Board's Monitoring And Retention Of Sub-Standard And Powerless CEOs

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Executive Summary

Do corporate boards look after shareholder interests? This paper shows that CEO replacement may exhibit excessive inertia, in favor of the incumbent board of directors. The author shows that even when there is no relationship between the board of directors and CEO, and no threat of the CEO's power over the board of directors, there is a case in which the board wants to keep sub-standard CEOs. Pervasive understanding about the board's retaining sub-standard CEOs is that CEOs have the power to fire and hire the board members. (Hermalin and Weisbach 1998, Warther 1998). In order to reduce such power of CEOs, the Sarbanes-Oxley Act of 2002 and subsequent rules by the NYSE and NASDAQ have mandated the presence of independent directors on corporate boards.

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