Hofstra Law Review Volume 33 | Issue 1 Article 3 2004 The iH storical and Political Origins of the Corporate Board of Directors Franklin A. Gevurtz Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/hlr Part of the Law Commons Recommended Citation Gevurtz, Franklin A. (2004) "The iH storical and Political Origins of the Corporate Board of Directors," Hofstra Law Review: Vol. 33: Iss. 1, Article 3. Available at: http://scholarlycommons.law.hofstra.edu/hlr/vol33/iss1/3 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Gevurtz: The Historical and Political Origins of the Corporate Board of Di THE HISTORICAL AND POLITICAL ORIGINS OF THE CORPORATE BOARD OF DIRECTORS FranklinA. Gevurtz* I. INTRODUCTION ........................................................................ 90 II. THE CURRENT PUZZLE OF CORPORATE BOARDS .................... 92 A. The Board-Centered Model of Corporate Governance ..... 92 B. Rationalizations for the Board-Centered Model of Corporate Governance ...................................................... 95 1. The Need for Central Management ............................ 95 2. Group Decision-making ............................................ 96 3. Representation of Corporate Constituents and Mediating Claims to Distributions .............................. 97 4. Monitoring of Management .......................................... 101 C. The Board-Centered Model of Corporate Governance M eets R eality ...................................................................... 102 1. Closely Held Corporations ........................................... 102 2. Publicly Held Corporations .......................................... 103 III. THE HISTORICAL ROOTS OF CORPORATE BOARDS ................... 108 A. American Corporate Legislation ........................................ 108 B . English A ntecedents ........................................................... 110 1. The Bank of England .................................................... 110 2. The Companies Established to Colonize America ....... 111 3. The Trading Com panies ............................................... 115 a. The Joint Stock Trading Companies ....................... 115 b. The First English Trading Companies .................... 123 C. Continental European Antecedents .................................... 126 IV. THE CONCEPTUAL ORIGINS OF CORPORATE BOARDS ............... 129 A . Parliam entary A ssemblies .................................................. 129 * Professor of Law, University of the Pacific, McGeorge School of Law. I want to thank Richard Buxbaum, Michael Malloy, Stephen Bainbridge and the participants at the 2002 U.C.L.A.- U.S.C. Corporate Law Roundtable for their helpful comments. I also wish to thank my research as- sistants, Daniel Del Rio and Thomas Clark, for their tremendous efforts. Published by Scholarly Commons at Hofstra Law, 2004 1 Hofstra Law Review, Vol. 33, Iss. 1 [2004], Art. 3 HOFSTRA LAW REVIEW [Vol. 33:89 1. The Growth of Parliamentary Assemblies .................... 129 2. Parliamentary Assemblies and Corporate Boards ........ 133 B . T ow n Councils ................................................................... 140 1. The Growth of Town Councils ..................................... 141 2. Town Councils and Corporate Boards .......................... 144 3. The Motivations for Town Councils ......................... 148 C . Gu ild s ................................................................................. 15 5 D . C hurch C ouncils ................................................................. 162 V. CONCLUDING THOUGHTS ON THE PURPOSE OF CORPORATE B OA RD S ..................................................................................... 167 I. INTRODUCTION Over the years, considerable legal scholarship has focused on the liabilities of corporate boards of directors.' The composition and proce- dures of corporate boards, and innumerable proposals to reform the same, have spawned countless books and articles.2 No doubt recent cor- 1. See, e.g., DENNIS J. BLOCK ET AL., I THE BUSINESS JUDGMENT RULE: FIDUCIARY DUTIES OF CORPORATE DIRECTORS (5th ed. 1998); Norwood P. Beveridge, Jr., The Corporate Director's FiduciaryDuty of Loyalty: Understandingthe Self-Interested Director Transaction, 41 DEPAUL L. REV. 655 (1992); Michael Bradley & Cindy A. Schipani, The Relevance of the Duty of Care Stan- dard in Corporate Governance, 75 IOWA L. REV. 1 (1989); Stuart R. Cohn, Demise of the Director's Duty of Care:Judicial Avoidance of Standards and Sanctions Through the Business Judgment Rule, 62 TEX. L. REV. 591 (1983); Alfred F. Conard, A Behavioral Analysis of Directors' Liability for Negligence, 1972 DUKE L.J. 895 (1972); Melvin A. Eisenberg, The Duty of Care of Corporate Di- rectors and Officers, 51 U. PITT. L. REV. 945 (1990); Charles Hanson, The ALI CorporateGovern- ance Project: Of the Duty of Care and the Business Judgment Rule, a Commentary, 41 BUS. LAW 1237 (1986); Peter Letsou, Implications of Shareholder Diversification on CorporateLaw and Or- ganization: The Case of the Business Judgment Rule, 77 CHI.