The Harvard Law School Forum on Corporate Governance and Financial Regulation » Internal Governance of Firms

I really like this insight. It is from Raghuram Rajan's discussion of The Internal Governance of Firms by Acharya and Myers. It will definitely be added to class notes.

The simple version is that when junior level managers want to climb to the top, they have a vest interest in monitoring senior level managers.

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Internal Governance of Firms:

"The basic intuition behind the model is as follows. Think of a partnership run by an old CEO who is about to retire.....The CEO can appropriate everything else: he can tunnel cash out of the firm, consume perks, or convert cash to leisure by shirking. Because the CEO has a short horizon, he could simply decide to take all of the cash flow, investing nothing for the future. But he needs the young manager’s effort in order to generate the cash flow. If the manager sees that the CEO will leave nothing behind, she has scant incentive to exert effort, and cash flow falls significantly."

It would be interesting to see how this changes depending on whether firms have a reputation for hiring from within. Continually hiring external CEOs could lead to reduced internal monitoring.