Proposals for Reform of Corporate Boards of Directors: The Dual Board and Board Ombudsperson

By Dallas, Lynne L. | Washington and Lee Law Review, Winter 1997 | Go to article overview

Proposals for Reform of Corporate Boards of Directors: The Dual Board and Board Ombudsperson


Dallas, Lynne L., Washington and Lee Law Review


Introduction

The debate on reforming corporate boards of directors has centered on monitoring management to ensure that corporate board members act in the interests of shareholders rather than in their own personal interests.' To best monitor situations where managerial interests conflict with those of shareholders (conflicts monitoring), reformers have made numerous proposals to make boards independent of management. Two main problems confound these proposals. First, the proposals fail to deal adequately with social dynamics on boards that make independent decision making difficult when conflicted or nonindependent board members serve on the board, namely, inside (employee) directors and outside (nonemployee) directors with business relationships with the corporation or its management. Second, the proposals do not take proper account of the many important relational roles of the board other than conflicts monitoring.

In recognition of the importance of an independent board to conflicts monitoring and of the importance of the full range of relational roles of the board that requires a mix of different kinds of directors, I propose that state legislators modify state corporation statutes to permit public corporations to utilize a dual board structure. This structure would consist of two boards, each ideally composed to perform certain functions. One board, called the conflicts board, would perform conflicts monitoring and would be composed solely of independent directors, who are outside directors with no business relationships with the corporation or its management. The other board, called the business review board, would consist of a mix of different kinds of directors and would perform other relational roles. A full-time ombudsperson, selected by independent directors, would assist the independent directors in performing conflicts monitoring on the conflicts board or existing unitary boards.

Two theories of the board, contra-managerial hegemony theory2 (hegemony theory) and agency cost theory,3 have provided the foundation for the debate on corporate board reform. Both theories are conflicts monitoring theories. While hegemony theorists have given some attention to psychological factors that may hinder independent decision making by board members, they have not gone far enough in recognizing the substantial conformity pressures on board members. Both hegemony and agency cost theorists are content with a board containing inside directors and outside directors with business relationships with the corporation or its management.' As this Article suggests, such a board would be less effective at conflicts monitoring than a board composed solely of independent directors.

The focus on conflicts monitoring by prevailing legal theories, however, gives inadequate attention to other important roles of corporate boards. To explore these roles, reference is made to a broader theory of the board, the power coalition theory,5 which is widely accepted in the business literature, but has been largely ignored by legal reformers. Whereas conflicts monitoring theories perceive the board as mediating conflicts between managers and shareholders, power coalition theory describes the board's roles in terms of the corporation's relationships with various corporate stakeholders (including shareholders) and the corporation's social environment.

Under power coalition theory, the board provides the corporation with relational resources that decrease the corporation's uncertainty and enhance its chances of survival.6 These resources include coordination with the external environment, information access and exchange, support of corporate business, advice on various subjects, legitimacy and status in the eyes of relevant communities, monitoring, and control. Under this theory, functions of boards in addition to conflicts monitoring are economically significant. Independent directors, however, may not always be in a position to provide all of these resources. …

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