Managing the Corporation

• Pages: 95-125
• Author: Stephen M. Bainbridge

95

Chapter 5

MANAGING THE CORPORATION

§ 5.1 The Allocation of Corporate Decision-

Making Power

Most public corporations are marked by a separation of

ownership and control. Shareholders, who are said to own the firm,

have virtually no power to control either its day-to-day operation or

its long-term policies. In contrast, the board of directors and senior

management, whose equity stake often is small, effectively controls

both. As a doctrinal matter, moreover, corporate law essentially

carves this separation into stone.

As the Delaware code puts it, for example, the corporation’s

business and affairs “shall be managed by or under the direction of a

board of directors.”

1

In contrast, under the Delaware code,

shareholder voting rights are essentially limited to the election of

directors and approval of charter or bylaw amendments, mergers,

sales of substantially all of the corporation’s assets, and voluntary

dissolution. As a formal matter, only the election of di rectors and

amending the bylaws do not require board approval before

shareholder action is possible. In practice, of course, even the election

of directors (absent a proxy contest) is predetermined by the existing

board nominating the next year’s board.

The statutory decision-making model thus is one in which the

board acts and shareholders, at most, react. To be sure, the

shareholders’ right to elect the board of directors can give the former

de facto control even though the statute assigns de jure control to the

latter. Consequently, we can speak of a “control block,” i.e., shares

held by one or more shareholders whose stock ownership gives them

effective control. Firms having such a shareholder exhibit a partial

separation of ownership and control. The dominant shareholder

controls the firm, despite owning less than 50% of the outstanding

voting shares, leaving the minority shareholders without significant

control power. Majority controlled firms, in which a dominant

shareholder (or group of shareholders acting together) owns more

than 50% of the outstanding voting shares, likewise exhibit a partial

separation of ownership and control. Where no such control block

1

DGCL § 141(a). Herein, we will use “decision” as a shorthand for a process

that often is much less discrete in practice. Most board of director activity “does not

consist of taking affirmative action on individual matters; it is instead a continuing

flow of superviso ry process, punctuated only occasionally by a discret e transactional

decision.” Bayless Manning, The Business Judgment Rule and the Director’s Duty of

Attention: Time for Reality, 39 Bus. Law. 1477, 1494 (1984).

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MANAGING THE CORPORATION

Ch. 5

exists, however, control passes from the firm’s shareholders to its

directors. Although shareholders of such firms retain the right to

elect directors, the incumbent board controls the election process, and

thus the firm. The board of directors is the key player in the formal

corporate decision-making structure.

How well does this statutory model match up to the real world?

In practice, most corporate actions are actually taken by corporate

officers and subordinate employees pursuant to delegated authority.

Yet, even a board that has been thoroughly captured by senior

management typically retains at least some formal functions. The

board, moreover, retains the power to hire and fire firm employees

and to define the limits of their authority. In addition, certain

extraordinary acts may not be delegated, but are instead reserved for

the board’s exclusive determination.

In practice, it thus is possible to identify several roles that most

boards perform most of the time. First, and foremost, the board

monitors and disciplines senior management. Second, while boards

almost never get involved in making day-to-day operational decision

making, most boards have some managerial functions. Broad

policymaking is commonly a board prerogative, for example. Even

more commonly, however, individual board members provide advice

and guidance to senior managers with respect to operational and/or

policy decisions. Finally, the bo ard provides access to a network of

contacts useful in gathering resources and/or obtaining business.

Among these functions, however, the board’s monitoring role

reigns supreme. To be sure, at one time, corporation statutes

affirmatively required the board to manage the corporation.

Delaware’s statute, for example, formerly provided: “The business

and affairs of every corporation organized under this chapter shall be

managed by a board of directors.”

2

It was only when the legislature

added the phrase “or under the direction of” that the statute

expressly contemplated the delegation of managerial functions to

corporate officers.

Query, however, whether boards of large public corporations

ever really managed firms in the sense of day-to-day operational

decision making? To the contrary, that they have never done so is

suggested by the very antiquity of complaints that boards fail to

actively manage their firms.

3

Instead, the emergence of large public

corporations in the 19th century (such as the railroads) bo th

necessitated and facilitated the concomitant emergence of a class of

2

Delaware General Corporation Law § 141(a), quoted in Ernest L. Folk III,

The Delaware General Corporation Law: A Commentary and Analysis 50 (1972).

3

See, e.g., William O. Douglas, Directors Who Do Not Direct, 47 Harv. L. Rev.

1305 (1934).