The Trouble with Boards

Abstract

The Delaware Chancery Court's recent decision in the Disney case raises the question of how we've come to accept an institution with such minimal duties as the board of directors as the principal legitimating device of modern corporate governance. In this article I examine the history of the development of the monitoring model of the board of directors, the model clearly dominant today and affirmed in Disney. My conclusion is that the monitoring board was developed by academics as a sincere reform effort. However, in practice it was corrupted, to be used not for governance purposes but as a liability shield. The article lays out and analyzes this history.

The story has significance for corporate governance reform. Most reform suggestions begin with the monitoring model as the accepted starting point. To begin with a model that quickly developed in order not to work is to ensure that reform will fail. Moreover, reform efforts continue to disregard the real seat of corporate power, the CEO and senior management. In order to succeed, reformers either must completely reconceptualize the board or acknowledge and account for the power of the CEO in their governance models.

Keywords: Disney, boards, monitoring, outside, independent, history, ALI, function, governance, corporations, directors