Boards Of Directors: A History

Boards of Directors are an integral part of a corporation. The word corporation stems from the latin corporare meaning “to combine in one body”. When you create a corporation you are, in a legal sense, creating an artificial person. (Bet you didn’t think of company founders as being in the same line of work as Dr. Frankenstein.) That artificial person can then own things and be sued, among other rights.

A problem arises in that the corporation needs to act through real people and there needs to be some basis for determining whether a CEO of a company (or anyone else) is acting for the corporation or on her own behalf.

The traditional way to solve this problem is to create a board of directors to oversee and be responsible for the actions of the corporation. None of the individual board members, in their capacity as board members, can act individually on behalf of the corporation. But, acting as a group they can make collective decisions for the corporation and, legally, those decisions are the decisions of the corporation, not any of the directors individually.

But there are other ways in which a corporation might solve this problem, so why is it that a board of directors is the way this is has historically been accomplished? According to Professor Franklin Gevurtz of UCLA, the origins of the board of directors go back to the middle ages.

The earliest corporations that had a broadly similar form to the corporations that exist today were joint stock companies in which shareholders "joined their stock" (or inventory) together and shared in the fortunes of the companies in proportion to the number of shares that they owned.

The first joint stock companies in England emerged in the mid 1500s with the Company of Merchant Adventurers to New Lands (bet you can't come up with a better name than that for your new company) chartered in 1553 and the Muscovy Company chartered in 1555. These joint stock companies were, from the start, governed by boards of directors.

The first joint stock companies, themselves, were drawing on a number of different medieval precedents in order to determine how to organize and govern themselves. These included medieval guilds, universities, and self governing towns. All of these were, in a medieval sense, corporations in that they had a collective existence and were self-regulating.

In medieval England, as in many other European countries, there were a series of laws called mortmain laws that prevented property from being donated to a corporate entity without royal consent. This was because artificial entities, since they could not die or reach their majority did not pay many of the customary taxes that property holders were otherwise obligated to pay to the crown.

In effect, then, those corporate entities that did exist at the time and that owned property had a significant tax advantage over individuals who held property. The main entity that benefited from this treatment was, of course, the church. But other entities, like guilds and independent towns, which are far more directly related to today's corporations also had this advantage.

In addition to the tax advantage (which continues today in the sense that corporations are not subject to the estate tax) medieval corporate entities enjoyed a large degree of self-governance. A typical inhabitant of England would be subject to their local lord's jurisdiction and the ultimately to the king's jurisdiction for both criminal and civil disputes. Members of medieval corporate entities, though, were subject to the jurisdiction of the entity to which they belongs and those entities were expected to maintain order and resolve disputes among their members.

The origins of corporate boards are ultimately shrouded in the mists of history because there simply isn't enough documentation to provide a definitive answer. But, the self-governance practices of medieval guilds, trading towns and universities are surely a large part of the answer. These entities typically established boards (often of 12 members) and a large part of their function was to hear and resolve internal disputes. Note the similarity of the 12 member medieval board to the traditional 12 member jury.

It is even less clear from the records we have when board members began to view their role as protecting the interests of shareholders, or when boards asserted the power to appoint and dismiss corporate officers. But what is clear is that the corporate board as an institution has evolved over time from its medieval origins to its modern role at the center of corporate governance. And, that governance of one sort or another has always been at the heart of the board's mission.


 

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