'The functions of a corporate director': an address before the Harvard Business School Club of Cleveland, May 31, 1949.

• Author: Weinberg, Sidney J.
• Position: Role Of The Board

Editor's Note: Sidney J. Weinberg (1891-1969) was present at the creation of modern-day corporate governance. When he became chairman of Goldman, Sachs & Co. in 1930 (having joined the firm in 1907), he would witness within a few short years the historic legislation that gave birth to the Securities and Exchange Commission and other regulatory initiatives. That 1930s legislation, along with attendant legal rulings of the period, began to define what we would rightly recognize today as the characteristics and workings of an independent board of directors. For anyone who might think that an era of good corporate governance was ushered in with the passage of the Sarbanes-Oxley Act of 2002, be prepared to be astonished. Mr. Weinberg's advice on the proper conduct of board members--as exemplified by his 1949 speech that follows and his 1933 memorandum to company chairmen (see page 24)--are remarkable documents. They attest to an enlightened approach to director participation in the affairs of the corporation that resound strongly and credibly over half a century after the recommendations were first issued. During his lifetime as an investment banker and public servant, Mr. Weinberg held more than 40 corporate directorships, among them Champion Papers Inc. (1954-1964), Cluett, Peabody & Co. (1930-1957), Continental Can Co. (1930-1964), Ford Motor Co. (1956-1969), General Electric Co. (1945-1963), B.F. Goodrich Co. (1930-1962), McKesson & Robbins Inc. (1934-1963), and Sears, Roebuck & Co. (1930-1953). One can only imagine how these company managers and shareholders in particular--and corporate America in general--benefited from his progressive thinking on how best to govern the public corporation.

--James Kristie

Mr. Chairman and Gentlemen:

I feel highly honored at being asked to address the Harvard Business School alumni of Cleveland. As a member of the Visiting Committee of the School, I am greatly interested in its alumni. The alumni are the living results of the School's work and, let me say, I find it always a pleasure to meet them. Out of a group such as yours must come the future corporate directors.

I am going to talk tonight on "The Functions of a Corporate Director," as I have had some experience in this activity. I am afraid it is not a subject which can be talked of, as suggested in your notice of this meeting, in salty terms. That is the reason why I have to read this, which I regret, as I am out of character in doing so.

There are many phases of this subject. I could not cover all phases of a director's functions in a speech as it would make the speech too long, so I will speak briefly and at the end will endeavor to answer any questions you may wish to ask. The questions, I hope, will clarify what I may have omitted in the talk.

A century ago, most corporations were local and dominated by one man. Corporate law required a board of directors, but one man generally controlled the board which, as a rule, was composed of subordinates or relatives. As corporations grew in size and scope and in number of stockholders and became public companies, it became evident that it was necessary to have more diversity in the board of directors. Stockholders insisted on representation on the board aside from the active executive management, and outside directors proved of help to the company in bringing fresh points of view. As a result, in most widely owned public companies today, some of the directors are executives of the corporation; others are elected from the outside. I am an outside director on the boards of several corporations, and in my talk tonight I am speaking primarily about the functions of an outside director.

There seems to be some mystery about being an outside director of a public company. A great many people do not seem to understand just what it entails, what the responsibilities of such a director are, the field in which he operates, and how he functions.

Language of the law

The laws of many states say that it is the responsibility of the board of directors to manage the corporation. As a practical matter, the directors cannot manage a corporation. In the narrow sense of this definition, the law is a relic of the past, when corporations were small and local. Under the law, the director has no power except during a directors' meeting at which a quorum is present. For the rest of the time, he must fulfill his duties to the corporation through the influence he is able to develop by means of the work he has done and is doing for the corporation. His relations with the internal management as to the operations of the corporation are for the most part advisory. The management of the corporation--that is, its day-by-day executive management--must be in the hands of the officers, who are elected by the directors. The officers' powers are derived either from the by-laws or from resolutions of the board. The board of directors is the supreme body of the corporation.

The law imposes upon a director fiduciary obligations and also the duty of giving to the affairs of the corporation that same degree of care and judgment that a man would exercise in connection with his own affairs; but, in addition to that, there are statutory obligations such as imposed by the Securities and Exchange Act whereby a director of a corporation with securities listed on a stock exchange has to report his purchases and sales to the SEC and the stock exchange, and must also surrender to the corporation any profit he makes arising from purchases and sales within a six months' period. A director who habitually does not attend board meetings may well run a serious risk of liability; if he attends and votes on matters that subsequently go wrong, he can urge that he used his best judgment, but a man who stays away does not have that defense. Also, if the figures put out by a corporation turn out to be wrong, the directors may be liable to stockholders who relied on them to their detriment.

The director has obligations to all stockholders. Beyond his legal duties, he...