Process Over Structure: An Organizational Behavior Approach to Improving Corporate Boards
Nicola F. Sharpe
University of Illinois College of Law
August 24, 2012
Southern California Law Review, Vol. 85, 2012
Illinois Program in Law, Behavior and Social Science Paper No. LBSS11-36
Illinois Public Law Research Paper No. 11-01
History has shown that the scholarly and regulatory focus on board composition and structure is a dangerously incomplete solution to the problems that have caused recent corporate failures. The media and corporate scholars have assigned much of the blame for the 2008 financial crisis and the Enron-era corporate scandals to corporate boards. The conventional diagnosis of these ills is that boards were largely at fault because they failed to effectively monitor corporate officers. Unfortunately the conventional diagnosis of the problem is incomplete and the policy prescriptions flowing from this faulty diagnosis are unlikely to address the very real problems that continue to plague corporate governance.
The principal problem is that most regulatory attempts fail to adequately consider an essential step in understanding the board’s relationship to corporate failure: the process by which boards monitor corporate performance. By relying on insights from a robust organization behavior literature, this Article demonstrates that the processes boards employ to undertake their monitoring function are in need of significant improvement. In other words, how boards engage in management monitoring should be the focus of corporate regulatory reform, more so than who sits on boards or how boards are structured.
This Article makes three distinct contributions to the corporate governance literature regarding the board of directors. First, it identifies the routinely overlooked connection between board structure and composition on the one hand, and board process on the other. In doing so, the Article uses current board reform efforts to illustrate why it is a mistake to focus on board structure and composition while ignoring or discounting board process. Second, this Article identifies structure as a constraint on board process. Given the importance of process for successful board monitoring, it is important that regulatory initiatives recognize the consequences of structural regulation. Finally, it fills a hole in the literature by examining the interactions between the board of directors and others within the firm, such as the Chief Executive Officer (CEO). From a practical standpoint, making these connections is crucial to closing the space between what corporate governance regulations intend and what they are able to accomplish.
Number of Pages in PDF File: 54
Keywords: Corporate Governance, Organizational Behavior, Board of Directors, Agency Theory, Board Composition, Independent Directors, Monitoring, Financial Crisis
JEL Classification: K22, L20, L21, M10, M20
Date posted: October 14, 2011 ; Last revised: August 27, 2012