8.1 - The board of nonprofit organizations: puzzling through the gaps between law and practice – a view from the United States

Summary

Introduction

Scholars of American corporate governance – both for-profit and nonprofit – have long remarked on the contrast between the sketchiness of the legal regime and the robust and diverse set of practices inside boardrooms and executive suites. To many, this state of affairs is the desired result of a laissez-faire legal structure that sets forth minimum rules of the road but that otherwise provides only default rules for conduct. Indeed, the Delaware supreme court – speaking for the state in which most large US corporations are incorporated – recently observed: “All good corporate governance practices include compliance with statutory law and case law establishing fiduciary duties. But the law of corporate fiduciary duties and remedies for violation of those duties are distinct from the aspirational goals of ideal corporate governance practices…”

This laissez-faire legal construct makes sense for corporations that have private owners. Minimal laws put a lower bound on behavior to prevent opportunistic behavior, but otherwise get out of the way. Where corporate statutes set forth rules of practice, they can, in most cases, be overridden by the corporate charter or bylaws. After all, the theory goes, owners do not need to be protected from themselves and the contracts they might enter into. To contractarian purists, fiduciary duties in the business context impose only a duty of loyalty and good faith, and do not expose fiduciaries to monetary liability for breaches of the duty of care waived by the shareholders unless there is lack of good faith.