Communication and Decision-Making in Corporate Boards

Abstract

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 e¤ort 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 e¤ective decision-making because directors' decisions are not fully based on their information. However, if in addition directors can communicate their information more e¤ectively 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.

How Transparency Kills Information Aggregation: Theory and Experiment

“…Indeed, recent theoretical literature has shown that reputational concerns influence committee behaviour differently under secrecy and transparency in the case of political committees (e.g. Stasavage (2007)), corporate boards (Malenko (2013)), and monetary policy committees (Levy (2007); Visser and Swank (2007); Swank and Visser (2013); Swank et al (2008); Meade and Stasavage (2008); Gersbach and Hahn (2008)). …”

The Labor Market for Directors and Externalities in Corporate Governance

“…See, for example, Hermalin and Weisbach (), Warther (), Adams and Ferreira (), Harris and Raviv (), Levit (), Chakraborty and Yilmaz (), and Malenko ().…”

“…Because their paper does not feature conflicting types of reputation, the reason for multiplicity of equilibria in their model is different from ours. 10 See, for example,Hermalin and Weisbach (1998),Warther (1998),Adams and Ferreira (2007),Harris and Raviv (2008),Levit (2012),Chakraborty and Yilmaz (2013), andMalenko (2014).11 The Internet Appendix may be found in the online version of this article.…”

Board interlocks and capital structure dynamics: evidence from China

“…For the advisory function, the board helps managers with operational and strategic decisions, including capital structure choices. Malenko () argues that communication among directors is critical for successful board functioning. By providing advice, certain practices of a specific firm can be diffused to the linked firms.…”

“…() suggest that interlock networks help industrial corporations to acquire a greater level of financial capital. Malenko () develops a theoretical model to discuss the communication and decision‐making in corporate boards. According to Malenko ()'s third proposition: when outside directors are less busy, are geographically closer to each other, and their social and professional connections are stronger, then, all else being equal: (i) outside directors are more likely to vote in unison with each other; (ii) the board's decisions are more informed and are better for firm value.…”