Authority, Consensus and Governance

We look for necessary properties of shareholder-value maximizing corporate boards when shareholders face a trade-off between improving information sharing between the board and management and reducing distortions in decision-making arising out of managerial agency. We draw a distinction between the alignment of preferences of the board with management (which affects information flows) and the allocation of authority to the board or management (which affects ex-post decisions). We show that it is in general suboptimal to allocate authority to management. Authority should be held by a supervisory board that may be imperfectly aligned with both shareholders and management. Indeed, even when management has captured all authority and the board only has an advisory role, the optimal board may be designed to withhold information from management. An optimal advisory board must however be sufficiently aligned with management in order to create ex-post consensus and ensure authority is irrelevant. Given optimal board alignment, the value of the board's authority equals the cost of requiring consensus. Shareholders may hold ultimate decision-making authority within an optimal supervisory board without any loss in welfare and in many cases this is strictly optimal