Authority, Consensus and Governance

48 Pages Posted: 5 Aug 2011 Last revised: 22 Aug 2011

See all articles by Archishman Chakraborty

Archishman Chakraborty

York University - Schulich School of Business

Bilge Yilmaz

University of Pennsylvania - Finance Department

Date Written: July 1, 2011

Abstract

We look for necessary properties of shareholder-value maximizing corporate boards when shareholders face a trade-off between improving information sharing between the board and management and reducing distortions in decision-making arising out of managerial agency. We draw a distinction between the alignment of preferences of the board with management (which affects information flows) and the allocation of authority to the board or management (which affects ex-post decisions). We show that it is in general suboptimal to allocate authority to management. Authority should be held by a supervisory board that may be imperfectly aligned with both shareholders and management. Indeed, even when management has captured all authority and the board only has an advisory role, the optimal board may be designed to withhold information from management. An optimal advisory board must however be sufficiently aligned with management in order to create ex-post consensus and ensure authority is irrelevant. Given optimal board alignment, the value of the board's authority equals the cost of requiring consensus. Shareholders may hold ultimate decision-making authority within an optimal supervisory board without any loss in welfare and in many cases this is strictly optimal.

Keywords: cheap talk, delegation, intermediation, consensus, supervisory boards, advisory boards, governance, hierarchies

JEL Classification: C72, D71, D72, D74, D82, G34

Suggested Citation

Chakraborty, Archishman and Yilmaz, Bilge, Authority, Consensus and Governance (July 1, 2011). Available at SSRN: https://ssrn.com/abstract=1905802 or http://dx.doi.org/10.2139/ssrn.1905802

Archishman Chakraborty

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://www.yorku.ca/archish/

Bilge Yilmaz (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1163 (Phone)
215-898-6200 (Fax)

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