Advice and consent: the biggest danger is that the governance model transforms too radically and directors become a threat to, rather than a resource for, management.

• Author: Macey, Jonathan R.
• Position: ENDNOTE

THE WAVES of accounting scandals, company meltdowns, and related fiascos have destroyed billions of dollars in shareholder wealth. The ongoing crisis has raised the question of what value, if any, do corporate boards of directors add to the corporations they ostensibly serve.

Mistrust in American corporate management is evidenced by the growing number and scope of shareholder resolutions contained in proxy statements. The issues at stake in corporate elections are becoming increasingly governance-related, suggesting that shareholders as well as managers and incumbent directors all are trying to recruit fresh, new talent to boards in order to improve on the status quo.

Despite the rash of proposed new laws and regulations, the market ultimately will determine what model of corporate governance will dominate. There are several possibilities.

One is the old-fashioned collegial model. Board members were valued for their ability to reach consensus. Getting along with other members was a virtue. Unanimity was the unvarying outcome of board votes. Dissent, particularly public dissent, from board decisions was not tolerated.

A second possibility is the adversarial model of board service. In this model, board members are valued for their independence. The willingness to challenge the CEO and to push dissenting opinions on management is the critical value of the adversarial model.

We support the ability of shareholders to choose whatever model of governance they feel will maximize the value of the firm and of their investments. It would be a mistake, however, for shareholders to lose sight of the value that directors can add as advisers to management.

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The 'third way'

This "third way" that combines the obscure virtues of the collegial approach with the clear virtues of the adversarial approach is similar to the relationship that the U.S. Senate has with the President of the United States under Article II of the Constitution. The President (CEO) manages the firm with the "advice and consent" of the Senate (board of directors). Sometimes this relationship is adversarial. Sometimes it is collegial. In all cases, board members must be more than mere watchdogs or lapdogs.

Lapdogs are obviously unsuitable in today's corporate world. It also is the case, however, that directors limited to serving merely as watchdogs will do little to add real value for shareholders. If board meetings evolve into a vigilance-only agenda, managers will...