Originally uploaded at SSRN.

Abstract

e board of directors is the theoretical fulcrum of the corporate form: Statutes task the board with managing the corporation. Yet in the twentieth century, CEOs and other executives came to dominate the real-world control of the corporation. In light of this transformation, in the 1970s Melvin E. Eisenberg proposed reconceiving the board as an independent monitor. Eisenberg’s monitoring board is now the dominant regulatory model of the board. Recently two different visions of the board of directors have emerged. Stephen Bainbridge’s “director primacy” model calls directors “Platonic guardians,” and Margaret Blair and Lynn Stout’s “team production model” characterizes them as “mediating hierarchs.” Each of these models involves different conceptions of the board, but both theories presume that boards should play a central role in corporate governance.

The reality of today’s public corporate board, however, is one of limited information, constrained time, and uncertain ability. The reforms of the past three decades have left us with supermajority independent boards — boards, that is, composed mostly of outsiders. There is no guarantee that the directors populating these boards have any knowledge of the corporation in general or of the particulars of the business they serve. With one exception (the financial expert), they need not have advanced degrees or a minimum level of experience in business or management. The only quality they must have is independence, defined as a lack of ties to the corporation. This chief strength of the board is also a weakness, because it means that most members of the board rely on the CEO for knowledge of the corporation and its business.

The centrality of independence to modern boards requires us to rethink their essential role. I do so here by articulating and defending a “conflict primacy” model of the public company board. In my view, expecting a group dominated by outsiders to make substantive managerial decisions about the corporation – about the proper approach to labor disputes, when to expand the corporation, how to expend corporate resources – simply does not make sense. What does make sense is for the board to police situations in which the self-interest of the corporation’s day-to-day managers impedes their ability to function effectively. The board’s central role, then, should concern monitoring CEO performance and pay (including the removal power and succession planning), overseeing the audit function, and dealing with takeovers and derivative suits. In such areas of conflict of interest the board’s lack of ties to management becomes a strength, and so it is on these subjects that the board should focus. Perhaps controversially, the conflict primacy model would reduce the CEO’s role on the board, demoting him to nonvoting, ex officio status. Reconstituted in this manner as a more fully independent body, the board of directors would have a clear but circumscribed mandate that comports with its modern character. Part-timers are not well situated to second-guess executives, but are well equipped to manage conflicts of interest.

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