Renee Adams2014-11-05 3:35 PM

A Theory of Friendly BoardsAbstract

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 manager faces a trade-off concerning the amount of information he discloses to the board. On the one hand, if he reveals his information he gets better advice. On the other hand, the board may change its opinion of his ability on the basis of his information. Our model shows that the board may choose to pre-commit to reduce its monitoring of the manager in order to encourage the manager to share his information. Therefore, management-friendly boards may be optimal governance structures under certain circumstances. We discuss some evidence consistent with the new empirical implications of our theory. We also use the insights from the model to discuss the differences between a sole board system such as in the United States and the dual board system as in various countries in Europe. Finally, we discuss some policy implications.


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Renee Adams

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