Comments

This paper is a simplified version of Nina Walton's "Gatekeepers and CEO Reputation," also available from BEPress.

Abstract

This paper provides a theoretical model to examine when and how boards of directors can utilize outside experts who provide second opinions to assist them in 1) monitoring managers with career concerns, and 2) approving firm investments. Because an agreeable second opinion serves as a signaling mechanism, when such opinions are credible, policies mandating the use of experts are unnecessary as managers will choose to seek out second opinions on their own. When Mandates can be counterproductive however when second opinions are not credible, unduly elevating the status of costly second opinions that always agree with management recommendations. In the absence of incentives for truthful disclosure, it is better for boards to forego efforts to monitor and require management and experts to pool their recommendations.

Disciplines

Corporation and Enterprise Law | Economics | Law and Economics

Date of this Version

May 2010