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Why do boards exist? The board as a team and its superiority.

The post follows an article by Stephen Bainbridge, William D. Warren Distinguished Professor of Law at the UCLA School of Law in Los Angeles, (1).

A) The board statutory role.

Boards are given by Corporate Law the power to manage companies, while shareholders are only entitled to vote a few things and react in a limited number of situations. Decisions at the board (or any other group) should be done through “consensus”, efficient when members of an organization have very similar information and interests, or “authority”, efficient when this is not the case and somebody gathers information and adopts the correct decisions, (see (2)).

Boards nevertheless are not there to manage day-to-day operations as Corporate Law grants the role of those under whose authority companies are run (by managers nominated by boards), in a waterfall of authority and power delegation. Companies have nevertheless become more a hierarchy of teams than of individuals.

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Although hierarchies are accepted as more efficient in complex organizations, both New Institutional Economics (3) and Behavioral Economics (4) accept their members to be only rationally bounded individuals. Branching hierarchies (waterfall of small groups) are an efficient solution to this reality, (both in production and transfer of information and in limiting agency costs –though with the problems of incomplete contracts, collective action problems, etc-). Contracting is an efficient ex-ante mechanism and governance an ex-post one, leading to reduce shirking and punish it, (see for example the M-form corporation).

At the top though there is a team, the board, not an individual. As there are problems arising for that, (individual input measurement, task often being even non separable, the creation of intra-team specific human capital, social loafing due to coordination, motivation difficulties, etc), the questions arises as to why a collective body at the top has been chosen. Read more…

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