Corporate board dynamics: Directors voting for directors

I propose a model in which corporate directors perform firm tasks (such as monitoring management) and elect new directors. Elections introduce a dynamic element – the incumbent board's willingness to hire a candidate depends on how the candidate will vote in future hiring rounds. Lack of a commitment mechanism means directors do not always choose board compositions that maximize shareholder value. I use the model to analytically and numerically investigate the effects of stock exchange rules governing board composition and director elections. I find that the regulations benefit shareholders in a dynamic environment, but not in a static environment.

► In practice, corporate directors are chosen by incumbent board members. Director candidates are evaluated by how they will contribute to the board and how they will vote in future director nomination rounds.
► Directors choosing directors can result in decreased shareholder value, such as when boards become entrenched with one type of director.
► Recent regulatory changes address inefficiencies created by directors choosing new directors. In my dynamic model, these regulations can benefit shareholders. In traditional static models, these regulations can only hurt shareholders.