Two heads may not be better than one : corporate board structure, managerial self-dealing,and common agency

Abstract

This paper compares the effects on corporate performance and managerial self-dealing in a situation in which the CEO reports to a single Board that is responsible for both monitoring management and establishing performance targets to an alternative in which the CEO reports to two Boards, each responsible for a different task. The equilibrium set of the common agency game induced by the dual board structure is fully characterized. Compared to a single board, a dual board demands less aggressive performance targets from the CEO, but exerts more monitoring. A consequence of the first feature is that the CEO always exerts less effort toward production with a dual board. The effect of a dual board on CEO self-dealing is ambiguous: there are equilibria in which, in spite of the higher monitoring, self-dealing is higher in a dual system. The model indicates that the strategic interdependence generated by the assignment of different tasks to different boards may yield results that are far from the desired ones.