Managing Leadership^®

As we mentioned yesterday, the corporate veil describes a legal principle of protecting owners from liability for the actions of the owned corporation. This has the effect of freeing up additional sources of capital and increasing its liquidity for investment. It is somewhat less well known that the veil also was intended to protect directors – and even officers – as well.

However, the spectacular and egregious nature of some of the corporate scandals of recent years has led to the veil being pierced far enough for litigation to reach individual directors and executives more often than had been seen previously. The reason is that the active malfeasance on the one hand, or negligence of fiduciary duty on the other, was adjudged to be so pronounced, and so directly responsible for the widely devastating collapses, that the individual perpetrators had, in effect, abrogated their right to the protection of the veil.

We will take this topic up from a different angle, in due course. But for now, it is sufficient to ask how we know when and why the veil might be so pierced. What are the aims to be sought by directors, and what are the standards to be met in that pursuit? In particular, who determines what those are? Of course, the same question applies to senior officers of a public corporation.

For the answers, we needn’t analyze the legal arguments made for the particular instances of litigation and prosecution that we’ve seen. It’s more instructive to assess the reaction to the issue in the community of managers, consultants and academics interested in the topic. And, in short: there’s no consensus.

Some argue that the board is an extension of the CEO, its role to formally approve that executive’s agenda and to muster assets in support of it. Others suggest that it is a sort of networking portal of fellow CEOs or senior executives, through which the CEO can reach the wider world for information and resources.

On a rather stricter vein, some propose that the board is the key guardian of fundamental regulatory issues affecting the corporation, particularly, of course, those related to corporate governance. Finally, some even insist that the board has to try to act in the interests of shareholders.

Now, this range of roles is irreconcilably wide. Moreover, each point on it is defended with great energy by influential voices in both practicing management and academia, as well as among professional advisers.

The question is, how did this cacophony of opinion about what really should be a straightforward matter come about? And, as long as it persists, what can we do to improve corporate governance?

We’re going to try to wrap that issue up presently, so we can move on to a closer examination of boards and directors. Please do join us.

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This post is a part of a series. You can learn about and link to the other articles here: Corporate Governance and Capitalism

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Today’s tip: As concerns grow that the US economy may be beginning a backslide, it might be worth your while to visit this well-done piece on things to not do in a recession, from BusinessWeek.

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