Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations
George W. Dent Jr.
Case Western Reserve University School of Law
June 1, 2013
Delaware Journal of Corporate Law (DJCL), Forthcoming
Case Legal Studies Research Paper No. 2013-15
For over 80 years, debate over corporate governance has centered on the balance of authority between the board and shareholders. One side in this debate advocates “shareholder primacy”, so that directors would actually be chosen by and accountable to the stockholders. The other side touts “director primacy” and keeping shareholders weak. This side claims that directors who are free of shareholder control would strive to maximize long-term firm value, and have the wisdom and independence to pursue this goal intelligently and conscientiously.
The boards of non-profit organizations (“NPOs”) are self-perpetuating: They are not answerable to shareholders because they have no shareholders. If director primacists are right, NPO boards should function as director primacists wish corporate boards would. The reality is quite the contrary. Commentators agree that NPO boards are generally worse than corporate boards. This brief article describes the functioning of NPO boards, discusses why they are so dysfunctional, and what lessons their example holds for corporate governance.
Number of Pages in PDF File: 16
Keywords: corporate governance, non-profit organizations, director primacy, shareholder primacy, boards of directors, NPO governance
JEL Classification: K22
Date posted: June 28, 2013 ; Last revised: March 1, 2015