How independent should the board be? Corporate board structure from a voting perspective

Abstract

This paper proposes a model of corporate voting in which private information and individual preferences of board directors drive the board decisions. The optimal board structure and optimal firm value are solved numerically and their dependence on director and firm characteristics are studied. The optimal board structure is determined by outside and inside directors’ relative unforcedness about the firm, insiders’ bias, outsiders’ advisory ability as well as the characteristics of the projects that the firm have. Voting rules other than the majority voting rule are considered. It is found that the majority rule often is not the optimal rule and it is optimal for a firm to have more inside directors while adopting a tougher voting rule. By studying strategic voting equilibria theoretically, insights about how board directors vote strategically are also provided