Boards in Information Governance

Abstract

This Article focuses on the evolving role of the board of directors.It charts the decline of two leading, twentieth-century frameworks shaping boards' roles: agency-cost theory, which produced the limited “monitoring board,” and“separate realms” theory, which ceded board responsibility for all matters other than profit maximization to government regulation. Hedge fund activism and wild stock market swings have exposed the limits of the board’s role in agency-cost theory. A pandemic, economic crises, investor demands for socially-responsible stewardship, and firms' own active political spending have rendered separate realms thinking untenable.Much theorizing in corporate law remains constrained by these twin constructs. But as we demonstrate, technology, necessity,and law reform are moving boards beyond them.In spring 2020, the economic shocks of the COVID-19 pandemic sent public company boards into high gear, forcing them to look beyond stock prices to engage the firm’s full capacity for information gathering and synthesis, and to actively command the firm’s systems of internal and external communication.Yet even before a global pandemic placed heightened demands on boards,a two-decade trend toward information-based governance was well underway, catalyzed by new technology,legal requirements, industry best practices, committee charters, fiduciary duties, and investor demands. The shift is observable, for example,in the overhaul of the regulatory frameworks compelling audit committees’ increased participation in financial reporting. It is evident in legal requirements compelling greater board participation in risk management,legal compliance,and ESG oversight.These requirements are, in turn,fostering directors' capacity to participate in strategy formation o na superior footing—a prerequisite for boards responding adeptly to activists' interventions and stock price gyrations.We name this new model of board governance “informational governance” to capture the board’s agency in data gathering and synthesis, deliberation, and reporting processes as constitutive of the firm’s status. Informational governance highlights a leadership role for boards in driving communicative action in firms—the active framing, synthesis and deployment of the firm’s self-knowledge. In this respect, we discern and emphasize an affirmative, value-creating role for boards that has been discouraged by agency theory's “monitoring board” conceit. We analyze areas of ongoing legal flux and evolution based on the new, technologically-enhanced, information-rich paradigm we identify.