It is a tenet of my friend and colleague Lynn Stout's scholarship that corporate governance is a form of team production, in which directors serve as "mediating hierarchs."
According to Professors Blair and Stout’s innovative stakeholder approach,[29] it is more realistic to think of a public corporation as a team of members who make firm-specific investments in the corporation with the goal of producing goods and services as a team (team production)[30] with the board of directors acting as a “mediating hierarchy.”[31] These board members serve the interests of the corporation.[32] Moreover, “the interests of the corporation, in turn, can be understood as a joint welfare function of all the individuals who make firm-specific investments and agree to participate in the extracontractual, internal mediation process within the firm.”[33] Team members are primarily made up of executives, rank-and-file employees, and equity investors, but can also include researchers, creditors, the local community, marketers, and vendors who provide specialized products and services to the firm and shareholders, among others.[34] Any person or entity that makes a firm-specific investment is a member of the team. The result is “that no one team member is a ‘principal’ who enjoys a right of control over the team.”[35]
In this innovative approach to understanding the public company, the board of directors, composed primarily of outside members who are also independent of the firm, provides a unique mediating function. Not only does it have the final authority on hiring and firing corporate officers, approving corporate policy, recommending major transactions for shareholder approval, approving executive compensation packages and the like, but it also acts “as an internal ‘court of appeals’ to resolve disputes that may arise among the team members.”[36] In this role, board members are “mediating hierarchs whose job is to balance team members’ competing interests in a fashion that keeps everyone happy enough that the productive coalition stays together.”[37]
I criticized the team production/mediating hierarch model at length in my article Director Primacy: The Means and Ends of Corporate Governance. One of my principal complaints is that I see no evidence that directors in fact perform this mediating function.
I recently ran across some interesting historical evidence in a post-Citizens United essay on the Founder's view of corporations. The essay is worth reading on its onw merits, but I found especially interesting the claim that directors once functioned as mediating hierarchs, but only insofar as they mediated among shareholder interests:
Americans inherited the legal form of the corporation from Britain, where it was bestowed as a royal privilege on certain institutions or, more often, used to organize municipal governments. Just after the Revolution, new state legislators had to decide what to do about these charters. They could abolish them entirely, or find a way to democratize them and make them compatible with the spirit of independence and the structure of the federal republic. They chose the latter. ...
I should add, too, that as part of this effort to democratize corporations, state charters specifically spelled out how shareholder elections were to be conducted to choose directors. Corporations were supposed to resemble small republics, with directors balancing interests among shareholders. When they printed material or conducted correspondence, it was usually in the name of the "President, Directors, and Shareholders of the X Company."
