Expertise, Structure, and Reputation of Corporate Boards

Abstract:     
This paper studies the optimal structure of the board with an emphasis on the expertise of directors. The analysis provides three main results. First, the expertise of a value-maximizing board can harm shareholder value. Second, it is optimal to design a board whose members are biased against the manager, especially when their expertise is high. Third, directors' desire to demonstrate expertise can shift power from the board to the manager on the expense of shareholders. The effect of these reputation concerns is amplified when the communication within the boardroom is transparent.

Number of Pages in PDF File: 64

Keywords: Board of Directors, Communication, Information Acquisition, Expertise, Reputation, Transparency

JEL Classification: D74, D82, D83, L14, G34

working papers series