Two Heads May Not Be Better Than One: Corporate Board Structure, Managerial Self-Dealing, and Common Agency

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. ∗Economics Department, Stanford University. email: [email protected]. I am deeply indebted to Susan Athey and Jonathan Levin for their guidance and support throughout the process of writing this paper. I also thank William Fuchs, Joao de Mello, Carmit Segal, Ilya Segal and, specially, Leonardo Rezende and Jeffrey Zwiebel for comments and suggestions. Financial support from a John M. Olin Summer Fellowship and a Siepr Dissertation Fellowship is gratefully acknowledged. All errors are mine.