Is Your Purpose-Driven Board Actually Effective? To achieve their desired goals, boards must analyze their decision-making processes and avoid deference to their CEOs.

• Author: Raymond, Doug

Over the past year, issues of corporate governance have increasingly been debated in statehouses and on television and have even been trending on TikTok and Twitter. This kind of attention, which is unusual for a subject matter typically confined to boardrooms, academics and attorneys, has been focused on "large" issues such as the purpose of the corporation and the role the corporation should play in important political and social issues. While this public discussion may have important societal implications, there is another significant issue that merits broader attention: Are corporate boards effective in fulfilling whatever goals they determine to be their primary obligations?

Managing the corporation "by or under the direction of the board of directors" is a principle derived from hoary rules of trust law, in which trustees would manage a trust on behalf of beneficiaries who were not able (or permitted) to manage the trust assets themselves. This precedent seemed well suited for the analogous situation caused by the disaggregation of capital from management that occurred in the 17th century with entities such as the Dutch East India Company and the further development that the owners' representatives --the board of directors--would also be separate from the day-to-day managers of the business. While for many years a significant percentage of the directors, if not a majority, remained those same day-to-day managers, this changed following the crisis in corporate governance of the early 2000s (Enron, WorldCom, et al.) and the adoption of Sarbanes-Oxley legislation in the United States. Today, most boards--at least of public companies--are composed primarily of persons with little direct experience with the corporations specific business, frequently with only the CEO and sometimes a former CEO remaining on the board.

As a consequence, while the directors of today's public corporations often have extensive experience in other, even related, industries, they typically are not as familiar with the corporations specific situation and industry. Indeed, the U.S. antitrust laws prohibit a person from simultaneously serving as an officer or on the board of competing corporations, with limited exceptions. Even if those other directors are wise and experienced, their lack of specific experience may make them more deferential to the CEO who lives these issues every day.

Moreover, in many boardrooms the CEO is the chair and also sets the board agenda...