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98 Colum. L. Rev. 1283 (1998)
The Active Board of Directors and Performance of the Large Publicly Traded Corporation

handle is hein.journals/clr98 and id is 1309 raw text is: ESSAY
Ira M. Millstein and Paul W. MacAvoy*
Observation and reasonable assumptions lead the authors to the working
hypothesis that a professional board-a board that is active and independent
of management-should be associated with higher returns to investors. The
authors test their hypothesis through an economic analysis of potential re-
turns to investors defined as economic profit--operating earnings in excess
of the costs of capital-and the authors'judgment as to the presence or ab-
sence of a professional board in a sample of 154 large publicly traded domes-
tic corporations. The data analysis from 1991-1995 demonstrates that
there have been significant increases in economic profit where a profes-
sional board was present. Although the results do not prove causation, cor-
porations with active and independent boards appear to have performed
much better in the 1990s than those with passive, non-independent boards.
Pursuant to state law, the board of directors is charged with manag-
ing the affairs of the corporation' in the best interests of the share-
holder.2 In practice, boards have for decades done so by delegating to
* Ira M. Millstein is Senior Parmer at the New York law firm Weil, Gotshal & Manges
LLP and the Eugene F. Williams, Jr. Visiting Professor in Competitive Enterprise and
Strategy at the Yale School of Management (SOM). Paul W. MacAvoy is the Williams
Brothers Professor of Management Studies at the Yale SOM. This research has been
funded by the John M. Olin Foundation program in government-business relations at the
Yale SOM and by Weil, Gotshal & Manges LLP. Olin Senior Fellows Karen Lamb and Gary
Davison, assisted by SOM students Michael Asato and Mangesh Mulgaonkar, contributed
materially to implementation of the research design. The authors wish to express their
gratitude to the following scholars and experts in the field for their valuable input and
insights: WflliamJ. Baumol, HollyJ. Gregory, Jim Hawley, Thomas R. Horton, Tim Koller,
Richard H. Koppes, Paula Lowitt, Chris McCusker, Richard A. Miller, Robert A.G. Monks,
AlanJ. Patricof, James Phills, Ned Regan, Martin Shubik, John G. Smale, Michael I. Sovern,
Robert B. Stobaugh, Kenneth West, and Andy Williams. We would like to extend special
thanks to Kayla Gillan, General Counsel of CalPERS; Richard H. Koppes, former General
Counsel of CalPERS; and Kenneth West, Senior Consultant to TIAA-CREF, for providing
us with access to governance data considered for analysis in this paper.
1. See Delaware General Corporation Law, Del. Code Ann. tit. 8, § 141(a) (1991)
(The business and affairs of every corporation organized under this chapter shall be
managed by or under the direction of a board of directors ....).
2. Most state statutes which have codified directors' duties stipulate that a director
shall discharge his duties... (1) in good faith; (2) with the care an ordinarily prudent
person ... would exercise ... ; and (3) in a manner he reasonably believes to be in the best
interests of the corporation. Model Bus. Corp. Act § 8.30(a) (1994) (amended 1996).

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