER ID: w26155
Authors: Jason Roderick Donaldson; Nadya Malenko; Giorgia Piacentino
Abstract: We develop a dynamic model of board decision-making. We show that a board could retain a policy all directors agree is worse than an available alternative. Thus, directors may retain a CEO they agree is bad—a deadlocked board leads to an entrenched CEO. We explore how to compose boards and appoint directors to mitigate deadlock. We find that board diversity and long director tenure can exacerbate deadlock. Moreover, we rationalize why CEOs and incumbent directors have power to appoint new directors: to avoid deadlock. Our model speaks to short-termism, staggered boards, and proxy access.
Keywords: Board Decision-Making; Corporate Governance; Deadlock; Director Tenure; Board Diversity
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Diverse board (G34) | Deadlock (Y70) |
| Directors strategically block policies (L52) | Retention of suboptimal policies (D78) |
| Anticipation of future disagreements (D84) | Current voting behavior (D72) |
| Fear of limiting future options (D84) | Blocking alternative policies (L49) |
| Strategic behavior (C70) | Harm to shareholder interests (G34) |
| Shareholder unilateral control (G34) | Exacerbation of deadlock (D74) |
| Balanced approach to board appointments (G34) | Mitigation of deadlock (D74) |