This paper examines how the labor market for directors and directors' reputational concerns affect corporate governance. We develop a model in which directors can influence corporate governance of their firms, and corporate governance, among other things, affects firms' demand for new directors. Whether the labor market rewards directors for having a reputation of being shareholder-friendly or management-friendly is endogenous and depends on the aggregate level of corporate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance decisions across firms. Directors' reputational concerns amplify the corporate governance system in the sense that strong systems become stronger and weak systems become weaker. We derive implications for director appointments, multiple directorships, transparency of the corporate governance system, and board size.
This paper studies informal communications (voice) and exit as alternative ways through which shareholders can influence managers when obtaining control is not feasible or too costly. By focusing on the interaction between financial markets and the incentives of activist investors to communicate with managers, the analysis relates the effectiveness of voice and exit to market liquidity; entrenchment and compensation structure of managers; and expertise, liquidity and ownership size of activist investors. Importantly, I characterize the circumstances under which activist investors prefer to voice themselves publicly rather than engaging with managers behind the scenes.
This paper studies the optimal structure of the board with an emphasis on the expertise of directors. The analysis provides three main results. First, the expertise of a value-maximizing board can harm shareholder value. Second, it is optimal to design a board whose members are biased against the manager, especially when their expertise is high. Third, directors' desire to demonstrate expertise can shift power from the board to the manager on the expense of shareholders. In this sense, the "friendliness" of the board is endogenous. The effect of these reputation concerns is amplified when the communication within the boardroom is transparent.
This paper studies the advisory role of the board in takeovers. Corporate boards can alert target shareholders when a takeover offer is inadequate and assist them to coordinate their collective decision. The analysis relates the characteristics of the bidder and the target firm to the influence the board has on target shareholders and the value of their shares, and shows that they can both increase with the board's bias. Importantly, the board can be influential even if in equilibrium its recommendation is uninformative and ignored by shareholders. The analysis also provides a novel rationale against the use of takeover defenses.