January 25, 2006
Group Decision Making
Posted by Steve Bainbridge

Elizabeth Nowicki observes:

The points made by appellants’ counsel (as I recall) include: 1.  The directors had the obligation to meet together (as a group) and deliberate together on the decision to fire Ovitz.  By failing to do so, the directors breached some duty, per se.

I tend to sympathize with Larry Ribstein's point that:

I would hope that, after its mistake in Van Gorkom, the court now recognizes how wrong it would be to insist on excessive procedures, including requiring a meeting in order to satisfy due care duties.  And clearly that shouldn't matter for good faith purposes under 102(b)(7).

Yet, it is important to recognize that corporate law's insistence that boards of directors act collectively has a sound basis. Indeed, the very existence of the board of directors is predicated on the superiority of group as opposed to individual decision making. Or so I argued in my article Why a Board? Group Decisionmaking in Corporate Governance:

Abstract: The default statutory model of corporate governance contemplates not a single hierarch but rather a multi-member body that acts collegially. Why? This article reviews evidence that group decisionmaking is often preferable to that of individuals, focusing on evidence that groups are particularly likely to be more effective decisionmakers in settings analogous to those in which boards operate. Most of this evidence comes not from neo-classical economics, but from the behavioral sciences. In particular, cognitive psychology has a long-standing tradition of studying individual versus group decisionmaking. This article contends that behavioral research, taken together with various strands of new institutional economics, sheds considerable light on the role of the board of directors. In addition, the analysis has implications for several sub-regimes within corporate law. Are those sub-regimes well-designed to encourage optimal board behavior? Two such sub-regimes are surveyed here: First, the seemingly formalistic rules governing board decisionmaking processes turn out to make considerable sense in light of the experimental data on group decisionmaking. Second, the adverse consequences of judicial review for effective team functioning turns out to be a partial explanation for the business judgment rule.

Indeed, in that article, I even went so far as to venture a defense of the Van Gorkom decision:

… the Van Gorkom court arguably created a set of incentives consistent with the teaching of the literature on group decision making. The decision disfavors agenda control by senior management, penalizes boards that simply go through the motions, and encourages inquiry, deliberation, care, and process. The decision strongly encourages boards to seek outside counsel and financial advice, which is consistent with evidence groupthink can be prevented by outside expert advice and evaluations. Even the court’s criticism of the board’s willingness to take action after a single meeting is consistent with suggestions that a “second-chance meeting” also helps prevent groupthink. As such, the oft-repeated law and economics critique of Van Gorkom appears overblown. Contrary to what most law and economics scholars have asserted, there is a rational basis for the seemingly formalistic procedures mandated by that opinion.

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