A “Solution” That Will Make Things Worse

Professors Stephen M. Bainbridge and M. Todd Henderson acknowledge that boards of directors are not very effective, especially when the companies they are supposed to oversee are larger and more complex than any private organizations in history. But the solution they propose in their new book, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance is a frying pan/fire situation, a massive swerve in exactly the wrong direction.

They propose giving corporations the option of hiring a new kind of firm, a Board Service Provider (BSP), to serve as their boards. Today, corporations hire law firms, accounting firms, and consulting firms to give them the expertise needed to run their highly complicated businesses. So why not a corporate governance firm?

Let us explain why not.

The CEO decides which service providers to hire. If we let the CEO hire the one group that theoretically — and legally — is supposed to provide independent oversight, then how can we expect them to challenge the person who determines whether they will continue to be paid? Expertise in board members is essential, but independence is even more so. While the authors claim that this will increase accountability to shareholders by making it less expensive to mount a proxy contest, we are not persuaded.

An article in the University of Chicago Law School Magazine about the book describes the almost whimsical basis for this proposal, more a thought experiment than an idea:

There is one hurdle: Legally, boards of directors must be composed of natural persons or individual human beings—not corporations. But Henderson said that shouldn’t be a concern—and could be fixed by abolishing the natural person requirement in Delaware, where most of the nation’s corporations are incorporated.

“This is a myth that should be debunked,” Henderson said. “There are only human beings. At the end of the day there are no such things as corporations, they are just fictions. Our BSPs would be composed of human beings, just like the current board. But, using the BSP form, they would be able to cooperate in ways that today’s board members cannot. And to be honest, no one is defending the natural person rule.”

Doing away with Delaware’s natural person rule would give corporations the opportunity to change their charters to allow board to be composed of natural persons unless otherwise stated.

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