Monday, April 6, 2009

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?

3 comments:

  1. Hi,

    Came across your blog post quite accidentally. Actually, what you are proposing finds resonance in Japanese system of governance which puts a corporation's duty toward society, environment, country and employees & suppliers much ahead of shareholders. Many corporate governance disclosure by Japanese companies do not even mention shareholders as stakeholders!!! Probably a way of doing business that we in the west will do well to emulate!

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