Improving Board Decisions: The Promise of Diversity

Many rely on outside directors to play an important monitoring role in corporate law. Yet their presence on the board is not a panacea. Due to their status as outsiders, independent board members lack the information necessary to fully understand the company's operations. Furthermore, outside directors often are not completely independent from management: they move in similar social and professional networks, sometimes developing personal friendships. Without complete information and full independence, it is not surprising that the monitoring function of the board sometimes fails. Kamalnath proposes two solutions to this dilemma. First, she suggests that increasing the diversity of board members will help improve the board's monitoring of management. Second, she recommends both companies and potential board candidates interact with third party intermediaries to help reduce information gaps between these two sides of the labor market.