Advising the Management
53 Pages Posted: 25 Aug 2018 Last revised: 15 Jun 2020
Date Written: June 12, 2020
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. Similar implications hold if the committee also has authority, but unlike purely advisory committees, committees with authority are more diverse.
Keywords: shareholder voting; board of directors; advisory committee; communication; heterogeneous beliefs; authority; diversity
JEL Classification: D71, D74, D82, D83, G34
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