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LONE-INSIDER BOARDS: IMPROVED MONITORING OR A RECIPE FOR DISASTER?

Michelle L. Zorn, John A. Martin and James G. Combs
Journal of Managerial Issues
Vol. 24, No. 3 (Fall 2012), pp. 345-362
Stable URL: http://www.jstor.org/stable/43488815
Page Count: 18
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
LONE-INSIDER BOARDS: IMPROVED MONITORING OR A RECIPE FOR DISASTER?
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Abstract

Boards have become increasingly independent, to the point where some firms have removed all of the insiders except for the CEO. The authors call this phenomenon a "lone-insider board" and submit that it constitutes a fundamentally distinct governance arrangement worthy of inquiry. This paper describes institutional pressures that give rise to increasing reliance on lone-insider boards, and investigates likely outcomes. According to agency theory, the greater the proportion of independent directors, the more effective boards are in monitoring CEOs. The authors submit, however, that a lone-insider board creates a fundamental shift in board effectiveness due to a loss of mutual monitoring and an increase in information asymmetry. Mutual monitoring occurs when members of the top management team actively monitor the CEO. Information asymmetry refers to the disparity in knowledge between the CEO and the board of directors. The authors propose that reduced mutual monitoring causes increased information asymmetry between the CEO and the board and increases rather than decreases CEO power. The authors hope this article will stimulate fruitful inquiry in the area of lone-insider boards.

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