Download This PaperAuthority, Consensus and Governance
The Review of Financial Studies, Volume 30, Issue 12, December 2017
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
47 Pages Posted: 1 Jun 2012
Date Written: June 2012
Abstract
We characterize optimal 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 show that allocating authority to management is suboptimal. Authority should be held by a supervisory board that may be imperfectly aligned with both shareholders and management. 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. Optimal advisory boards must however be able to create consensus with management, making the allocation of authority irrelevant.
Keywords: governance, consensus, supervisory boards, advisory boards, cheap talk, delegation, hierarchies
JEL Classification: C72, D71, D72, D74, D82, G34
Suggested Citation: Suggested Citation