Questioning Authority: Why Boards Do Not Control Managers and How a Better Board Process Can Help

45 Pages Posted: 14 Feb 2012 Last revised: 16 Apr 2012

See all articles by Nicola F. Sharpe

Nicola F. Sharpe

University of Illinois College of Law

Date Written: February 10, 2012

Abstract

Few Chief Executive Officers (CEOs) believe their boards of directors understand the strategic factors that determine their corporation’s success. In fact, some long-term directors “confess that they don't really understand how their companies make money.” Yet broadly accepted theories of corporate governance, such as Stephen Bainbridge’s Director Primacy, are founded on the faulty premise that boards of directors have the actual authority to stop managers from behaving badly. These theories, as well as corporate law, wrongly assume that boards have practical authority over managers. This Article directly challenges that assumption and argues that managers, not boards, control corporate decision-making processes. The problem is that legal scholars and policymakers have ignored the connection between decision-making processes and practical authority. This Article is the first to identify and examine this relationship, which is essential to helping boards live up to their legislative mandates.

This Article argues that an effective decision-making process is essential to securing a corporate board’s actual authority. Unless boards engage in such a process, regulators will continue to expect boards to perform tasks that exceed their capabilities. Organizational behavior theory, which can be found in business literature, but is frequently ignored in law, provides the attributes of an effective decision-making process. Analyzing the components of an effective process, and identifying which components are truly controlled by boards as opposed to managers, supplies a roadmap for what boards need in order to have both de facto and de jure authority in their corporations. This Article provides that original analysis.

Keywords: Corporate Governance, Organizational Behavior, Board of Directors, Decisionmaking, Decision-making, Authority, Board Composition, Independent Directors, Monitoring, Process, Structure

Suggested Citation

Sharpe, Nicola F., Questioning Authority: Why Boards Do Not Control Managers and How a Better Board Process Can Help (February 10, 2012). Illinois Program in Law, Behavior and Social Science Paper No. LBSS12-02; 38 Journal of Corporation Law __ (Forthcoming 2012); Illinois Public Law Research Paper No. 11-14; Illinois Program in Law, Behavior and Social Science Paper No. LBSS12-02. Available at SSRN: https://ssrn.com/abstract=2003010 or http://dx.doi.org/10.2139/ssrn.2003010

Nicola F. Sharpe (Contact Author)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

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