The Monitoring Role of Insiders
Posted: 11 Jul 2007 Last revised: 26 Jan 2018
Conventional wisdom suggests that giving monitored agents an oversight role may blunt the effectiveness of the monitoring process. In contrast, I show that less independent boards can sometimes be more effective at monitoring. Fully independent boards have incentives to shirk monitoring ex post, after the agents' productive inputs are sunk, if the boards cannot commit ex ante to monitoring. However, boards with inside directors may have incentives to monitor the agents ex post. The demand for insiders thus arises endogenously as they allow boards to indirectly commit to monitoring and thereby facilitate the monitoring process.
Keywords: Corporate governance, Board of directors, Monitoring, Commitment
JEL Classification: D80, G34, M40
Suggested Citation: Suggested Citation