From the Symposium: Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance

Boards of directors are curious creatures. The law generally requires corporations to have them—indeed, they are the focus of the corporate law we teach in Business Associations in U.S. law schools. The corporation is managed by directors or under their direction; directors hire and fire officers; directors are necessary for fundamental transactions.

But the reason why corporations have directors is not entirely clear. In the prototypical privately held corporation, the family firm, the same individuals serve both as directors and officers. The CEO (better known as Mom) and CFO (Dad) decide corporate strategy, make hiring and firing decisions, and generally run the day-to-day business around the boardroom table, i.e., the kitchen table. Once a quarter, they might meet as a “board” to discuss high level decisions, issue a dividend (unlikely if all the shareholders work for the business given that salaries are deductible at the entity level), or take actions requiring a board, but it all seems a bit formalistic. Whether they are convening as directors or officers, CEO Mom and CFO Dad know the business intimately and there is no question who is running it. On cynical days they view holding a formal board meeting, complete with the requisite recording of board minutes, as another meaningless hoop to jump through—one required perhaps not so much by the law’s dictate as by their lawyer’s billable hours.

A public corporation’s need for a board seems, in contrast, much easier to explain. After all, someone needs to decide when it’s time for a CEO to go. Shareholders could theoretically vote out a lackluster CEO, but the exigencies of modern corporate life often require speed. If the CEO is arrested for a #metoo indiscretion, a public corporation cannot wait to set a record date, issue proxies, and tabulate the results of a vote. The board is a convenient mechanism to allow shareholders’ representatives to make such decisions quickly. But when they aren’t busy replacing the CEO, what else are directors supposed to do?