Boards of Directors and Capital Structure : Alternative Forms of Corporate Restructurings

This paper discusses a model which combines internal and external control mechanisms in a firm in which assets can have alternative uses which are in some states more profitable than the current. However, restructuring a firm in order to realise the gains from alternative uses affects managers adversely since they invest in firm-specific human capital. Several institutions which can regulate the agency relationship between shareholders and managers are discussed. The main focus is on independent directors, who are not part of executive management. Their function is to review and monitor contracts and managers' compensation. Independent directors constitute a potentially better organizational form to check managerial discretion than do constraints from debt or the market for corporate control. However, if directors fail to exercise control over management, takeovers or creditor control become second-best solutions