Research Seminar MicroeconomicsBiased BoardsTim Baldenius (NYU Stern)
21 April 2017
Tim Baldenius (NYU Stern, 12:15 - 13:45, Room 0029 (VMP 5)
Abstract
We study a corporate board tasked with monitoring a firm's CEO and providing incrementally decision-relevant information in an investment setting. The board has both compensation and non-pecuniary incentives - we label the latter board bias. We show that the optimal board bias is jointly determined by the CEO's initial information advantage and by whether the board has commitment power when dealing with the CEO. The board should be weakly "friendly" (partially aligned with the CEO) if it lacks commitment power and the CEO's information advantage is high. In contrast, the board should be weakly "antagonistic" (counter to the CEO's bias) if it has commitment power, or if it lacks such power and the CEO's information advantage is small. For given board bias, commitment power improves communication, thereby reducing the need for the board to exert costly (information gathering) effort. Endogenizing the
board bias, however, shows that commitment power may be associated with greater board effort. We also show that the shareholders may be better off with a board that lacks commitment power, even if the shareholders can control the board bias.