A Theory of Friendly Boards

Adams, Renee B.; Ferreira, Daniel

doi:10.2139/ssrn.453960

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A Theory of Friendly Boards

Journal of Finance, Forthcoming

ECGI - Finance Working Paper No. 100/2005

45 Pages Posted: 9 Dec 2005

See all articles by Renee B. Adams

Renee B. Adams

University of Oxford; European Corporate Governance Institute (ECGI)

Daniel Ferreira

London School of Economics - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Abstract

This paper analyzes the consequences of the board's dual role as an advisor as well as a monitor of management. As a result of this dual role, the CEO faces a trade-off in disclosing information to the board. On the one hand, if he reveals his information, he gets better advice. On the other hand, a more informed board will monitor him more intensively. Since an independent board is a tougher monitor, the CEO may be reluctant to share information with it. Thus, our model shows that management-friendly boards can be optimal. Using the insights from the model, we analyze the differences between a sole board system, such as in the United States, and the dual board system, as in various countries in Europe. We highlight several policy implications of our analysis.

JEL Classification: G34, L22, J41, J44, M41, M47

Suggested Citation: Suggested Citation

Adams, Renée B. and Ferreira, Daniel, A Theory of Friendly Boards. Journal of Finance, Forthcoming, ECGI - Finance Working Paper No. 100/2005, Available at SSRN: https://ssrn.com/abstract=866625 or http://dx.doi.org/10.2139/ssrn.453960