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Board Monitoring, Consulting, and Reward Structures
George Drymiotes, University of Houston
Konduru Sivaramakrishnan, University of Houston
ABSTRACT. While extant literature in corporate governance has focused almost exclusively on the contracting and monitoring roles of the board of directors, there is little emphasis on its "consulting" role. In this paper, we explicitly model this consulting role of the board and examine the consequent implications for its corporate governance duties. Consulting benefits shareholders whenever it complements managerial productive effort directly by increasing expected firm output, and indirectly by enhancing monitoring efficacy. However, these benefits cannot be realized if the board is unable to commit to consulting and monitoring inputs. We show that awarding the board equity stake in the firm resolves the commitment issue with respect to consulting. Moreover, we show that making the board care about the same performance measure that is used to evaluate managers (such as awarding a bonus based on short-term performance) is a way to resolve the commitment issue with respect to monitoring.
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