Managers and Directors: A Model of Strategic Information Transmission
CEMFI Working Paper No. 0003
Posted: 24 Mar 2000
Date Written: February 2000
Abstract
This paper models the process of policy making at the top level of the firm: its board of directors. Directors are expected to both advise and monitor the CEO to ensure that shareholders' wealth is maximized. The more independent directors are the better they will fulfill this fiduciary duty.
However, the flow of information that the board receives is controlled by the CEO, who will strategically use it in ways that depend on the structure of the board. The model makes three predictions: (i) It is possible to have too many independent directors. (ii) The optimal proportion of independents is higher for firms in "high-growth" environments. (iii) When independent directors value their reputation the proportion of independents will rise after a sequence of bad results.
JEL Classification: G30, G31
Suggested Citation: Suggested Citation
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