Corporate Governance Competition Pushes Boards Toward Irrelevance

Corporate boards have been a cornerstone of American capitalism for a century—but the board’s function may be fading into ambiguity.

Boards traditionally oversee management, safeguard shareholder interests, and guide strategy. This model is shaped primarily by state corporate law, which imposes duties on directors that shareholders can enforce through lawsuits.

Delaware law has long provided the gold standard. It offers specialized business judges whose fluency in corporate law enables them to balance competing interests—combining deference to business judgment with scrutiny of procedures and fairness. More than two-thirds of Fortune 500 companies are incorporated in Delaware—not out of inertia, but because its legal regime offers balance and reliability.

That equilibrium is under pressure. Delaware, along with other states, has been reforming its legal framework—with significant implications for the board’s role. While some reforms are necessary to restore or maintain balance, others tilt in the opposite direction and may undermine the value boards bring to corporations and their shareholders.

Consider Tesla Inc., which reincorporated from Delaware to Texas in 2024. The move followed years of criticism of the company’s board, particularly its close ties with CEO Elon Musk.

One flashpoint: the board’s approval of a $55 billion payday for Musk, invalidated by a Delaware court for failing longstanding tests of independence and proportionality. These events demonstrated Delaware’s oversight function—and how a board can avoid it by relocating to a different legal regime.

Texas recently revised its corporate law to reduce director risk and curtail shareholder rights. Directors are now broadly presumed to meet their duties absent clear fraud or intentional misconduct.

Texas now allows companies to raise procedural thresholds for bringing corporate lawsuits, making legal recourse less likely—changes Tesla promptly adopted. Most consequentially, companies may now draft charters that significantly dilute, or even eliminate, basic board duties.

In parallel, Texas has launched a new system of business courts, modeled after Delaware’s famous Chancery Court. These courts, which have been operational since late 2024, aim to bring consistency and expertise to complex disputes. But they remain untested, lacking both Delaware’s precedents and the fluency of its judges.

Dropbox Inc.’s 2024 reincorporation from Delaware to Nevada also drew attention. Nevada has long marketed itself as a place where directors can rest easily, with minimal obligations and little risk of litigation. But unlike Texas, Nevada hasn’t even created specialized courts to handle the complex balancing acts between shareholder interests and board discretion.

Delaware isn’t immune to pressure. Earlier this year, it tightened shareholder access to corporate books and records and broadened the use of tools boards can use to insulate conflicted transactions from judicial scrutiny. These changes fueled debate about whether Delaware is preserving its traditional balance or racing to compete with Texas and Nevada to a one-sided finish line.

All this invites two quandaries. First, what is the role of the board in today’s governance landscape? If directors are protected from liability, shielded from litigation, and no longer meaningfully bound by fiduciary duties, can they still serve as effective stewards of the corporate enterprise? We aren’t yet at an imbalance, but the directional trend is clear.

Second, in any market, competition can drive innovation. But when it becomes irrational—through underpricing, overreach, or competitive nihilism—it can cause real harm.

Corporate law is no exception. When state competition has gone too far in the past, Congress has intervened. Delaware has historically used its leadership and political savvy to contain federal overreaction—after waves of governance failures in 2002 limiting Sarbanes-Oxley to audit committees and after the vast financial debacle in 2010 Dodd-Frank to compensation committees.

Texas and Nevada have no similar track record. If they push too far, Delaware may feel compelled to keep pace—and all states could end up preempted from establishing corporate governance. That would hand control to Washington, replacing a competitive system grounded in legal expertise with a centralized bureaucracy shrouded in politics.

For now, boards across Delaware, Texas, Nevada, and beyond generally retain the incentives and tools to exercise meaningful oversight. But the framework can get uneven. As the legal foundations of board authority continue to shift, the board’s role may begin to change—perhaps gradually, but significantly.

The most important question isn’t whether Tesla’s board still matters—it may not, and that may be fine for that company and its shareholders. The question is whether the American corporate board, as an institution, can continue to serve its intended functions of effective stewards of shareholder capital to deliver high sustained returns and prosperity.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lawrence A. Cunningham is director of the John L. Weinberg Center for Corporate Governance at University of Delaware.

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