Thread by @jasoncrawford

Never thought I would say these words in the same sentence but I am reading a *fascinating* history of the role of boards of directors in corporate governance

“Instead of theorizing, this Article examines historical sources in order to look at how and why an elected board of directors came to be the accepted mode of corporate governance.”

After my own heart scholarlycommons.law.hofstra.edu/cgi/viewconten…

I'm only halfway through, but it's tracing the history of boards backwards through time, in “the method of an archeological
dig”, to explain why boards seem so fail at their supposed function of oversight.

The puzzle it sets up, in part, is: boards are supposed to monitor the execs, but in practice the execs have the power and control the board; the board rarely can exercise effective oversight… and so we get scandals from the South Sea Company to Enron

And it traces this back to the formation of joint-stock companies themselves.

Early trading companies, like 1500s or so, weren't companies as we think of them today. They were more like associations of merchants, who shared a trading monopoly under a common charter.

Even the EIC was like this: “during the first half of the seventeenth century, in lieu of having permanent capital, members of the East India Company subscribed to joint stock funds that would finance a certain number of trading voyages to India. …

“… These funds then were supposed to be wound up and the proceeds distributed among the subscribers.”

Like a movie studio or something where each voyage is its own venture.

“Joint stock” here literally refers to the stock of *goods* that a merchant voyage set out with, which I suppose was a big part of the investment in such a voyage.

This is where the term “stock” comes from when we talk about equity in companies!

The Muscovy Co, and the later EIC, were joint-stock *companies*: the whole company was organized around a permanent joint stock of goods. Now it conducted business as, and was managed as, a single corporate entity.

So what does this have to do with boards?

In these early companies, that were really associations of independent merchants, the board was there to impose some common rules on the members.

E.g., they might prohibit “selling goods of a nonmember merchant as a member's own”, in order to maintain their exclusive franchise.

As these companies evolved into companies with permanent joint stocks and permanent charters, they kept the institution of the board—but now it needed to do something quite different.

In the words of the paper, “The same board structure that existed to enact and enforce rules governing the conduct of independent merchants in the regulated company … found itself pressed into service to manage a large business venture in the joint stock company”

“This occurred without any evident consideration as to the different nature of these tasks, or whether an institution developed for one task best fit the needs of the other function.”

YOLO 🤷‍♂️

I'm only halfway through the paper, we'll see if this intriguing start holds up through the rest of it! But I feel like I just hit the climax in Act III of some Shakespearean tragedy and now it's all inevitable downfall from here

Now he's tracing this further back to companies named (I am not making this up) “The Company of the Merchants of the Staple” and “the Company of Merchant Adventurers”.

Not sure if I'm reading about legal history or D&D at this point

OK, I finished the paper. Basically he traces this back all the way through parliaments, town councils, guild organization, and church governance.

Which was the root? No one thing. A lot of this co-evolved, with e.g. town councils taking a cue from guilds and vice versa.

And he keeps coming back to Roman and Canon Law doctrines of *quod omnes tangit ab omnibus approbetur*, “what touches all is to be approved by all”, and *plena potestas*, the “full power” of a representative to bind a group to decisions.

Overall, there is a long European tradition of collective governance. Individuals or small exec teams may manage, but big decisions should be made by the group. However, with large groups this becomes impractical, so a board of representatives is created to make those decisions.

What decisions? Largely political ones—legislative (making rules) and especially adjudicative (resolving disputes).

Note that this is not what corporate boards are supposedly for today—supervision and oversight of management.

And so we come back to the crux of the issue. Corporate boards evolved out of a long tradition that originated in *political* needs.

“… since the board was not designed originally as a monitoring tool,” Gevurtz concludes, “one should not be totally surprised if boards turn out not to be all that effective as a means to monitor management.”

So are boards pointless? He ends on a more optimistic note, that boards provide a crucial function of *providing political legitimacy*:

“… the reason the board of directors endures is because human beings, even in the business context, do not divorce their notions of how to run a business from their broader political and cultural ideas…

“… and that the idea of consent through elected representatives is so ingrained in our culture that shareholders expect it even if they do not take advantage of it.”

Fin scholarlycommons.law.hofstra.edu/cgi/viewconten…

I did *not* expect I was going to read this entire 84-page paper. But it was just too compelling and I learned so much about the evolution of governance structures—across church, state, and business.