Intruders in the Boardroom: The Case of Constituency Directors

65 Pages Posted: 23 Apr 2013 Last revised: 10 May 2013

See all articles by Simone M. Sepe

Simone M. Sepe

University of Arizona - James E. Rogers College of Law; University of Toulouse 1 - Université Toulouse 1 Capitole; IAST - Fondation Jean-Jacques Laffont - TSE; European Corporate Governance Institute (ECGI)

Date Written: March 13, 2013

Abstract

Under current fiduciary rules, directors who fail to maintain an undivided loyalty to common shareholders are essentially “intruders,” exposed to shareholder retribution and liability for breach of fiduciary duty.

This Article argues that the increasing appointment of “constituency directors” has made current rules mandating directors be exclusively loyal to common shareholders both outdated and normatively undesirable. A “constituency director” is a director designated to the board by a particular constituency (or “sponsor”). These constituency directors are generally appointed to advocate for investors who are not common shareholders, such as preferred shareholders, creditors, unions, and even the federal government. Contrary to conventional scholarly accounts, these kinds of investors (non-common equity, or “NCE” investors) cannot always fully protect their interests through contracting alone. Thus, constituency directors are appointed to gain access to the added safeguards that only direct board advocacy can provide. By remedying this condition of “contractual failure”, constituency directors make NCE investments worth undertaking where they otherwise might not be. Hence, the liability constituency directors face under current fiduciary rules may reduce a corporation’s access to important sources of capital.

This suggests that there is a normative case to be made for turning a director’s obligation of undivided loyalty to shareholders into a default rule. Allowing constituency directors to properly advocate for their sponsors, this reform would bridge the gap between corporate practice and corporate law, to the benefit of all involved parties and society as a whole.

Keywords: constitutuency directors, NCE investors, non-common equity investors, fiduciary duty

Suggested Citation

Sepe, Simone M., Intruders in the Boardroom: The Case of Constituency Directors (March 13, 2013). Washington University Law Review, Vol. 91, 2013, Forthcoming; Arizona Legal Studies Discussion Paper No. 12-24. Available at SSRN: https://ssrn.com/abstract=2254982

Simone M. Sepe (Contact Author)

University of Arizona - James E. Rogers College of Law ( email )

P.O. Box 210176
Tucson, AZ 85721-0176
United States

University of Toulouse 1 - Université Toulouse 1 Capitole ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

IAST - Fondation Jean-Jacques Laffont - TSE ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
Toulouse Cedex, F-31042
France

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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