Access, Common Agency, and Board Size*

We study the impact of the size of a firm’s board of directors on managerial incentives. We present a model where a risk-averse agent (the top management team) performs multiple tasks for a firm that is controlled by multiple principals (the board of directors) who differ in the relative value they place on each task. We show that the agent’s incentives are lower than they would be had the board been smaller. Our empirical results are consistent with the model’s predictions. We find that the number of social objectives (community, diversity, environment, etc.) that a firm pursues is positively related to board size. Board size is negatively related to managerial incentives. We also find that firms incorporated in states with alternative constituency statutes (allowing boards to consider the interests of constituencies other than shareholders) pursue more objectives, have larger boards, and lower managerial pay-performance sensitivities. Our results are robust to the inclusion of various board and firm control variables and to a myriad of specifications. * We thank Sheri Aggarwal, Michael Bradley, Zsuzsanna Fluck, Charles Hadlock, Pete Kyle, Gordon Phillips, Shiva Rajgopal, Michael Roberts, S. Viswanathan, and Yi-Lin Wu for helpful comments, as well as seminar participants at American University, University of Delaware, Duke University, University of Georgia, University of Minnesota, Harvard Business School, Oxford University, and Hong Kong University of Science and Technology. We thank the Investor Responsibility Research Center (IRRC) for providing the data and the Center for the Advancement of Social Entrepreneurship (CASE) for funding the project. We also thank Andrew Samwick for his assistance. Any errors are our own. Access, Common Agency, and Board Size Abstract: We study the impact of the size of a firm’s board of directors on managerial incentives. We present a model where a risk-averse agent (the top management team) performs multiple tasks for a firm that is controlled by multiple principals (the board of directors) who differ in the relative value they place on each task. We show that the agent’s incentives are lower than they would be had the board been smaller. Our empirical results are consistent with the model’s predictions. We find that the number of social objectives (community, diversity, environment, etc.) that a firm pursues is positively related to board size. Board size is negatively related to managerial incentives. We also find that firms incorporated in states with alternative constituency statutes (allowing boards to consider the interests of constituencies other than shareholders) pursue more objectives, have larger boards, and lower managerial pay-performance sensitivities. Our results are robust to the inclusion of various board and firm control variables and to a myriad of specifications. We study the impact of the size of a firm’s board of directors on managerial incentives. We present a model where a risk-averse agent (the top management team) performs multiple tasks for a firm that is controlled by multiple principals (the board of directors) who differ in the relative value they place on each task. We show that the agent’s incentives are lower than they would be had the board been smaller. Our empirical results are consistent with the model’s predictions. We find that the number of social objectives (community, diversity, environment, etc.) that a firm pursues is positively related to board size. Board size is negatively related to managerial incentives. We also find that firms incorporated in states with alternative constituency statutes (allowing boards to consider the interests of constituencies other than shareholders) pursue more objectives, have larger boards, and lower managerial pay-performance sensitivities. Our results are robust to the inclusion of various board and firm control variables and to a myriad of specifications.