Communication and Decision-Making in Corporate Boards

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. I am very grateful to my dissertation committee, Anat Admati, Paul P‡eiderer, and Je¤rey Zwiebel, for their guidance and valuable suggestions. I am also grateful to Francesco D’Acunto, Peter DeMarzo, Darrell Du¢ e, Joseph Grundfest, Dirk Jenter, Ron Kaniel, Arthur Korteweg, Doron Levit, Andrey Malenko, George Parker, Francisco Perez-Gonzalez, Francisco Santos, Kenneth Shotts, Eric So, James Van Horne, Bilge Yilmaz, and seminar participants at the New Economic School, Stanford University, the University of Houston, and the Berkeley-Stanford joint …nance student seminar for helpful comments and discussions. Address for correspondence: Stanford Graduate School of Business, PhD O¢ ce, 518 Memorial Way, Stanford, CA 94305. Email: [email protected].