Boarded In: Counteracting the Consequences of Board Insularity by Legitimizing Director Elections

By Grossblatt, Devan | Fordham Journal of Corporate & Financial Law, April 1, 2015 | Go to article overview

Boarded In: Counteracting the Consequences of Board Insularity by Legitimizing Director Elections


Grossblatt, Devan, Fordham Journal of Corporate & Financial Law


Abstract

As a result of the worldwide economic downturn stemming from events over the past fifteen years, there has been an emphasis on the need to reform modern corporate governance norms in order to restore public faith in corporate America. The public has openly criticized the upper echelon of corporate management for its failure to prevent the recent crises, continued prosperity, and perceived capitalization on the losses of other corporate constituents. In particular, boards of directors of large corporations have increasingly been subject to scrutiny. This Note addresses the insularity of boards of directors for publicly held corporations and argues that the existing ideological frameworks are polarizing and preclude the possibility of reaching a solution. It then proposes a reform to the election process and reconceptualization of shareholder voting rights.

American corporate governance laws and regulations require every corporation to have a board of directors to serve as an intermediary between the owners and managers of the corporation. The problem with executive boards is that they are self-perpetuating, and shareholders are generally without recourse even if it is clear that a board has mismanaged a corporation. Consequently, reforms seeking to eradicate the pervasiveness of corporate managers' personal preferences from corporate decisions have similarly sought to prevent corporate managers' social connections from influencing corporate appointments. Nevertheless, an elite network of corporate officers remains influential over the process of identifying and selecting directors.

This Note is concerned with the insularity of boards of directors of publicly held corporations because of the inherent consequences of the combination of board entrenchment and unconstrained board activity. Specifically, it addresses how board insularity compromises the objectivity of directors and ultimately precludes the board from faithfully working toward the ultimate goal of shareholder wealth maximization. Ultimately, this Note offers a way to mitigate an incumbent board's dominion over the corporation through reform of the processes of director selection and election. It explains that a national standard is necessary to preserve the integrity of the institution of corporate boards in light of the ever-increasing responsibilities imposed on them. Furthermore, the proposed solution was reached with consideration of the need to balance the establishment of protective measures to monitor directorial action with the board's need for autonomy from individual managers', shareholders', and governmental interests. A compromise among these competing interests can be reached by reforming the process by which directors are selected to ensure their competency rather than through interference with the way in which an assumedly competent board carries out its duties. This Note concludes by arguing that the existing ideological frameworks, which articulate the primary purpose of the board, are polarizing and preclude the possibility of reaching a solution to counterbalance the currently unrestrained insularity of corporate boards.

INTRODUCTION

"If you want to be on [corporate] boards, you have to fish where the fish are."1 Selected by Fortune as one of the "50 Most Powerful Women in Business" for five consecutive years, Maggie Wilderotter emphasizes the importance of networking to obtain a position on a board.2 In the last twenty-eight years, Wilderotter served as a director on the boards of twenty-three publicly held corporations.3 In 2004 Wilderotter was both appointed to the board of directors of Frontier Communications Corporation and hired as its Chief Executive Officer ("CEO").4 Subsequently, Wilderotter attributed landing her current job as well as her appointment to various boards to successful networking.5

As a result of the worldwide economic downturn stemming from events over the past fifteen years, there has been an emphasis on the need to reform modem corporate governance norms in order to restore public faith in corporate America. …

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