Developments in U.S. Boards of Directors and the Multiple Roles of Corporate Boards

Abstract

As corporations have increased in size and complexity so have the demands on their operations, requiring more complex organizational structures. The demands on corporate boards of directors have also changed. These demands require boards to perform a multitude of functions that call for attention to the structure of boards and to their composition and practices. Insufficient changes have been made, however, to accommodate these multiple roles of corporate boards. This paper is about the multiple roles of corporate boards, which are defined as the manager-monitoring, relational and strategic management roles of boards. This paper argues that these roles more accurately describe board functions than the description of board functions as control, service and strategy. In addition, this paper argues that the multiple roles of boards often come into conflict with each other.

A recent meta-analysis has found that both insider-dominated boards and outsider-dominated boards are associated with more successful corporations in terms of return on assets. In this paper, I explore a number of alternative explanations for these findings. I offer an interpretation that is based on the multiple conflicting roles of corporate boards. I argue that insider-dominated board perform some roles more effectively than outsider-dominated boards, particularly strategic management. I argue that the advantages of the insider-dominated board in strategic management comes from the advantages of group decision making by peers (fellow executives) which decreases corporate politics and the chance of a dominant CEO becoming convinced of his invincibility. In addition, the quality of decision making is enhanced in ambiguous and uncertain situations when diverse perspectives are shared and this sharing is encouraged when persons are in similar social positions. Outsider-dominated boards perform other functions better than insider-dominated boards, such as manager-monitoring functions, to the extent that the outside directors are truly independent of management. This analysis suggests a number of reforms for corporate boards that will enable them to perform their multiple functions more effectively.

JEL Classification: K22