3.4.2 US one-tier board: "primacy of the board" and one-tier turning into two-tier or multiple-tier board

A saying in the US is "let the officers manage". This means that the rest of the board — the independent directors — should not micromanage the company's business and order its management team about.1

The unitary or single board of directors is the tule laid down in the Acts for US corporations.2 Since the early part of the 19^th century and certainly from the turn of the 20^th century the US has had corporations with widely spread shareholdings. These corporations have run more and more complicated enterprises. Everyone realized that widely spread shareholders should not try to direct the business and that control of management had to be lelt to the board.3

Corporation law statutes in every state make it clear that the board of directors is the focal point. The Delaware General Corporation Law states:

"the business and affairs of every corporation shall be managed by and under the direction of the Board of Directors".4

Put simply, the board is the corporate nexus of contracts between the company and the stakeholders. Bainbridge calls this nexus of contacts (note 104).

The primacy of the board is a specifically US concept and differs from practice in the UK, where the company was originally seen as a partnership and where shareholders have absolute power and can discuss with the directors whenever they wish and can hire and Eire them. The US understands that where companies have a vast number of shareholders, it is more efficient to discuss strategy in a small group, such as a board, than in a meeting of shareholders. This is called "bounds to rationalism". Moreover, because of agency costs, i.e. the costs for shareholders of having professional managers run the business, the efficient course is to leave control of the company to the board. While in the US the rights of shareholders on paper seem to be less strong than in the UK it is clear that shareholder pressure groups have fought and are continuing to fight, currently together with the federal administration, for just as many rights in practice as shareholders have in the UK.

US boards are one-tier boards. Because of the current practice of (a) executive sessions, which are separate meetings of independent directors without executive directors, and (b) the importance of board committees, such as the audit committee, the nominations committee and the compensation committee, and now also a risk management committee, the latest addition, consisting exclusively of independent board members and often meeting separately with their own independent advisors, it is often said that US boards are gradually turning into two-tier boards. I might even say they are turning into multiple-tier boards, i.e. the officers, the independent directors and 3 or 4 independent committees, which often have separate powers delegated by the full board.5

Martin Lipton described this to me orally as the "Balkanization of the board".6 Indeed, although boards in the US consist of a one-tier only according to both theory and statute, there are elements of a two-tier system in the division between independent directors, who monitor, on the one hand and officers, who run the business, on the other.