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Ownership Concentration, Monitoring and Optimal Board Structure (2005)
| Citations: | 5 - 0 self |
BibTeX
@MISC{Graziano05ownershipconcentration,,
author = {Clara Graziano and Annalisa Luporini Y},
title = {Ownership Concentration, Monitoring and Optimal Board Structure},
year = {2005}
}
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Abstract
The paper analyzes the optimal structure of board of directors in a …rm with ownership concentrated in the hands of a large shareholder who sits on the board. We focus our attention on the choice between one-tier board who performs all tasks and two-tier board where the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not the management board. We show that a two-tier structure can limit the interference of large shareholder and can restore manager’s incentive to exert e¤ort to become informed on new investment projects without reducing the large shareholder’s incentive to monitor the manager. This results in higher expected pro…ts in a two-tier board than in one-tier board and the difference in pro…ts can be su¢ciently high to induce large shareholder to prefer a two-tier board despite the fact that in this case the manager selects his preferred projects rather than the project preferred by large shareholder. The paper has interesting policy implications since it suggests that two-tier boards can be a valuable option in Continental Europe where ownership structure is concentrated. It also o¤ers support to some recent corporate governance reforms, like the so-called Vietti reform in Italy, that have introduced the possibility to choose between one-tier and two-tier structure of boards for listed …rms.
Keyphrases
large shareholder ownership concentration optimal board structure management board two-tier structure supervisory board listed rms manager incentive valuable option one-tier board er support large shareholder sits preferred project new investment project so-called vietti reform pro t optimal structure recent corporate governance reform interesting policy implication continental europe expected pro t two-tier board ownership structure project selection
