Academic journal article Stanford Law Review

Boards-R-Us: Reconceptualizing Corporate Boards

Academic journal article Stanford Law Review

Boards-R-Us: Reconceptualizing Corporate Boards

Article excerpt

Introduction I.   The Jobs and Failures of the Current Board of Directors      A. What Do Boards Do?      B. Boards Fail      C. Why Boards Fail         1. Directors are subject to significant time constraints         2. Directors have an inherent information disadvantage         3. Directors are generalists         4. Directors do not have well-designed incentive II.  The Basic BSP Model.      A. The Basic Idea      B. Institutional Choices         1. Appointment and elections         2. Composition and function.         3. Compensation         4. Liability. III. Mapping the BSP to the Current Board.      A. How BSPs Address the Reasons Current Boards Fail.         1. Economies of scale and scope.            a. Time.            b. Information            c. Specialization         2. Incentives            a. Compensation incentives.            b. Liability-based incentives            c. Reputational incentives            d. Exposure to market forces.            e. Measurability.      B. Board Functions.         1. Managing the firm.         2. Providing services.         3. Monitoring management. IV.  BSPs and the Law. V.   Extensions.      A. Shareholder Access to the Proxy      B. Increasing Managerial Power VI.  Objections      A. Limited Liability.      B. Sticky Equilibria.      C. Special Interest Representatives.      D. The Value of Personal Leadership.      E. Other Objections Conclusion 

[Alexander] Hamilton would have no trouble recognizing the corporate board of today. The structure and composition of boardrooms have changed surprisingly little in more than 200 years. (1)


Corporate boards of directors are one of the most important institutions in our capitalist system. This is because state law requires boards to mediate the relations between ownership and control of the corporation. (2) Separating capital and management is thought to be a source of efficiency, since those with capital may not be best positioned to manage publicly held firms. (3) But the separation generates the potential for opportunism since managers may be less careful spending other people's money than they would their own. (4) To optimize the tradeoff between management efficiency and opportunism, shareholders elect boards of directors to supervise management of the firm by corporate officers. (5) Although day-to-day decisions are made by managers, directors are obligated to make fundamental decisions, like hiring and firing the managers, setting compensation incentives, raising capital, and entering into mergers and acquisitions. (6) This latter category of decisions routinely involves high stakes and potential conflicts among corporate stakeholders, making the board the place where legal rules about corporate governance have the most relevance.

In recognition of the centrality of the board in corporate governance, judicial control of corporate activities is almost exclusively effected through review of board decisions and refinement of board duties to shareholders. (8) Through their review of board actions in connection with mergers, executive compensation, supervision of firm risk, approval of conflicted transactions, and so on, state courts have created many of the basic rules of corporate governance. (9)

Legislation (from both states and the federal government), as well as private rules from stock exchanges, also focuses on optimizing corporate governance through attempts to perfect the board and optimally define its position in the corporate decisionmaking hierarchy. (10) For instance, in response to numerous corporate scandals during the late 1990s, the Sarbanes-Oxley Act of 2002 required, among other things, that all listed companies have audit committees composed entirely of independent directors. (11) Similarly, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) implemented numerous corporate governance reforms, including new disclosures about consultants working for boards and about compensation of directors, as well as new independence standards for board compensation committees. …

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