Finance - Accounting Seminars

Members of the board of directors (BOD) are expected to play an active role in shaping the firm’s strategic direction through their influence on the decision-making processes. However, the question remains whether this objective can be realized through the effective engagement of all board members in the decision-making. To answer this question, we employ a game-theoretic analysis that explores all possible equilibrium dominant-coalitions that emerge among BOD members and the associated distribution of power to influence decision-making. We show that, under plausible governance design settings, it is impossible to achieve an effective influence of all directors on the decision-making process. Specifically, under CEO duality, while all board members participate in the emerged dominant coalition, non-CEO directors have negligible power to influence decision-making. Furthermore, under CEO/Chairperson role separation, while the extreme power of the CEO is somewhat mitigated by the Chairperson, the power to influence decision-making of all non-CEO/Chairperson directors is even further diminished. Moreover, we show that, when the CEO and Chairperson are hypothetically assumed to have no peculiar role-power in the firm, a minimal majority dominant coalition is formed, where directors outside this coalition have null power over decision-making. Our analysis thus delineates the impossibility of realizing an equilibrium in which all BOD members effectively influence the decision-making process.