A Theory of Friendly Boards

TLDR

The paper analyzes the consequences of a board’s dual advisory and monitoring role and compares sole versus dual board systems. The model shows that a CEO balances information disclosure to benefit from better advice against increased monitoring by an independent board, influencing the choice between sole and dual board structures. The analysis concludes that management‑friendly boards can be optimal and offers several policy implications.

Abstract

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.