Corporate Governance in a Competitive Environment

Abstract

We examine a firm's corporate governance choices within a competitive environment. A firm can choose a passive board that delegates decision rights to the executive manager, or an active board that retains these rights. We characterize the equilibrium governance choices and find that there generally is no systematic relation between governance systems and firm performance. We discuss how the governance choice is affected by the rate of technological innovation, board expertise, the discount rate, the benefit of using new technology, and the cost of operating an internal control system. Finally, we analyze consequences of the Sarbanes-Oxley Act.