Ownership Concentration, Monitoring and Optimal Board Structure

Clara Graziano and Annalisa Luporini ()

No 1543, CESifo Working Paper Series from CESifo

Abstract: The paper analyzes the optimal structure of the board of directors in a firm with a large shareholder sitting on the board. In a one-tier structure the sole board performs all tasks, while in a two-tier structure 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 on the management board. We show that such a two-tier structure can limit the interference of the large shareholder and can restore manager’s incentive to exert effort to become informed on new investment projects without reducing the large shareholder’s incentive to monitor the manager. This results in higher expected profits. The difference in profits can be sufficiently high to make the large shareholder prefer a two-tier board even if this implies that the manager selects his own preferred project. 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 offers 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 firms.

Keywords: board of directors; dual board; corporate governance; monitoring; project choice (search for similar items in EconPapers)
JEL-codes: G34 L22 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Ownership concentration, monitoring, and optimal board structure (2012)
Working Paper: Ownership Concentration, Monitoring and Optimal Board Structure (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1543

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