1、 Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature Benjamin E. Hermalin University of California at Berkeley and Michael S. Weisbach University of Illinois June 15, 2000 Abstract This paper surveys the economic literature on boards of directors. Altho
2、ugh a legal requirement for many organizations, boards are also an endogenously determined governance mechanism for addressing agency problems inherent to many organizations. Formal theory on boards of directors has been quite limited to this point. Most empirical work on boards has been aimed at an
3、swering one of three questions: 1) How do board characteristics such as composition or size related to profitability? 2) How do board characteristics affect the observable actions of the board? 3) What factors affect the makeup of boards and how they evolve over time? The primary findings from the e
4、mpirical literature on boards are: Board composition is not related to corporate performance, while board size is negatively related to corporate performance. Both board composition and size are correlated with the quality of the boards decisions regarding CEO replacement, acquisitions, poison pills
5、, and executive compensation. Finally, boards appear to evolve over time as a function of the bargaining power of the CEO relative to the existing directors. Firm performance, CEO turnover, and changes in ownership structure appear to be important factors affecting changes to boards. The NSF (Grant
6、SBR-9616675) and the Willis H. Booth Chair in Banking often these are attorneys or businesspeople that have a longstanding relationship with the firm. These directors are usually referred to as “affiliated” or “gray” directors. 3 hard to interpret. Second, empirical results on governance can often b
7、e interpreted as either equilibrium or out-of-equilibrium phenomena. While it is generally difficult to distinguish between the two interpretations in a given study, they often have drastically different implications for policy. For example, one of the most consistent empirical relations regarding b
8、oards of directors is that board size is negatively related to firm profitability. The out-of- equilibrium interpretation of this finding says that limits on board size should be encouraged, or perhaps even regulated. In contrast, the equilibrium interpretation of this result implies that some other
9、 factor is causing both board size and profitability, so that such regulation would be at best useless, and possibly counterproductive. Both endogeneity considerations and the equilibrium nature of the results should be carefully considered when evaluating any study of boards or any other aspect of
10、corporate governance. Despite these issues, much has been learned about boards of directors in public corporations in the past 15 years. Yet, there is still much work to be done. This literature has proceeded in the opposite direction from the model taught in graduate school; the empirical literatur
11、e on boards in public corporations is fairly well developed, while theory is still in its infancy. It is likely that subsequent developments in theory will lead to more sophisticated empirical tests of particular models. In addition, the governance of organizations other than for- profit corporation
12、s is a relatively unexplored area. Both theoretical and empirical work aimed at understanding these organizations is likely to be fruitful in the near future. Several caveats are in order. First, in surveying this literature on boards of directors, we emphasize the parts of it that we know best. We
13、have tried our best to be fair to all authors, but nonetheless plead guilty to spending a disproportionate amount of space on our own work. We apologize if we have neglected your favorite paper or unintentionally misrepresented your work. 4 Second, boards of directors are an important topic of resea
14、rch in many areas, not just economics. Especially important is work in the fields of management and law. We have omitted discussion of these literatures entirely. For a sample of work on boards from the management literature, see Kosnik (1990), Zajac and Westphal (1994), and Rediker and Seth (1995).
15、 From the legal literature, one particularly noteworthy study is Roe (1994). Macey and OHara (2000) provides a survey of the legal literature on boards of directors. Finally, boards of directors are only one element of corporate governance systems. See Shleifer and Vishny (1997) for a broader survey
16、 of corporate governance. 2. Conceptual Issues As with so much of economics, Smith (1776) appears to be the first economist to address boards: “The directors of joint stock companies, however, being the managers rather of other peoples money than of their won, it cannot well be expected, that they s
17、hould watch over it with the same anxious vigilance as owners Negligence and profusion, therefore, must always prevail, more of less, in the management of the affairs of such a company” (p. 700). One hundred fifty-six years later, Berle and Means (1932) took a largely similar view: “ control will te
18、nd to be in the hands of those who select the proxy committee and by whom, the election of directors for ensuing period will be made. Since the proxy committee is appointed by the existing management, the latter can virtually dictate their own successors.” (p. 87) Both quotes point out the critical
19、agency issues that have typically caught the economists eye. Until recently, however, economic theory was insufficiently developed to analyze such agency problems. But a “problem” it clearly seemed to be, and not only to economists. Much of the regulation of boards since Adam Smiths day has been dri
20、ven by a desire to solve this “problem.” Even today, the press regularly chides boards for being insufficiently vigilant guardians of other peoples money and being too much in managements hands. Similarly, we 5 still hear calls for “reforms.” For instance, the American Law Institute (1982), Lorsch a
21、nd Lipton (1992), and Jensen (1993) have each made proposals that, if adopted, would impose restrictions on the workings of boards. Yet, one doesnt have to hold a Chicago Ph.D. to ask, “if boards are so bad, why hasnt the market caused them to improve or, even, replaced the corporate form with some
22、less- problematic form of organization?” Or put differently, pointing out that an institution is not first- best efficient is not the same as demonstrating that outside regulation is needed. A reasonable possibility is that boards are the second-best efficient solution to the various agency problems
23、 confronting any organization with such a potentially large divergence in interests among its members. As a matter of economic theory, the conditions under which we could expect such regulation to be welfare enhancing are rather limited (see, e.g., Hermalin and Katz, 1993). Perhaps, then, before we rush to regulate boards, we should step back and ask to what problems are boards the solution? That is, why are there boards? 2.1. Why are th
