Multidimensional Corporate Governance: Board Design, Executive Compensation, and Information Sharing

Abstract

Corporate governance is a multidimensional construct, with many interactive mechanisms that must be simultaneously managed for efficiency. We develop a model where multiple governance mechanisms (board independence, board expertise, and CEO equity incentives) are endogenously selected to encourage information sharing by the CEO, which in turn optimizes the board’s ability to monitor and advise the CEO’s project selection. In equilibrium, we find that boards with greater independence also have higher expertise; board expertise and equity incentives are substitutes (complements) when the board has high (low) independence; and equity incentives may be positively or negatively related to board independence, depending on the benefit of expert advice. The analysis offers new predictions about the correlations between board independence, board expertise, and incentive compensation.

Keywords: Board independence, board expertise, equity incentives, corporate governance, information sharing

JEL Classification: G30, G34, D83