Questioning Authority: The Critical Link between Board Power and Process

By Sharpe, Nicola Faith | Journal of Corporation Law, Fall 2012 | Go to article overview

Questioning Authority: The Critical Link between Board Power and Process


Sharpe, Nicola Faith, Journal of Corporation Law


I. INTRODUCTION
II. AUTHORITY IN THEORY AND LAW
       A. The Board's Control Function
       B. Authority Defined
       C. Authority in Theory
          1. Managerialism
          2. Shareholder Control
          3. Director Control
       D. Board Authority in Law
          1. The Significance of Authority to Legislative Efforts
          2. The Business Judgment Rule and Legal Authority
III. THE GAP BETWEEN DOMINANT LEGAL THEORY, REFORMS, AND PRACTICE
       A. Process and Practical Authority
       B. Managerial Authority in the Decision-Making Process
          1. Identification
          2. Analysis
          3. Choice of Response
          4. Approval
          5. Implementation
          6. Information, Process, and Practical Authority
IV. FILLING THE GAP: DECISION-MAKING PROCESS--THE CORNERSTONE OF
PRACTICAL AUTHORITY
       A. Adding Value Through Effective Decision Making
          1. Types of Decision-Making Processes
          2. Programmed Versus Nonprogrammed Decisions
       B. Organizational Behavior Decision-Making Framework
       C. Attributes of an Effective Decision-Making Process
          1. Forward-Looking Information
          2. Multiple Information Gathering Channels
          3. Proactive Goal Setting
          4. Deliberation Techniques
          5. The Process Matrix
V. LEGAL IMPEDIMENTS TO PRACTICAL AUTHORITY
       A. The Detrimental Impact of Structural Reforms
       B. Objections
          1. Changing the Status Quo
          2. Pursuing Independence
VI. CONCLUSION

I. INTRODUCTION

The overwhelming majority of outside directors rely exclusively on executive management for information. (1) Few chief executive officers (CEOs) believe their boards of directors understand the strategic factors that determine their corporations' success. (2) In fact, some long-term directors "confess that they don't really understand how their companies make money." (3) Yet corporate law expects that boards of directors will stop managers from behaving badly. It assumes that the ultimate governing authority within corporations rests with their boards, and not with the managers who run them. (4) State corporate codes, federal reform efforts, judicial decisions, and a significant body of legal scholarship share an axiomatic assumption: corporate boards exercise significant control within the corporate hierarchy. Even Delaware--whose corporate law enjoys quasi-national authority within the United States (5)--assumes that boards have the power to manage their corporations. (6) Although boards, as a practical matter, delegate the majority of this management work to the top-level managers within the firm, (7) recent legislative efforts only reinforce the assumption that boards effectively control corporate governance. (8)

This assumption is highly dubious. One need only look at recent corporate failures for illustrations of managerial as opposed to directorial control. Take, for example, Eastman Kodak's recently filed bankruptcy petition. (9) Although the board decided to file for bankruptcy, it was a series of decisions by management to prioritize Kodak's film business over its digital business that lead to the company's decline. (10) American Airlines also gave in to a strategy it had resisted for over a decade and declared bankruptcy in November 2011. (11) Gerard J. Arpey, American Airlines' former CEO, was opposed to bankruptcy, and in fact resigned as a result of the Chapter 11 filing. (12) It was the CEO's strategic decision, not the larger board of directors, that caused the company to struggle financially while industry competitors profited. (13)

Kodak and American are only a small sampling of widespread corporate failure that illustrates the reality of U.S. businesses--managers, not boards, control most of the steps in the corporate decision-making process. (14) Moreover, courts and legislators have failed to acknowledge this fact. Against the backdrop of repeated, management-driven corporate failure, there has been a consistent shift away from descriptively accurate managerial models of corporate governance (which assume corporate boards perform a cursory advisory role) to descriptively inaccurate board-oriented models (which assume that independent boards are necessarily well positioned to actively monitor manager behavior). …

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