The (Neglected) Value of Board Accountability in Corporate Governance

The following post comes to us from Marc Moore, Director of the Centre for Corporate and Commercial Law at University of Cambridge.

The term “accountability” is virtually ubiquitous within literature and debates on organizational governance, and especially within corporate governance. However, as a social phenomenon it is frequently misunderstood, particularly by corporate lawyers.

To a large extent, this is unsurprising. After all, it is to be expected that complex sociological issues posed by the historically peculiar scale and structure of public companies—such as decisional power, accountability and legitimacy—will be received somewhat uneasily within orthodox corporate law discourse. Indeed, with limited exceptions, Anglo-American corporate law scholarship today remains rooted in the traditional conceptual habitat of private law, with its characteristic focus on the discrete relational transaction. A latent but nonetheless significant consequence of this has been the definitional “fudging” by corporate lawyers of some inherently public-governmental phenomena that are relevant to corporate governance, in an attempt to render them consistent with the logic and language of private law. This is true nowhere more than with respect to the difficult concept of accountability.

An especially common misassumption in this regard is that the dual tenets of: (i) board authority, and (ii) board accountability in corporate governance are mutually offsetting (or “sliding scale”) phenomena, such that a gain in one can only be achieved at the corresponding loss of the other. Thus an increase in board accountability to shareholders in any respect—according to customary belief—necessarily translates into a corresponding decrease in the scope of authority enjoyed by directors; and, vice versa, an increase in directors’ authority leads inextricably to a reduction in board accountability to shareholders. As conceptually neat as the above logic may be, though, it does not properly represent the nature or significance of accountability as an organizational governance quality, particularly where its relation to the logically distinct governance attribute of authority is concerned.

In fact, the concept of decision-maker accountability—when used in its most commonly understood sense—is not equivalent, or even tantamount, to the qualitatively distinct notion of decision-maker disempowerment. Rather, accountability as an institutional phenomenon—when understood in its proper sociological sense—essentially denotes a manifest requirement imposed upon a decisional authority-holder A “to give an account of themselves” to B: that is, to provide normatively cognizable reasons in attempted support of their decisions or conduct. For this purpose, B may be either a distinct individual or collective beneficiary of A’s decisions (if the relevant relation is discrete or private in nature), or—alternatively—someone perceived as being affected by A’s decision in a broader sense (which is more likely where the relevant relation is indiscrete or public in nature). Moreover, contrary to popular supposition, authority and accountability are not mutually offsetting organizational governance qualities. On the contrary, they are inherently interdependent phenomena, in the sense that, within complex but freely constituted private organizations—including business corporations—decisional authority is structurally unsustainable if not accompanied by effective mechanisms for ensuring the accountability of authority-holders to the recognized beneficiaries of their discretionary decisions.

Once this more nuanced understanding of the nature and effect of board accountability is grasped, it will become apparent that many corporate governance mechanisms which are perceived as counteractive to directors’ decisional authority are—contrarily—designed for the ultimate purpose of sustaining, rather than displacing, the board’s discretionary prerogative vis-à-vis shareholders. The immediate normative implication of this finding is that corporate lawyers should demonstrate considerably greater caution when considering the removal of legally established board accountability norms in corporate governance on grounds of their perceived administrative inefficiency or cost-ineffectiveness.

The full paper is available for download here.

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