The board of directors has outlived its purpose. The board is theoretically responsible for directing the management of a corporation, for monitoring its senior officers, and for making significant business decisions. The typical directors of the largest multinational corporations devote about seventeen hours per month to the governance of the corporation. So responsibility for the success or failure of the firm lies with a group of professionals, the board of directors, who work part time to monitor the firm’s business, and management, who receive almost all of their information about the firm secondhand.
Certainly the board of directors monitors corporate officers, particularly the CEO, and makes significant business decisions for the firm. But it is the senior corporate officers who are responsible for the day-to-day operation of the company and who are most involved in its business decisions. When the board must vote on a particular matter of corporate business, officers and experts selected by the officers brief it on the subject. Despite being the focus of corporate law’s accountability for corporate decision making, the board of directors relies heavily on the senior corporate officers it is supposed to monitor and lacks the time and expertise to challenge those officers in order to contribute valuable independent business judgment.
There are a number of other groups that exercise oversight over the firm. Creditors, for example, reserve oversight power in their contracts with the firm. Those contracts often give creditors a veto over some corporate decisions if the company is in a poor financial condition, and creditors often use the declaration of default threat to influence officers’ and directors’ decisions. Shareholders may exert control over the company through their ability to elect directors and enforce officers’ and directors’ obligations to the firm. Also, shareholder estimation of managerial performance is one component of stock price, which is a significant component of executive compensation. In firms with unionized labor forces, union representatives are able to influence corporate decision making through their ability to threaten a strike. Among these corporate monitors, directors are often the ones paying the least attention to the firm on a regular basis, even though they are ultimately responsible for the success of the firm. The board of directors, as an institution, has failed the modern public corporation with widely dispersed share ownership.
The inability of the board of directors to adequately perform its intended functions exacts serious costs. A system that relies so heavily on one governance structure is left vulnerable when that structure fails. Further, placing a strong emphasis on board accountability when boards cannot be meaningfully responsible for corporate decision making leaves those harmed by corporate scandal without recourse. Money spent on pursuing litigation against corporate directors is wasted, by and large, as directors are shielded from personal liability and yet the law still looks to directors for accountability for corporate decisions. Our expectations for boards of directors of large public companies far outweigh what such boards can realistically accomplish.
Numerous corporate law scholars have critically examined the structure and functions of the board of directors and have evaluated the relative success of various board compositions. These commentators have alternatively praised and criticized the board for its ability to monitor management and maximize shareholder wealth. The academic and business communities have failed to reach a consensus about how exactly the board should fit into the corporate governance structure, what its role and level of influence should be, how it is supposed to work toward the goal of shareholder wealth maximization, and to what extent the board should be responsible for a failure to meet those ends. Although the members of the corporate law community have reached a variety of conclusions, they all rest on the assumption that a board of directors is both necessary and desirable.
This Article challenges that basic assumption. It argues that the board of directors in a large public corporation is ineffective to perform the functions assigned to it and should thus be eliminated in favor of a governance system that more accurately reflects corporate decision making. Corporate officers and the investors and parties in interest that are essential to the firm’s daily operation and capital structure—the real corporate decision makers—should perform the functions assigned to the board, so that the now-vestigial board of directors can completely wither away.
