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ABSTRACT
A debate about corporate governance has long raged over the allocation of power between shareholders and directors. Proponents of "shareholder primacy" believe that the corporate board should be chosen by and accountable to the stockholders rather than dominated by the CEO, as they believe is common now. Advocates of "director primacy" want to limit shareholder power because they believe that shareholders have conflicting objectives, are uninformed, and pressure the directors to sacrifice the long-term health of the company to short-term share price.
The governance of non-profit organizations ("NPOs") offers an example that illuminates the corporate governance debate. Directors of NPOs suffer no pressure from shareholders because NPOs have no shareholders; NPO boards are effectively self-perpetuating. If the director primacists are correct, the governance of NPOs should be a model of wise, long-term management effected by officers who are clearly subordinate to the board.
In fact, however, a remarkable consensus of experts on NPOs agrees that their governance is generally abysmal, considerably worse than that of for-profit corporations. NPO directors are mostly ill-informed, quarrelsome, clueless about their proper role, and dominated by the CEO-as proponents of shareholder primacy would predict. In sum, the experience of NPO governance refutes the claims of director primacy that the absence of strong shareholders facilitates effective corporate governance.
I. INTRODUCTION
For over eighty years, debate over corporate governance has centered on the balance of authority between boards and shareholders.1 One side of this debate advocates "shareholder primacy" so that directors would actually be chosen by and would be accountable to the stockholders rather than bowing to the CEO as, they believe, often happens now.2 The other side touts "director primacy" and keeping shareholders weak because shareholders are uninformed, have conflicting preferences, and focus obsessively on short-term results.3 Further, this side claims that directors who are free of shareholder control would strive to maximize long-term firm value and have the wisdom and independence to pursue this goal intelligently and conscientiously.4
If this director primacy vision is accurate, non-profit organizations ("NPOs") should offer an attractive model for corporate governance.5 Directors of NPOs are not answerable to shareholders because they have no shareholders; NPO boards are legally self-perpetuating.6 Suffering no baleful shareholder pressure for short-term results, these boards are free to...