COUNSEL 20 Lecture Notes - Lecture 10: Executive Compensation
Document Summary
Boards of directors as an endogenously determined institution: a. Survey of the economic literature hermalin & weisbach. Firm performance, ceo turnover, and changes in ownership structure appear to be important factors affecting changes to boards introduction. Major conflict within boardroom: between ceo and directors: ceo wants to capture the board to ensure to keep his job and other benefits, directors want to maintain independence, monitor ceo and replace him eventually. Agency problems have been tried to be solved since adam smith (1776) If boards are so bad, why hasn"t the market caused them to improve or even replaced the corporate form with less problematic forms of organization? boards are second-best efficient solution to the agency problems. Market solution to an organizational design problem endogenously determined institution helping to ameliorate the agency problems. Part of the equilibrium solution to the contracting problem between diffuse shareholders and management (shareholders power works through position on the board)
