Modeling Board Decisions

In contrast to companies that are run by their owners, business decisions in companies run by management boards are made by groups of individuals with different qualifications and heterogeneous objectives that may differ from those of the owners. The members of the board will assess alternative action differently, depending on individual assessments of the situation and personal goals. From an economic point of view, it is particularly interesting to see how the shareholders assess the quality of the decision made by the board. If, as will be assumed in the following, the shareholders are only interested in the economic position of the company, then it follows that each of them will only be interested in the long-term financial success of the decision that he has delegated to the managers.The shareholders are faced with either making a decision themselves or delegating it to a group of managers. By delegating to the board the shareholders can hope to reach better decisions, i.e. improving the company's profitability, because of managements' superior knowledge or qualification. On the other hand, each manager pursues his own goals which may differ from those of the shareholders (‘personal interests’). The goals of the managers can, however, be at least partly compensated for by an incentive system that offers them a share in the profit made when the owners' goal is achieved. Compensation by means of an appropriate incentive system of course generates reward costs for the owners and so reduces their total gain. The trade-off between the managers' personal interests, their incentives, their qualification, and the board size is central for the model. The following meta decision problem results for the share-holders: They have to find an optimum way of matching incentives, group composition, and rules of group decision with their own goals while taking qualification, conflicting goals and reward costs into consideration.