Imagine there were a state law requiring legal services to be provided by individual sole proprietorships. Companies would have to hire individual lawyers, who could then contract with others for information, expertise, support, and so on. Such a law might be motivated by a belief that lawyers would be more careful acting alone or that conflicts of interest arising from pooling legal resources outweigh the gains or some other reason. But whatever the reason, such a rule would generate widespread opposition from lawyers arguing that by pooling their resources they could offer better services to their clients. Clients would object too. While some clients might prefer to hire lawyers unaffiliated with a large firm, others might prefer the costs and benefits of hiring a firm instead of a single lawyer. Business associations allow individuals to pool their resources to share risks, obtain gains from economies of scale and scope, optimize the deployment of various resources across space and time, devote time and effort to innovation, and develop large reputational assets that can constrain opportunism. In Coase’s framework, ringing the boundary of the law firm around multiple lawyers would bring efficiencies in the provision of legal services.

These benefits seem as applicable or even more so in the context of corporate director services. But state corporate law requires director services be provided by “natural persons.” Therefore, corporate boards are currently composed of ten or so part time sole proprietorships, who are forced to contract with others, be they inside or outside of the company, for information, expertise, support, and risk pooling (that is, insurance). This state of affairs is the source of many of the most severe problems of corporate governance identified by scholars and governance experts. Managerial domination of boards, such as it is, is founded primarily on the weakness of individual board members and the information asymmetries between managers and board members. And yet, governance experts take the sole proprietor board model for granted, and offer reforms, such as greater independence or destaggered boards, that merely tinker at the edges of this system.

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