Deadlock on the Board

Deadlock on the Board

Jason Donaldson, Nadya Malenko, Giorgia Piacentino

Series number :

Serial Number: 
645/2019

Date posted :

December 08 2019

Last revised :

September 30 2020
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Keywords

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

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.

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Published in

Published in: 
Publication Title: 
Review of Financial Studies, Vol. 33, No. 10, October 2020

Authors

Real name:
Jason Donaldson
Real name:
Giorgia Piacentino