Agency theory and corporate governance: A study of the effectiveness of board in their monitoring of the CEO

Purpose – The effect of corporate governance on firm performance has long been of great interest to financiers, economists, behavioural scientists, legal practitioners and business operators. Yet there is no consensus over what constitutes an effective corporate governance mechanism that induces agents or managers to consistently act in the interest of share value optimisation. The purpose of this study is to develop a model to resolve an on‐going issue in financial economics: how can CEOs be effectively monitored by the board of directors?Design/methodology/approach – A survey of the literature on corporate governance and the relationship between board composition and financial performance leads to the development of the proposed model, which is based on a framework which takes into account the probability of success representing a CEO's ability, and the active monitoring function (which is represented by the numbers of control visits) carried‐out by the directors.Findings – The design of the model is ai...