Authority, Consensus and Governance

We characterize optimal 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 show that allocating authority to management is suboptimal. Authority should be held by a supervisory board that may be imperfectly aligned with both shareholders and management. 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. Optimal advisory boards must however be able to create consensus with management, making the allocation of authority irrelevant