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The Role of the Board of Directors in a Modern Corporation

Talha Azeem | 2020-11-0053

The board of directors (BOD) is the senior most authority in a modern corporation’s hierarchy

which is enforced by law worldwide to protect the interest of the various stakeholders of an

organization. One broader role of BOD is of protecting the interests of the stakeholder or the

“Agency Role." The other role is the “Resource Dependence Role” in which the BOD connects

the organization with external factors to mitigate the risks associated with the external

environment. These two roles are carried out using different mechanisms such as advising the

CEO on matters ranging from corporate governance, strategies, and problem solving which

essentially means that they are present for either advice and council or serve as a sort of

discipline and to act in a crisis. However, in a modern-day corporation's BOD are viewed

merely as puppets to comply with the law.

The Agency role of the BOD on a theoretical level is to safeguard the interests of the

shareholders. The shareholders, in this case, are the principal and the BOD is the agent of these

shareholders trying to maximize their benefits. Fulfilling this role involves the BOD advising,

counseling and monitoring the senior level management of the organization to make sure that

the shareholder benefit is maximized (Mace). This also involves the hiring and firing of the

CEO and the senior management if it is seen as ineffective. A 2018 study suggests that around

80% of the BOD agree to be involved in setting the strategy for the organization and 45% saw

themselves as a monitor while only a mere 23% of these saw themselves as the “watchdogs”

for shareholders (Adams et al.). Even though it can be argued that helping set the strategy and

getting involved in matters of corporate governance is part of the bigger picture that primarily

benefits the shareholders gain value over time, however, the agency role something which is

enforced by law to protect the shareholders and it is surprising that this is not the first

responsibility that is assumed by the BOD.


The Resource Dependence role is quite distinct in a way that the BOD becomes an outside link

of the organization to minimize the risks from various environmental factors. This role requires

the BOD to comprise of insiders, business experts, support specialists and community

influencers. This distinct and diverse composition attempts to mitigate all the various

uncertainties. When the outside environment changes there comes a need for a new strategy,

and the BOD are the ones who plan the strategy knowing their strengths and weakness against

the external environment (Hillman et al.). In this way, the resource dependence and the agency

role of the BOD overlaps.

These roles are defined on a very theoretical level, and in reality, the characters played by

directors are vastly different. Some studies suggest that the BOD develops a strategy. However,

there are also contradictory, more convincing studies that show that even on the strategic level

the BOD is only involved for advice and counsel and not to develop the strategies. One of the

reasons for this is that developing an organization-wide plan requires time and knowledge

about the organization which the BOD does not have. Some of the BOD members are part of

in a few cases 10-20 different boards which suggest that at most they can only advise the

organizations and nothing more. This contradicts the earlier made argument that through

strategic decisions the BOD can safeguard the rights of the shareholders and leads one to

believe that the board is only present because of the law and is present to fulfill one role and

that is to advice and counsel the organization on various issues and in times of needs and crisis

situations. Even though this advice and counsel can be on matters of strategy and corporate

governance, however, is there is no guarantee of its implementation, and the president and the

CEO still have full autonomy and power in decision making (Mace).

In conclusion, the BOD have a few different roles in a modern corporation on a very theoretical

and legal level however in reality only a few roles are fulfilled because of the power of the

president and the CEO above the board which limits their role to mere counsel.
Works Cited

1. Adams, Renee, et al. “THE ROLE OF BOARDS OF DIRECTORS IN CORPORATE


GOVERNANCE: A CONCEPTUAL FRAMEWORK AND SURVEY.” NBER
WORKING PAPER SERIES, 2008.
2. Hillman, Amy J., et al. “The Resource Dependence Role of Corporate Directors:
Strategic Adaptation of Board Composition in Response to Environmental
Change.” Journal of Management Studies, vol. 37, no. 2, 2000, pp. 235–256.,
doi:10.1111/1467-6486.00179.
3. Mace, Myles L. “Directors: Myth and Reality.” Harvard Business School Press,
1971.

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