Academic Commons

Reports

When Are Uninformed Boards Preferable?

Isaka, Naoto

In this paper, I analyze the optimal choice of board of directors using the dual- role model of boards in Adams and Ferreira (2007). In my model, shareholders choose either an informed board that brings additional private information to the firm or an uninformed board that merely considers the inside information already available within the firm. The board then randomly chooses a good chief executive officer (CEO) with inside information or a bad CEO without such information, and the CEO decides whether to consult with the board when making a project decision. I show that shareholders generally choose the informed board to maximize firm value by utilizing the private information available to the board. However, the shareholders optimally select the uninformed board if the CEO is reluctant to communicate with the informed board for fear it will reject the CEO’s decision. The uninformed board is also optimal when the board has a sufficiently large private benefit of monitoring the CEO, the shareholders feel burdened by any conflict between the CEO and the board, or the firm is involved in many unrelated businesses, especially when the inside information is valuable and the firm needs many outsiders to observe useful outside information. I use some of these implications and casual observation of real-world data to discuss recent trends in the board structure of Japanese firms.

Files

  • thumnail for WP_353.Isaka.When_are_Uninformed_Boards_Preferable.pdf WP_353.Isaka.When_are_Uninformed_Boards_Preferable.pdf application/pdf 1.63 MB Download File

More About This Work

Academic Units
Center on Japanese Economy and Business
Publisher
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Series
Center on Japanese Economy and Business Working Papers
Published Here
July 21, 2016
Academic Commons provides global access to research and scholarship produced at Columbia University, Barnard College, Teachers College, Union Theological Seminary and Jewish Theological Seminary. Academic Commons is managed by the Columbia University Libraries.