Boards in Information Governance

Abstract

This Article charts the decline of the two leading twentieth-century paradigms of corporate governance: the agency-cost theory, which produced the limited “monitoring board,” and the “separate realms” theory, which deferred consideration of all matters other than profit to government regulation. Repeated stock market crashes and hedge fund activism have exposed the limits of the agency-cost theory. A global pandemic and financial crisis, investor demands for corporate social responsibility and stewardship, and corporations’ own participation in the political process have made separate realms thinking nearly irrelevant. We argue that, while much of corporate law theory remains constrained by these twin paradigms, the practice of board governance has largely moved beyond them. The economic shock of the COVID-19 pandemic, in particular, has sent public company boards into high gear, forcing them to look beyond stock prices, to engage the firm’s full capacity for information gathering and synthesis, and to actively command the firm’s systems of internal and external communication. Even before a global pandemic placed heightened demands on corporate boards, the trend toward information-based governance was well underway, catalyzed by new legal requirements, industry best practices, committee charters, fiduciary duties, and investor demands for more active board governance. It has been observable in audit committees’ increased participation in financial reporting, the expanding application of boards’ knowledge about the firm to strategic advising and to executive compensation decisions, and boards’ greater role in decision-making about risk management, legal compliance, and ESG matters. To capture the board’s investment in data gathering, deliberation, and reporting processes as constitutive of the firm’s status, and the board’s strategic management and authoritative deployment of knowledge and communication, we label this new board governance “informational governance.” Informational governance includes a robust role for corporate boards in communicative action—the active creation and deployment of the firm’s self-knowledge—recognizing an important, value-creating role for boards that has long been discouraged by the “monitoring board” conceit. Focusing on informational governance helps sharpen our understanding of the board’s role in corporate strategy, an overlooked subject in the corporate law literature, but one that has assumed new importance in the postpandemic era. We identify some areas in which the law is likely to evolve as this new, technologically-enhanced, information-rich paradigm continues to cohere.