Authority, Consensus and Governance Archishman Chakrabortyy Bilge Y¬lmazz

We look for necessary properties of shareholder-value maximizing corporate boards when shareholders face a trade-o ¤ between improving information sharing between the board and management and reducing distortions in decision-making arising out of managerial agency. We draw a distinction between the alignment of preferences of the board with management (which a¤ects information ows) and the allocation of authority to the board or management (which a¤ects ex-post decisions). We show that it is in general suboptimal to allocate authority to management. Authority should be held by a supervisory board that may be imperfectly aligned with both shareholders and management. Indeed, even when management has captured all au-thority and the board only has an advisory role, the optimal board may be designed to withold information from management. An optimal advisory board must however be su ¢ ciently aligned with management in order to create ex-post consensus and ensure authority is irrelevant. Given optimal board alignment, the value of the boards authority equals the cost of requiring consen-sus. Shareholders may hold ultimate decision-making authority within an optimal supervisory board without any loss in welfare and in many cases this is strictly optimal