Influencing on boards

We developed a theory on influencing between the board of directors and management, using an agency model to represent the relationship between a corporation's board and management. Management has the option to affect how directors interpret information related to its performance; it can potentially make directors interpret information more in favor of management, giving it more credit for good news and less blame for bad news. This particular aspect of the interaction between the board and management is the focus of our study. We view the board as a corporate-governance mechanism, whose role is to monitor and compensate management; and analyze how influencing affects its behavior, with emphasis on its effectiveness as a corporate-governance mechanism. Standard intuition suggests influencing is detrimental to the board and shareholders. However, our analysis shows that influencing, depending on its characteristics, can be efficient. It can be used as a partial substitute for monitoring and can reduce the manager's risk exposure. Furthermore, in cases where the manager can use influencing to facilitate shirking, the board preemptively increases monitoring: this can result in social-welfare gains. Our analysis includes cases with costless influencing, cases where influencing is personally costly for the manager, and cases where influencing impacts the manager's productivity. For costless influencing, the board cannot prevent the manager from influencing. However, when influencing is personally costly for the manager, the board can prevent influencing by increasing its monitoring intensity; this can also lead to social-welfare gains. Finally, we analyze a case with multiple sources of information, some of which are not subject to influencing, and discuss the board's and management's behavior. Overall, influencing can be efficient, and the board can be an effective corporate-governance mechanism, despite influencing.