Discussion Paper Details

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Title: Deadlock on the Board

Author(s): Jason Roderick Donaldson, Nadya Malenko and Giorgia Piacentino

Publication Date: December 2017

Keyword(s): CEO turnover, Corporate Boards, deadlock, director elections and entrenchment

Programme Area(s): Financial Economics

Abstract: We develop a dynamic model of board decision making. We show that directors may knowingly retain the policy they all think is the worst just because they fear they may disagree about what policy is best in the future-the fear of deadlock begets deadlock. Board diversity can exacerbate deadlock. Hence, shareholders may optimally appoint a biased director to avoid deadlock. On the other hand, the CEO may appoint unbiased directors, or even directors biased against him, to create deadlock and thereby entrench himself. Still, shareholders may optimally give the CEO some power to appoint directors. Our theory thus gives a new explanation for CEO entrenchment. It also gives a new perspective on director tenure, staggered boards, and short-termism.

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Bibliographic Reference

Donaldson, J, Malenko, N and Piacentino, G. 2017. 'Deadlock on the Board'. London, Centre for Economic Policy Research.