Say on Pay and the "Quiet Life" of Boards

Job Market Paper

The rapid rise in CEO pay over the past decades has fueled an intensive debate on corporate governance. Fiduciary duty rules are supposed to safeguard shareholders’ interests when boards design compensation packages for managers. However the so-called “managerial power view” holds that boards may be colluding with CEOs to transfer wealth from shareholders. In response, recent regulatory initiatives such as “Say on Pay” and the Dodd-Frank Act aim to reinvigorate fiduciary duty rules and to put shareholders back in control. I develop a model in which a self-interested board contracts with a CEO in a setting that combines agency frictions and strategic communication. The board can learn about the firm’s environment through monitoring and/or communication. In equilibrium the board has an excessive preference for communication. As a result, the board grants the CEO a greater equity stake than as preferred by the shareholders. While this may seem consistent with the managerial power view, it is in fact more a manifestation of the board pursuing a “quiet life”, because the greater CEO equity stake promotes CEO-board communication, and thereby reduces the pressure for the board to engage in costly monitoring. By adjusting the board’s equity stake, the shareholders can actively preempt such behavior, though they may not always choose to do so. Ironically, I find that precisely for those cases where the board successfully subverts the shareholders’ intent, the board is ultimately worse off from having discretion. This illustrates the importance of taking boards as strategic, self-interested players, rather than assuming they align themselves fully with either shareholders or management.

Biased Boards

with Tim Baldenius and Xiaojing Meng. The Accounting Review 2019, 94 (2), 1- 27.

The Value of Board Commitment

with Tim Baldenius and Xiaojing Meng. Conditionally Accepted at Review of Accounting Studies.

Boards can learn about the environment of their rms through information gathering and communicating with the CEO. In the post-Sarbanes-Oxley environment, some boards have taken steps to shape the communication more proactively by committing to decision rules, such as spending limits, before eliciting a report from the CEO. All else equal, such commitment power on the part of the board improves its communication with the CEO. However, taking into consideration the endogeneity of board composition/bias, we show that the board's commitment power may in fact impede such communication, in equilibrium, by prompting the shareholders to appoint a more antagonistic board. We identify other cases where, in equilibrium, the board's commitment power does foster communication, but ultimately reduces shareholder value, because the improved information flow dampens the board's effort incentives. We discuss applications of our model to board staggering.

Teaching Experience

Summer 2016, Principles of Financial Accounting, NYU Stern.

Spring 2020, Introduction to Financial Accounting, University of Hong Kong.