Corporate Board Composition, Protocols, andVoting Behavior: Experimental Evidence

We examine voting by a board designed to mitigate con£icts of interest be-tween privately informed insiders and owners. Our model demonstrates that, as argued by researchers and the business press, boards with a majority of trustworthy but uninformed ‘‘watchdogs’ ’ can implement institutionally pre-ferred policies. Our laboratory experiments strongly support this conclusion. Our model also highlights the necessity of penalties on insiders when there is dissension among board members. However, penalties for dissent appeared to have little impact on the experimental outcomes. CONSIDER THE SITUATION OF OWNERS of a corporation when they entrust the fate of their institution to groups of insiders. Because the owner-preferred allocation may be contingent on private information possessed by the insiders, owners need a mechanism to mitigate con£icts of interest with insiders. In practice, owners entrust the governance of corporations and other institutions to boards and com-mittees consisting of a mix of insiders and outsiders. Corporate boards are in