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Management

Why do Bebchuk and Fried believe that senior management controls the board, rather than the Board control senior management

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Why do Bebchuk and Fried believe that senior management controls the board, rather than the Board control senior management?

In the book, “Pay Without Performance: Overview of the Issues,” the authors Bebchuk and Fried critique the CEOs pay methods and the corporate governance as a whole and believe that the executive management in the company runs the board as opposed to the norm. The first reason explained by the authors as to why they think CEOs control the board is the director’s incentives to be re-elected on the board (Bebchuk & Fried, 2005). Being a board member has various advantages as such social connections besides a hefty salary. Therefore, for a director to be retained on the board, he/she has to be in good terms with the CEO, who has a substantial influence over the nomination process.

Another reason why Bebchuk and Fried believe CEOs control the board is that CEOs have the power to reward loyal directors. The CEO can significantly influence director compensation as well as influence an increase in the director’s pay. Those board members who are friendly and loyal to the CEO and do not oppose his/her style of leadership stand to benefit the most in issues to do with compensation and pay. There is also the issue of hiring a new CEO. While the board has control of the hiring process, they also understand that having a proper working and personal relationship with the next head of the firm is advantageous to them in terms of compensation. Lastis the issue of collegiality, authority, and solidarity. A CEO is also a board member, and those sitting on the board would not want to frustrate their own, hence letting the CEO run the show.

 

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