CORPORATE DIRECTORS—WHO NEEDS THEM?
| Author | Christopher S. Axworthy |
| Published date | 01 May 1988 |
| DOI | http://doi.org/10.1111/j.1468-2230.1988.tb01757.x |
| Date | 01 May 1988 |
THE
MODERN LAW REVIEW
Volume
51
MAY
1988
No.
3
CORPORATE
DIRECTORSWHO
NEEDS
THEM?
1.
INTRODUCTION
THE
received legal model of directors’ functions bears little
resemblance to reality, or at least practice. Studies have shown that
directors, especially of large corporations, not only do not do what
the law envisages of them but, indeed, cannot fulfil the law’s
requirements.’ Directors do not and cannot “manage the
.
. .
corporation” or “direct [or supervise] the management
of
the
corporation”*; the senior managers fulfil this function3-very often
casting judgment over their own actions. Indeed, it may even be
undesirable and inefficient for directors to carry out this directing
or supervising f~nction.~
M.
L. Mace,
Directors: Myth And Reality,
Boston, Harvard University, 1971;
M.
L.
Mace, “Directors: Myth And Reality-Ten Years Later” (1979), 32 Rutgers L.Rev. 293;
The Conference Board,
The Board
of
Directors: Perspectives and Practices
in
Nine
Countries,
New York, The Conference Board, 1976; W.
J.
McDougall and G. Fogelberg,
Corporate Boards
in
Canada:
How
Sixty-Four Boards Function,
London, Ont., University
of
Western Ontario, 1968. The Conference Board in Canada,
Canadian Directorship
Practices:
A
Profile,
Ottawa. The Conference Board in Canada, 1977; The Conference
Board in Canada,
Canadian Directorship Practices: A Critical Self-Examination,
Ottawa,
The Conference Board in Canada, 1977. Cf. R.
J.
Haft “Business Decisions By The
Board: Behavioural Science And Corporate Law (1981),
80
Mich.L.Rev.
1,
3-6.
North American corporation statutes prescribe directors’ duties, although the language
of
the legislation vanes. Section 97 of the Canada Business Corporations Act, S.C. 1974-
75, c.33, as am. states, “Subject to any unanimous shareholder agreement, the directors
shall manage the business and
affairs
of
a corporation.’’ The Saskatchewan Business
Corporations Act, R.S.S. 1980, c.
B-10,
s.97 states that the directors shall
.
.
.
“direct the
management
of
the business and affairs the corporation.” Section 115
of
the Ontario
Business Corporations Act,
S.O.
1982, c.4 is a little more realistic. It states that the
directors “shall supervise the management of the business and affairs of the corporation.”
For
the
U.K.
see Companies Act, 1948,
11
&
12 Geo. 6,
c.38,
Sched. 1, Table
A,
art.
80.
M. A. Eisenberg, “The Modernisation of Corporate Law: An Essay for Bill Cary”
(1983), 37
U.
Miami L.Rev. 187, at 204.
‘
See the discussion in M. A. Eisenberg,
The Structure
of
the Corporation,
Boston,
Little, Brown, 1976, at pp.154-156. There is a long and growing !iterature on the
desirability of effective and independent directors and audit committees, but the issue
of
support
staff for outside directors and audit committees is a matter
of
some contention.
See,
e.g.,
V. Brudney, “The Independent Director-Heavenly City
Or
Potemkin
Village?” (1982), 95 Harv.L.Rev. 597, at 638;
0.
Williamson, “Corporate Governance”
(1984), 93 Yale L.J. 1197, at 1219. In particular, it will be undesirable for there to
be
“too much control” over management because that will generate inefficiency; see B. D.
Baysinger and H. N. Butler, “The Role Of Corporate Law In The Theory Of The Firm”
(1985), 28 J.L.
&
Econ. 179, at 180.
273
274
THE
MODERN
LAW REVIEW
[Vol.
51
The recommendations in the area of directors’ duties and
functions have taken one of two tacks. Some would argue that the
law should be reformed to ensure that boards of directors are in a
position to carry out this legal duty: or that statutory prescriptions
should be intensified
so
as to increase what can be expected of
directors.6 Others perfer to see the law change to take account of
the limited functions they suggest directors can perform.’
2.
WHAT
DIRECTORS Do AND Do
NOT
Lo
A number of Canadian and
U.S.
studies have investigated how
corporate directors view their function.s Mace found that most
boards of directors of large corporations do not establish corporate
objectives, strategies and policies, ask discerning questions, select
the chief executive officer or carry out managerial functions.
Indeed, without serious challenge, Mace contends, that the boards
of directors of most large corporations are under the control of
their chief executive officer in terms of composition, information
flow and activities. In fact, they answer to management rather than
to the shareholders.’
McDougall and Fogelberg’s Canadian study concurred in Mace’s
results that directors provide advice and counsel, constitute a
discipline for senior management and act in crisis situations.’0
Another Canadian study found that directors felt their role in
ensuring a smooth process
of
management succession was
particularly important and that, while there was still room for
improvement, boards of directors had become more effective in
recent years. Also, directors stated a desire to be more involved in
their corporation and to be more independent of management.”
The thesis of this article is that as boards of directors in most
large corporations do not and cannot function
so
as to fulfil
their legal responsibility of supervising the management of the
corporation, but rather act as formal ratifymg bodies for the
See Haft,
supra,
note 1, at ppSM7. See also Eisenberg,
supra,
note 3, at pp.l4%
156;
K.
Andrews, “Rigid Rules Will
Not
Make Good Boards” (1982),
60
Harv.Bus.Rev.
34, at 44-46.
See the brief discussion of the corporation law of France and Belgium in
K.
J.
Hopt,
“New Ways In Corporate Governance: European Experiments With Labor Representation
On Corporate Boards” (1984),
82
Mich.L.Rev. 1338, at 1341. See
also,
H. Berthon,
“Liability
Of
Officers And Directors”
(1984),
6
J.
Comp. Bus
&
Cap. Market L. 257, at
267-269.
’
This is the thesis of Eisenberg,
supra,
note 4, at pp.156170.
See the works cited in note
1,
supra.
Supra,
note 1, at pp.68-71 and pp.8>85. See the rather different perspective
of
R.
Dahrendorf,
Class and Class Conflict in Industrial Society,
London, Routlege
&
Kegan
Paul, 1959.
lo
Mace,
Directors: Myth And Reality-Ten Years Later, supra,
note
1,
at pp.294-295.
Canadian Directorship Practices:
A
Critical Self-Examination, supra,
note
1,
at ix-x.
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