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.
Corporation and Enterprise Law | Economics | Law and Economics
Date of this Version
Nina Walton, "Delegated Monitoring: When Can Boards Rely on Outside Experts?" (May 2010). University of Southern California Law and Economics Working Paper Series. Working Paper 115.