John Graham is D. Richard Mead, Jr. Family Professor at Duke University’s Fuqua School of Business. This post is based on a recent paper by Professor Graham; Hyunseob Kim, Assistant Professor of Finance at SC Johnson Graduate School of Management at Cornell University; and Mark Leary, Associate Professor of Finance at Washington University in St. Louis.
Corporate boards are expected to oversee and monitor managers on behalf of shareholders. However, too much monitoring by the board can hinder the ability of management teams to make nimble, optimal decisions. In equilibrium, theory suggests that talented CEOs, whose skills match well to the firms they manage, should be optimally monitored less intensely by the board. Theory also suggests that inside directors (who have other ties or past work experience with the firm) are likely to monitor the CEO less intensely. Thus, an equilibrium outcome may result in talented CEOs working at firms with less independent boards of directors and the independence of the board falling over the tenure of a given CEO.
