Ownership Concentration, Monitoring and Optimal Board Structure

We analyze the choice between a one-tier and a two-tier board structure in a firm with a large shareholder sitting on the board. The board has two tasks: project selection and monitoring the ability of the manager. In a one-tier structure, the sole board performs all tasks. In a two-tier structure, the management board is in charge of project selection and the supervisory board is in charge of monitoring. We show that such a two-tier structure can limit interference from the large shareholder and can provide the manager with the incentive to exert effort to become informed on investment projects without reducing the large shareholder's incentive for monitoring. This results in higher expected profits. If the increase in profits is high enough, the large shareholder prefers a two-tier board even if this implies that the manager selects his own preferred project.