In theory, a corporation is run by its board of directors, whose decisionmaking is guided by the principle of shareholder wealth maximization. In practice, however, all too often corporations are run by their top managers for the benefit of those managers. Times are changing, however. In particular, the cult of the imperial CEO that dominated the business world in the 1980s and, especially, the 1990s is dying a slow death.
Why? Much director compensation is now paid in stock, which helps align director and shareholder interests. Courts have made clear that effective board processes and oversight are essential if board decisions are to receive the deference traditionally accorded to them under the business judgment rule, especially insofar as structural decisions are concerned (such as those relating to management buy-outs). Third, director conduct is constrained by an active market for corporate control, ever-rising rates of shareholder litigation, and, some say, activist shareholders. As a result, modern boards of directors typically are smaller than their antecedents, meet more often, are more independent from management, own more stock, and have better access to information. These developments culminated in a series of high-profile board revolts against incumbent managers at such iconic American corporations as General Motors, Westinghouse, American Express, and Sunbeam.
HP provides the latest example. Carly Fiorina is one of the last of the charismatic imperial CEOs. She demonstrated her power by ramming through the merger of HP and Compaq over strenuous opposition from the son of HP’s founder. Yet even she is no longer invulnerable. CNN Money reports that HP’s board of directors is about to trim her wings in a big way:
In recent months, directors have grown uneasy with HP's uneven performance, the [WSJ] said. The board's concerns include the mediocre performance of the PC business, and the perception that HP holds weak market positions against IBM and Dell, according to the article.
Under the plan discussed by the board, three HP executives would gain more day-to-day control, according to the newspaper. They are Joshi; Ann Livermore, head of services and enterprise computing; and Shane Robison, the chief technology and strategy officer, the article said, citing people familiar with the matter.
The newspaper reported that one person close to the situation said Fiorina had initially resisted the moves, but by the end of the session had agreed with directors and was on good terms with them.
My scholarship of late has emphasized a model of director primacy, in which the board rather than management is understood to be the principal decisionmaker within the corporation. Some of my fellow legal scholars have derided this model as being out-of-step with what they call the management dominated reality. In my view, however, if Carly Fiorina has been smacked down by her board and made to like it, the days of the imperial CEO are numbered (if not over).
