The Origins of Boards of Directors: Why Are They Here, and Are They Still Relevant?

The Control Series, part 1

Imagine this: you start a company. At first, you’re not just the founder—you’re also the CEO, the janitor, the HR department, and the office supply thief (borrowing your kid’s pencils when needed). Then, slowly but surely, your startup grows. One day, you’re no longer just the person running the show—you’re answering to a board of directors. A group of people who, theoretically, can fire you from the company you built with your blood, sweat, and tears. Fun, right?

This transformation is often seen as a mark of success. After all, no one fights for control over a sinking ship. A growing, valuable company, however? That’s worth the tug-of-war. But why do boards of directors exist in the first place? And is their original purpose still valid in the context of modern startups?

Let’s start with a little history.

A Brief History of Boards of Directors

The concept of the board of directors is rooted in the Industrial Revolution. Back then, factories and railroads were often owned by distant financiers—wealthy individuals or institutions with little direct involvement in day-to-day operations. The actual management, however, was carried out by hired managers who, let’s just say, didn’t always have the owners’ best interests at heart.

Case in point: in the late 19th century, corruption scandals were rampant. Managers embezzled funds, exaggerated profits, and engaged in all sorts of shady practices to enrich themselves at the expense of the company. The infamous Crédit Mobilier scandal of 1872 in the United States is one such example. Executives from the Union Pacific Railroad created a fake construction company, billed their own railroad for inflated expenses, and pocketed the profits. It was a public relations nightmare that led to widespread calls for accountability.

These scandals sparked discussions among academics and business leaders about the “agency problem”—a term coined to describe the misalignment between the interests of those who own a company (the principals) and those who manage it (the agents). Economists like Berle and Means famously explored this issue in their groundbreaking book The Modern Corporation and Private Property (1932), which laid the intellectual foundation for modern corporate governance. They argued that boards of directors could act as intermediaries, ensuring that managers acted in the best interests of shareholders. Read more here.

This model worked well for industrial-era businesses. Shareholders were often long-term investors who relied on dividends for returns, while managers were tempted to maximize short-term profits (or outright steal). Boards were the necessary checks and balances to keep everyone honest.

But is this structure still relevant in today’s world of fast-paced startups and venture capital?

The Evolution of Boards in Startups

Over time, the idea of a board of directors migrated from factories to Silicon Valley. Today, having an “independent board” is considered a hallmark of good governance. Investors often push for it during funding rounds, citing the same rationale: boards are here to protect the company from poorly motivated or misaligned management.

But here’s where things get interesting. In startups, the roles are often reversed. Founders—who typically comprise the management team—are often the ones with the long-term vision and skin in the game. Venture capital investors, on the other hand, frequently have short-term goals, looking for exits in 5–7 years. Suddenly, the very structure designed to protect long-term interests starts looking a little… backwards.

Let’s not forget that the law offers few protections for founders. In Delaware, where most startups are incorporated, directors are legally obligated to act in the best interests of shareholders, but shareholders themselves aren’t bound by any such obligations. They can act in their own interests, even if those interests conflict with the company’s. Like interest in getting attention. Or interest in not getting bored.

This creates a power dynamic where founders—who are often the best stewards of their companies’ long-term health—can be ousted by a board controlled by short-term-focused investors. It’s a modern twist on the agency problem, except this time, the agents (founders) are the ones who might need protection.

Do Boards Always Work?

Of course, investors’ fears aren’t entirely unfounded. History is full of examples of companies derailed by unchecked executives. The Enron scandal of the early 2000s comes to mind, where weak oversight allowed fraudulent practices to spiral out of control, leading to one of the largest corporate bankruptcies in history.

But boards aren’t a perfect solution either. Just look at the recent OpenAI drama, where board disagreements led to sparking chaos and confusion. While the details are not that clear, the situation underscores a key point: boards are only as effective as the people who sit on them, and even the best intentions can lead to unintended consequences.

Interestingly, research suggests that founder-controlled boards can yield strong results. A recent study from Harvard highlights that dual-class share structures—where founders retain disproportionate voting power—often correlate with long-term success in certain contexts. Think of companies like Spotify, Duolingo or Meta, where founder influence has been a key driver of innovation and resilience.

So, What’s the Takeaway?

The idea of a board of directors has noble origins. It was created to solve a specific problem in a specific era: protecting shareholders from opportunistic managers. But the world has changed. Startups aren’t factories, and founders aren’t 19th-century railroad executives lining their pockets with embezzled funds.

Does this mean boards are obsolete? Not at all. But it does mean we should revisit their purpose and structure in the context of modern startups. Investors’ concerns about governance are valid—there are real risks to companies when power is too concentrated or misaligned. At the same time, the one-size-fits-all approach to boards may not serve every startup equally well.

In the next post, we’ll dive deeper into investors’ fears: what they’re really worried about, why those fears are valid, and how founders can address them constructively—without losing control of their companies in the process.

For now, let’s leave it here: the original “why” behind boards of directors is worth reexamining. Because sometimes, the best way forward starts with asking if the old way still makes sense. At least for innovative tech companies.

If you want to find tons of links to get deeper in details about that - visit the perplexity page I have crafted while writing this post.

This is the first post in The Control Series.