A team production model of corporate governance

Executive Overview A post-Enron consensus on corporate governance has emerged among investor groups, government regulators, and the private exchanges. The corporate board should function principally as a shareholder oversight body. To ensure independence from management, the board should have a substantial majority of independent, outside directors, who neither have business relationships with the firm nor social relationships with management. These reforms may decrease the probability for director complicity in managerial malfeasance. However, research has not demonstrated a relationship between board independence and firm performance. Corporate governance looks quite different when the firm is considered as a cooperative team to produce new wealth. From this “production” perspective, corporate governance recommendations differ substantially from recent reforms. Rather than have directors solely represent shareholder interests, boards should represent those stakeholders that add value, assume unique risk, and possess strategic information. Rather than restrict insiders to one or two, boards should include a group of employees (managers and workers) who bring the firm's know-how to the table. The team production model for corporate governance has far-reaching implications. The recommendations derived from our model suggest that the latest reform proposals offered by the New York Stock Exchange and the Securities and Exchange Commission create a board of directors that does not adequately consider the firm's new wealth-producing capabilities. This, we argue, accounts for the missing positive link between board independence and firm performance.