Expertise, Structure, and Reputation of Corporate Boards

This paper studies the implications of directors’s expertise for optimal board structure. The expertise of directors is particularly important when the company’s management does not cooperate with the board, and directors must rely on their own judgment when making decisions. The results of this paper demonstrate that even when the board acts in its shareholders’best interests, its expertise can harm shareholders’value by discouraging an opportunistic management from collecting and sharing valuable information. This effect takes place when a priori management and shareholders disagree on the optimal strategy, and despite management’s free access to information. Under those circumstances, an optimal board structure emerges: shareholders’ value is maximized when the board is inherently biased against management. Moreover, when directors are concerned about their reputations as experts, the incentives of management to cooperate with the board change. We show that management might gain more power on the expense of shareholders’ value if the uncertainty about directors’expertise is high or if a priori directors are not perceived as experts.