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Insular Decision Making in the Board Room: Why Boards Retain and Hire Substandard CEOs
Author(s) -
AdachiSato Meg
Publication year - 2015
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12055
Subject(s) - negotiation , business , accounting , relation (database) , corporate governance , on board , microeconomics , economics , industrial organization , finance , law , computer science , political science , engineering , database , aerospace engineering
This paper explores why a corporate board often fails to replace a substandard CEO . I consider the situation in which the incumbent CEO and directors make decisions in the absence of the new CEO . I show that the board and the CEO maximize the expected utilities of the negotiating parties that do not include the expected utility of the potential CEO . This sometimes results in the retention of an inefficient CEO . I argue this same logic provides a theoretical explanation for how a new CEO is chosen in relation to both the voluntary and enforced replacement of an existing CEO .