This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The board of directors has the final legislative and judicial authority within a corporation. The board elects officers, determines policies, authorizes contracts, passes on methods of financing, declares or withholds dividends, and in general manages all the affairs of the corporation. This describes their legal status and responsibilities.
In practice, however, boards of directors are likely to become mere appendages or echoes of some one or two individuals who actually direct the corporation. The real, final authority is frequently lodged in the president, if he is an active man and performs all the duties of his office, and the board of directors simply ratifies his decisions. This is frequently the case even though the directorates may be made up of able and forceful men. Under the American system they have no direct interest, except as shareholders, in the profits of the corporation, and cannot afford to devote a great deal of time and thought to its activities. They have confidence, presumably, in the president or in the chief officer or officers, whoever they may be, and they prefer for their own convenience and comfort to leave the whole corporation in the care of its actual head. The thing that frequently happens, therefore, is that the shareholders elect directors; the directors elect a president or other chief officer; and this man designates the other officers, fixes the policy of the concern, and carries on all its affairs subject only to the formal ratification of his board. So long as the president and other officials are well chosen, the system works well. Its weakness lies in the fact that the directors themselves are poorly informed and are left in a helpless or ignorant condition as compared with the officers; hence they are quite unable to protect themselves or the corporation against practices on the part of the officers that are perhaps detrimental. In place of a representative democracy, which is the ideal form of government for a corporation, they substitute a small tyranny.
This common state of affairs is due, in the United States, partly to the custom of choosing directors of important corporations from a very small circle of well-known business men. The result is that one man may serve on 10, 20, 50, or even 75 different boards. Even though some of these boards may be those of subsidiary corporations which transact nothing but the most formal business, nevertheless the men who are members of so many boards cannot be thoroughly informed as to any of them. Within the last two or three years, there has been a significant tendency to reduce the number of directorates of which one man is a member, but the number is still too large. William H. Newman, for instance, Chairman of the Board of the New York Central Railroad Company, who was at one time a director in 112 separate corporations, is now a director in 73 companies. H. L. Doherty, who is largely interested in public utility properties, is a director in 66 corporations. W. K. Vanderbilt, Jr., is a director in 65 corporations. E. T. Stotesbury is a director in 58 corporations. In England there was at one time a custom of filling directorates with gentlemen of title, most of whom were incredibly ignorant of all business transactions. More recently, according to Hartley Withers, it is becoming more the fashion to put in men who are supposed to know something about the business, "but the real requirement, that of genuine business capacity, is still to a large extent left out and probably must be as long as directors' fees are on their present absurdly small scale".