-KENT L. REV. 179 (2001); Harold Marsh, Jr., Are Directors Trustees? Conflict of Interest and CorporateInterest Transactionsand the ALI's Principles of Corporate Governance, 61 GEO. WASH. L. REV. 954 (1993); Edward B. Rock & Michael L. Wachter, Islands of Conscious Power: Law, Norms, and the Self-Governing Corpora- tion, 149 U. PA. L. REV. 1619 (2001); Larry D. Soderquist, The ProperStandard for Director'sNeg- ligence Liability, 66 NOTRE DAME L. REV. 37 (1990). 1 confess I have contributed my small share to the literature treating corporate directors primarily as a target for legal liability. See, e.g., FRANKLIN A. GEVURTZ, CORPORATION LAW, §§ 4.1-4.4 (2000); Franklin A, Gevurtz, The Business Judgment Rule: Meaningless Verbiage or Misguided Notion?, 67 S. CAL. L. REV. 287 (1994). 2. See, e.g., ROBERT A.G. MONKS & NELL MINOW, CORPORATE GOVERNANCE 203-10 (2d ed. 2001); AMERICAN LAW INSTITUTE, PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND RECOMMENDATIONS §§ 3.02, 3A.01-3A.05 (1994) [hereinafter PRINCIPLES OF CORPORATE GOVERNANCE]; MELVIN A. EISENBERG, THE STRUCTURE OF THE CORPORATION 149-85 (1976); Robert W. Hamilton, CorporateGovernance in America 1950-2000: Major Changes but Uncertain Benefits, 25 J. CORP. L. 349 (1999); Sanjai Bhagat & Bernard Black, The Uncertain Relationship Between Board Composition and Firm Performance, 54 BUS. LAW. 921 (1999); Laura Lin, The Effectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence, 90 Nw. U. L. REV. 898 (1996); Charles M. Elson, The Duty of Care, Compensation, and Stock Ownership, 63 U. CIN. L. REV. 649 (1995); ABA Committee on Corporate Laws, CorporateDirec- http://scholarlycommons.law.hofstra.edu/hlr/vol33/iss1/3 2 Gevurtz: The Historical and Political Origins of the Corporate Board of Di 2004] ORIGINS OF THE CORPORATE BOARD porate scandals will once again produce the question "Where were the directors?" and lead to still more lawsuits against directors, and more calls for reform. 3 Yet, given the constant interest in, and litany of com- plaints about, corporate boards, perhaps more scholars should ask why corporation laws in the United States, and, indeed, around the world, generally call for corporate governance by or under a board of directors. After all, there are other governance models for a business. This Article seeks to add to the literature on why boards exist. Moreover, it does so by taking a very different approach in searching for an answer. Instead of theorizing, this Article examines historical sources in order to look at how and why an elected board of directors came to be the accepted mode of corporate governance. The story of how and why corporate boards arose turns out not only to be interesting in its own right, but it shows that the original purpose for having boards was quite different from the purposes argued based upon current economic and or- ganizational theory. This insight, in turn, may help explain the frustrat- ing dissonance between what corporate law currently expects of boards, and what boards, in fact, do. This examination of the historical and political origins of the corpo- rate board of directors will proceed in four parts. To provide a starting point against which to address the history of corporate boards, Part II of this Article explores the current puzzle presented by the board of direc- tor's Guidebook, 49 Bus. LAW. 1243 (1994); Ronald J. Gilson & Reinier Kraakman, Reinventing the Outside Director: An Agendafor InstitutionalInvestors, 43 STAN. L. REV. 863 (1991); Arthur J. Goldberg, Debate on Outside Directors,N.Y. TIMES, Oct. 29, 1972, at 1. 3. See, e.g., Douglas M. Branson, Enron-When All Systems Fail: Creative Destruction or Roadmap to CorporateGovernance Reform?, 48 VILL. L. REV. 989, 1014-21 (2003); James D. Cox, Managing and Monitoring Conflicts of Interest: Empowering the Outside Directors with Independ- ent Counsel, 48 VILL. L. REV. 1077, 1093-95 (2003); Charles M. Elson & Christopher J. Gyves, The Enron Failure and Corporate Governance Reform, 38 WAKE FOREST L. REV. 855 (2003); Luca Enriques, Bad Apples, Bad Oranges:A Comment from Old Europe on Post-EnronCorporate Gov- ernance Reforms, 38 WAKE FOREST L. REV. 911, 927-32