Trends in Corporate Governance



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    • Hermalin is at the University of California, Berkeley. Financial support from the Willis H. Booth Chair in Banking and Finance is gratefully acknowledged. This paper has benefited from conversations with Jonathan Berk, Bengt Holmstrom, John Morgan, and Michael Weisbach. The helpful comments and suggestions of an anonymous referee, an anonymous associate editor, Philippe Aghion, Nancy Beaulieu, Robert Gibbons, and numerous seminar participants at the 2nd Humboldt Forum on Corporate Governance, nber Organizations Conference, the Harvard-MIT organizations workshop, Otto-von-Guericke-Universität Magdeburg, the University of British Columbia, and UC Berkeley are also gratefully acknowledged.


The popular press and scholarly studies have noted a number of trends in corporate governance. This article addresses, from a theoretical perspective, whether these trends are linked. And, if so, how? The article finds that a trend toward greater board diligence will lead, sometimes through subtle or indirect mechanisms, to trends toward more external candidates becoming CEO, shorter tenures for CEOs, more effort/less perquisite consumption by CEOs (even though such behavior is not directly monitored), and greater CEO compensation. An additional prediction is that, under plausible conditions, externally hired CEOs should have shorter tenures, on average, than internally hired CEOs.