Few Chief Executive Officers (CEOs) believe their boards of directors understand the strategic factors that determine their corporation’s success. In fact, some long-term directors confess that they don't really understand how their companies make money. Yet corporate law expects that boards of directors will stop managers from behaving badly. It assumes that the ultimate governing authority within corporations rests with their boards, and not with the managers who run them. Broadly accepted theories of corporate governance, such as Stephen Bainbridge’s Director Primacy, are based on the faulty assumption that boards have actual authority over managers. This Article directly challenges that assumption and argues that managers, not boards, control corporate decision-making processes. The problem is that legal scholars and policymakers have ignored the connection between decision-making processes and authority. This Article is the first to examine this largely unexplored relationship, which is essential to helping boards live up to their normative mandates.
Without an effective decision-making process, regulators will continue to expect boards to perform tasks that exceed their capabilities. Worse still, conventional structural reforms such as increased director independence can actually have dangerous consequences. These reforms lessen boards’ actual authority by reducing their ability to utilize effective decision-making processes. Boards must take active steps to improve the quality of their decision making. Unless they do so, they will continue to fail because they lack the power to meet the demands that law and legal theory place on them.
This Article argues that effective decision-making processes, the attributes of which can be found in organizational behavior theory, are essential to securing a corporate board’s actual authority. Analyzing the components of such a process, and identifying which components are truly controlled by boards as opposed to managers, provides a roadmap for what boards need in order to have both de facto and de jure authority in their corporations. This Article provides that original analysis. Process is power, and without it, board authority is only an empty theory, not reality.
Corporation and Enterprise Law
Date of this Version
Nicola F. Sharpe, "Questioning Authority: The Critical Link between Board Power and Process" (February 2012). University of Illinois Law and Economics Working Papers. Working Paper 110.