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Communication and Decision-Making in Corporate Boards

  • Nadya Malenko

    (Stanford University)

Registered author(s):

    This paper develops a model of communication and decision-making in corporate boards. The key element of the paper is that the quality of board communication is endogenous, because it depends on the effort directors put into trying to communicate their information to others. In the model, directors may have biases regarding board decisions and may also be reluctant to disagree with other directors. If the only interaction between directors is at the decision-making stage, when decisions are made but discussion is limited, these frictions impede effective decision-making because directors' decisions are not fully based on their information. However, if in addition directors can communicate their information more effectively at a cost, then both stronger biases and stronger concerns for conformity at the decision-making stage might improve the board's decisions, because directors have a stronger motivation to convince others of their position. The paper provides implications for the design of board policies, including the use of open vs. secret ballot voting, the frequency of executive sessions of directors, board structure, and the role of committees.

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    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 449.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:red:sed011:449
    Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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    1. Wouter Dessein & Tano Santos, 2006. "Adaptive Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 956-985, October.
    2. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
    3. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc.
    4. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
    5. Mathias Dewatripont & Patrick Bolton, 1994. "The firm as a communication network," ULB Institutional Repository 2013/9595, ULB -- Universite Libre de Bruxelles.
    6. Gilat Levy, 2007. "Decision Making in Committees: Transparency, Reputation, and Voting Rules," American Economic Review, American Economic Association, vol. 97(1), pages 150-168, March.
    7. Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 283-306, June.
    8. Doraszelski Ulrich & Gerardi Dino & Squintani Francesco, 2003. "Communication and Voting with Double-Sided Information," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-41, August.
    9. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
    10. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Ottaviani, Marco & Sorensen, Peter, 2001. "Information aggregation in debate: who should speak first?," Journal of Public Economics, Elsevier, vol. 81(3), pages 393-421, September.
    12. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, 02.
    13. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
    14. Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-548, 04.
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