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; Toulouse School of Economics; European Corporate Governance Institute (ECGI); American College of Governance Counsel

Date Written: March 13, 2013


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of “constituency directors” has made current rules mandating directors be exclusively loyal to common shareholders both outdated and normatively undesirable.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:

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 )

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Toulouse, 31042

Toulouse School of Economics ( email )

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European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

American College of Governance Counsel ( email )

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New York, NY 10018
United States

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