Corporate Governance Without Shareholders: A Cautionary Lesson from Non-Profit Organizations

24 Pages Posted: 18 Aug 2014

See all articles by George W. Dent

George W. Dent

Case Western Reserve University School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: 2014

Abstract

A debate about corporate governance has long raged over the allocation of power between shareholders and directors. Proponents of "shareholder primacy" believe that the corporate board should be chosen by and accountable to the stockholders rather than dominated by the CEO, as they believe is common now. Advocates of "director primacy" want to limit shareholder power because they believe that shareholders have conflicting objectives, are uninformed, and pressure the directors to sacrifice the long-term health of the company to short-term share price. The governance of non-profit organizations ("NPOs") offers an example that illuminates the corporate governance debate. Directors of NPOs suffer no pressure from shareholders because NPOs have no shareholders; NPO boards are effectively self-perpetuating. If the director primacists are correct, the governance of NPOs should be a model of wise, long-term management effected by officers who are clearly subordinate to the board. In fact, however, a remarkable consensus of experts on NPOs agrees that their governance is generally abysmal, considerably worse than that of for-profit corporations. NPO directors are mostly ill-informed, quarrelsome, clueless about their proper role, and dominated by the CEO — as proponents of shareholder primacy would predict. In sum, the experience of NPO governance refutes the claims of director primacy that the absence of strong shareholders facilitates effective corporate governance.

Keywords: Delaware, Journal, Corporate, Law, allocation, power, shareholders, directors, George W. Dent Jr., Shareholder primacy, director primacy

Suggested Citation

Dent, George W., Corporate Governance Without Shareholders: A Cautionary Lesson from Non-Profit Organizations (2014). Delaware Journal of Corporate Law (DJCL), Vol. 39, No. 1, 2014; Case Legal Studies Research Paper No. 2014-34. Available at SSRN: https://ssrn.com/abstract=2481646

George W. Dent (Contact Author)

Case Western Reserve University School of Law ( email )

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