Monitoring Managers: Does it Matter?

We study how well-incentivized boards monitor CEOs and whether such monitoring improves performance. Using unique, detailed data on boards’ information sets and decisions for a large sample of private-equitybacked firms, we find that gathering information helps boards learn about CEO ability. ‘Soft’ information plays a much larger role than hard data, such as the performance metrics that prior literature focuses on, and helps avoid firing the CEO for bad luck or in response to adverse external shocks. We show that governance reforms increase the effectiveness of board monitoring and establish a causal link between forced CEO turnover and performance improvements.