Delegated Monitoring: When Can Boards Rely on Outside Experts?

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. Mandates can be counterproductive, however, if they unduly elevate the status of costly second opinions that always agree with management recommendations. In the absence of incentives for truthful disclosure of information to experts, it is better for boards to forego efforts to and require management and experts to present their recommendations as one. Copyright 2012, Oxford University Press.