RFS Advance Access published online on May 28, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn052
Consensus in Diverse Corporate Boards
University of Texas at Dallas
Washington University, Saint Louis
Address correspondence to Nina Baranchuk, School of Management, University of Texas at Dallas, P.O. BOX 830688 SM31, Richardson, TX 75083-0688; telephone: (972) 883-4771; e-mail: nina.baranchuk{at}utdallas.edu
JEL Classification: G30, D71, D72, C78
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Abstract |
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Many directors are not simply insiders or outsiders. For example, an officer of a supplier is neither independent nor captive of management. We use a spatial model of board decision-making to analyze bargaining among multiple types of directors. Board decisions are modeled using a new solution concept called consensus. We use consensus to show that the information a new director brings is more important than the new director's impact on bargaining when the board is large and not too diverse. Our model suggests broadening the regulatory definition of independence and requiring a supermajority of outsiders. It also cautions that strong penalties, such as those imposed by Sarbanes-Oxley erode incentives when board performance is difficult to measure.
The authors are grateful for useful discussions with Cindy Alexander, Octavian Carare, Rob Gertner, Armando Gomes, Robert Kieschnick, Lubomir Litov, Robert Merton, Gary Miller, Sandra Mortal, Lars Stole, and especially Pete Kyle. We also thank seminar participants at Chicago, CKGSB, Fudan University, Minnesota, Wash University, and University of Texas at Dallas. Dybvig is grateful for support from SWUFE (Xinan Caida in Chengdu, China)