One of the great mysteries of modern capitalism is the corporate board of directors. As Justin Fox and Felix Salmon write, it’s not really clear what they’re supposed to do. The function most commonly posited for them is to protect shareholders’ interests vis-à-vis management, but this isn’t actually their legal function and no board actually seems to do a good job of it. Firms that follow what on paper looks like best practice and don’t pack their boards with insiders don’t do any better than “poorly governed” companies and as Salmon says “Often, good boards are like a good movie soundtrack: if the job is done well, it’s not noticed at all.”
Note that in a German-style codetermination system the board actually has a well-definied function. Half the members are elected by shareholders and half are elected by employees, which makes the board a forum in which the interests of capital and labor can be contested and hopefully reconciled in a way that allows the enterprise to continue functioning.
But in the American system—not so much. I think it’s at least worth considering the idea that companies shouldn’t be required to have boards at all. That’s not to say that companies wouldn’t have boards. It’s just to say that you wouldn’t have to have one. In that case, I’d think if boards emerged they would have a clear function. Maybe you’d find it was impossible to raise capital without creating one, in which case you’d come up with a corporate governance scheme that was adequate to the practical task of raising capital. Or maybe workers would accept lower pay (leading to higher profits) in exchange for shared control of the enterprise, in which case you’d put some worker representatives on the board. Maybe preventing insiders from having seats on the board would make it easier to raise funds and maybe it wouldn’t. Frankly, I have no idea what investors want or think they want from a board. But the standard free market concept that we ought to allow for some variety and then see what flourishes seems to me to have some forece in this regard.
And yet we conspicuously fail to apply that concept to one of the central institutional props of actually existing capitalism. Forming a board becomes a legal check mark. Since everyone knows you have a board simply because you have to have a board, nobody much cares who you put on the board. So board seats become rotten boroughs handed out to high-status individuals for no particular reason as a kind of bonus payment for having already been successful in life. There’s no real goal in mind, no standard for performance, and no operating theory as to what the directors are supposed to do. It’s exactly what you would expect when you shelter an arbitrarily chosen model of economic organization from any kind of meaningful competition.
