Finance Series

Deadlock on the Board

Series number:

645/2019

Date published:

Last revised:

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Categories

Boards
CEO
Diversity

Keywords

board of directors, dynamic decision-making, deadlock, entrenchment, director elections, CEO turnover, diversity, tenure, staggered boards

Keywords

board of directors, dynamic decision-making, deadlock, entrenchment, director elections, CEO turnover, diversity, tenure, staggered boards
    This article was published in The Review of Financial Studies, Volume 33, Issue 10, Pages 4445-4488, on . Read the journal article here.

Abstract

We develop a dynamic model of board decision-making akin to dynamic voting models in the political economy literature. We show 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—deadlocked boards lead to entrenched CEOs. We explore how to compose boards and appoint directors to mitigate deadlock. We find board diversity and long director tenure can exacerbate deadlock. 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.

Published in

Review of Financial Studies, Vol. 33, No. 10, October 2020

© Jason Donaldson, Nadya Malenko, Giorgia Piacentino, 2019
All rights reserved. Distributed for discussion purposes only; not to be reproduced without permission. The views expressed are those of the author(s) and do not necessarily reflect those of ECGI or its members. For copyright queries or takedown requests, contact wp@ecgi.org.

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