A Theory of Friendly Boards

  • Author(s): RENÉE B. ADAMS, DANIEL FERREIRA
  • Published: Jan 11, 2007
  • Pages: 217-250
  • DOI: 10.1111/j.1540-6261.2007.01206.x

ABSTRACT

We analyze the consequences of the board's dual role as advisor as well as monitor of management. Given this dual role, the CEO faces a trade‐off in disclosing information to the board: If he reveals his information, he receives better advice; however, an informed board will also monitor him more intensively. Since an independent board is a tougher monitor, the CEO may be reluctant to share information with it. Thus, management‐friendly boards can be optimal. Using the insights from the model, we analyze the differences between sole and dual board systems. We highlight several policy implications of our analysis.

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