A friend asked me to comment on a draft law review article that discusses three theories about boards of directors in the legal literature: Melvin Eisenberg's "monitoring model" as set out in his classic work The Structure of the Corporation: A Legal Analysis, Margaret Blair and Lynn Stout's mediating hierarch theory, and my director primacy theory.
Obviously, it is flattering to have one's work assessed in the context of such luminous company. Yet, I think there is an important but all too often overlooked difference between my project and those of Eisenberg and Blair/Stout.
Like most legal theorists who write about the board, both Eisenberg and Blair/Stout are concerned with the uses to which the board puts its powers. Eisenberg wants the board to monitor. Blair/Stout want the board to mediate.
In contrast, I did not approach the board of directors from a perspective framed by the question “what does the board do?” Instead, my inquiry started differently. I looked at the language of the DGCL and the MBCA, which both state that the business and affairs of the corporation shall be managed by or under the direction of the board of directors. And I asked, why? Why a board? Why not shareholders? Or employees? Or an imperial CEO?
You see, I start with a premise “that corporate law tends towards efficiency. A state generates revenue from franchise and other taxes imposed on firms that incorporate in the state. The more firms that choose to incorporate in a given state, the more revenue the state generates. Delaware, the runaway winner in this competition, generates so much revenue from incorporations that its resident taxpayers reportedly save thousands of dollars a year. … I ask the reader simply to assume for the sake of argument that the race to the top is generally valid. If so, we need an account of why states “raced” to a governance structure topped by a board of directors.” The New Corporate Governance at x.
I developed the model I call director primacy to provide such an account. Hence, like the statutes, director primacy is about the allocation of power within the firm, and has little to say about how that power is to be used (other than requiring that it be used to maximize shareholder wealth).
In my work, I thus have noted that the literature identifies three functions performed by boards of public corporations. First, the board monitors and disciplines top management. Second, while boards rarely involve themselves in day-to-day operational decision making, most boards perform at least some managerial functions. Broad policy making, for example, is commonly a board prerogative. Even more commonly, however, individual board members provide advice and guidance to top managers with respect to operational and policy decisions. Finally, the board provides the corporation access to a network of contacts that may be useful in gathering resources and/or obtaining business. Outside directors affiliated with financial institutions, for example, facilitate the firm’s access to capital.
The statutes are indifferent as to how specific boards allocate their time amongst those functions. And so am I.
In contrast, Eisenberg and Blair/Stout—and, I think, my friend—are worried about which of those three should get primary attention and how that chosen role should be defined.
I prefer the statute’s approach to this issue, because I believe firms are heterogeneous. One size does not fit all. Some companies are best served by a board that focuses on service. Others need active monitoring of top management. The statutes let boards define their own role, so as to take into account these differences. And so does director primacy.
In sum, director primacy is about the allocation of power and the decision making norms by which that power is to be used, but is enabling (or, perhaps more precisely, non-prescriptive) with respect to how boards allocate their time and efforts amongst the three basic functions of monitoring, management, and networking.
BTW, I discuss Blair/Stout's team production model at pages 60ff of The New Corporate Governance in Theory and Practice, and Eisenberg at pages 53ff of Corporate Governance after the Financial Crisis.