Advising the Management
53 Pages Posted: 25 Aug 2018 Last revised: 6 Jun 2019
Date Written: June 4, 2019
We study the optimal size and composition of an advisory committee when shareholders differ in preferences and beliefs and strategically acquire and communicate information. If shareholders and management have similar objectives but disagree due to different beliefs, and information is cheap, the optimal advisory body includes all shareholders. Conversely, if agents have conflicting preferences or information is sufficiently costly, the optimal advisory body is a strict subset of shareholders. Thus, advisory voting (board) is optimal in the former (latter) case. If ownership is endogenous and shareholders differ in beliefs, combining advisory shareholder voting with a diverse board can be optimal.
Keywords: advisory board, advisory voting, cheap talk, communication, heterogeneous beliefs, information aggregation
JEL Classification: D71, D74, D82, D83, G34
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