Boards of Directors as Mediating Hierarchs

Abstract

In June of 2014, the board of directors of Demoulas Supermarkets, Inc.—better known as Market Basket, a mid-sized chain of grocery stores in New England—decided to oust the man who had been CEO for the previous six years, Arthur T. Demoulas. Most likely, the board of directors did not anticipate what happened next: Thousands of employees, customers, and fans of Market Basket boycotted the stores and staged noisy public protests asking the board to reinstate “Arthur T.” The reaction by employees and customers made what had been a simmering, nasty, intrafamily feud within the closely held Market Basket chain into national news. In this era of overpaid and aloof CEOs, who expects employees and customers to go to bat for the CEO? The Demoulas clan feud provides useful context for thinking about the institutional mechanism for resolving disputes at the heart of corporate rate law: the granting of decisionmaking authority to a board of directors. In this Essay, the author highlights and explores the dispute resolution function of the corporate law requirement that corporations have boards of directors with “all corporate powers.” In Part II, the author briefly review the theory of team production in the economic literature, and walk through the argument laid out by Blair and Stout that the institution of boards of directors in corporations fits the description in the economics literature of an important solution to a “team production” problem. Part III discusses how the legal structure and duties of boards of directors ensures that most of the potentially highly contentious decisions that must be made in the management and governance of corporations will be resolved internally, without recourse to a court. If they cannot be resolved at a lower level, they will go to the board of directors and be resolved there, which means that a major task of boards is mediation and dispute resolution. Because the law requires that certain decisions must be made by the board, and that most decisions, once made by the board, cannot be challenged in court, board governance helps minimize the number of disputes that might otherwise boil over and require court adjudication. The Article argues that corporate law has traditionally supported this interpretation of what boards are supposed to be doing better than it supports the idea that boards are supposed to be agents of shareholders. In Part IV, the author reviews new theoretical work on corporate law that explores this idea, and Part V reviews empirical findings on boards of directors that provide support for this interpretation. Part VI reviews several developments in the Delaware courts that may inhibit the ability of boards to carry out this function before concluding how the effect that these developments may have on how corporate boards carry out their duties