Disciplining and Screening Top Executives
Tinbergen Institute Discussion Paper No. 06-054/1
41 Pages Posted: 22 Jun 2006
Date Written: June 2006
Boards of directors face the twin task of disciplining and screening executives. To perform these tasks directors do not have detailed information about executives' behaviour, and only infrequently have information about the success or failure of initiated strategies, reorganizations, mergers, etc. We analyse the nature of (implicit) retention contracts boards use to discipline and screen executives. Consistent with empirical observation, we find that executives may become overly active to show their credentials; that the link between bad performance and dismissal is weak; and that boards occasionally dismiss competent executives.
Keywords: board of directors, turnover, retention contracts, selection, moral hazard, empire building
JEL Classification: G30, G34
Suggested Citation: Suggested Citation