Why do corporations need boards of directors?

If I hear another corporate governance "expert" tell me that the role of a board of directors is to make management accountable to the company's owners (read shareholders for for-profit and members/public for not-for-profit companies) I am going to... Well, on second thought, I'll blog about it now and get it off my chest.

No law of any jurisdiction that I am aware of, even Delaware (the most shareholder-friendly state), says directors owe a fiduciary duty to shareholders. They all say, directors owe fiduciary duties to "the corporation". In fairness, the courts of some jurisdictions, namely Delaware, have interpreted that to mean "shareholders", reasoning that shareholders are the rightful owners (really?, even day traders who own the stock for a few days, if not minutes) of the corporation, and the board of directors' role is to monitor management in order to protect shareholder interests. However, keep in mind, this is only one interpretation of the law. Is it really true that a corporation is simply an extension of its owners? Is a corporation not a distinct entity, in fact a legal person, with most of the same rights and obligations as its owners?

If God created people, then who created the corporation? The state created corporations by granting them a corporate charter for public policy purposes (remember, the state has other options). If God giveth and taketh away natural life, then the state has the same power over corporations. So why is it that boards of directors are deemed to vicariously have a fiduciary duty to shareholders, rather than the state? In fact, why is it that boards of directors should have derivative fiduciary duties to any single stakeholder? Aren't corporations legal members of society? Do people have a duty of loyalty and care to any other person or group of people? The answer is generally not, except parents have a fiduciary duty to care for their children while they are minors. Parents do not, however, have a duty to their employers, parents, creditors, the state, or any other entity that may have entrusted them with assets.

Consider for a moment the possibility that the primary role of a board of directors is to ensure the corporation is properly socialized as a legal person - in effect to provide the human link between the legal person and the natural persons with which it interacts. And it does this by assuming a paternal role; a father figure for the corporation. Yes, I am suggesting that a board of directors is a paternal archetype.

Some time ago I wrote a brief article that offers an evolutionary argument for this point of view: "Restoring Trust in Corporations".

How would this view of the role of the board of directors affect your perceptions about corporate governance best practices?

Why I am Blogging on Corporate Governance Best Practices

I am honoured to have been invited to contribute a chapter on Corporate Governance Best Practices for a book on Corporate Governance being published by Wiley in 2010.

I started researching corporate governance practices when I was invited to present a paper to the Doctoral Consortium of McMaster University's 2006 McMaster World Congress on Corporate Governance. My paper, "Trust Enabled Corporate Governance", attempted to connect the issue of shareholder trust to corporate governance practices. I subsequently wrote an article, entitled "Corporate Governance Best Practices: One size does not fit all", disclosing my research findings that discrete governance styles appear to be associated with distinct business performance metrics. One of them was the Trusted Board Style, which I found to be correlated with higher business (stock) valuations. A logical derivative of this insight was the possibility that corporations with superior revenue growth may be more trusted by their customers. Those companies, by the way, tended to have a Management Controlled Board Style. I also found that the most profitable companies had a Sovereign Board Style. What might this suggest about relationship between profitability and the trust of other stakeholders? Moreover what is the legitimate role of boards of directors in helping corporations achieve their strategic objectives, and by extension, enabling trust in their business relationships?

A few months ago, I posed this question to a panel of corporate governance gurus in Toronto. They were advocating for improved board competency in risk management. At the same time, one of them observed that business leaders are no longer considering the impact of their decisions on their reputation, instead only on their survival. I found this to be an apparent contradiction, since, to me, survival considerations are an acute example of risk management. If reputation, a method of developing trust, was being subsumed by survival considerations, then this would be an example of excessive risk management. In my mind, the solution is not more risk management, but more Trust Enablement. So what can a board of directors do to enable trust? After all, the current economic recession is the direct result of a loss of trust and confidence by all stakeholders. Their answer floored me. One panelist suggested it was the role of the World Bank to restore trust by restoring credit liquidity to banks, not that of boards of directors. The other, an academic, said he had no opinion, and later admitted privately that he had never thought about it.

This blog and the resulting book chapter will help us to begin thinking about the role of the board of directors, so that we can define valid criteria for corporate governance best practices. I look forward to engaging you in a provocative discussion on these contentious issues.