James Surowiecki writes on financial matters for The New Yorker. recently he wrote a piece on the performance of company boards of directors.
When Citigroup and Bank of America held their annual meetings last month, shareholders were in an understandably surly mood. Even as the companies’ C.E.O.s apologized for past failures and vowed to do better, shareholders blasted the executives for their incompetence, and talked about the need for dramatic change. Yet, after all the venting and repenting was done, something weird happened: every member of each bank’s board of directors was reëlected to office.
Surowiecki then proceeded to discuss the issue further. He noted the move to appoint more independent directors in recent years, but commented:-
The academics Sanjai Bhagat and Bernard Black, for instance, have found no evidence that simply appointing more independent directors improves corporate performance. And, while increasing diversity was, in theory, going to break up the old boys’ club and make boards less deferential, the benefits have proved more elusive in reality. James Westphal, a business professor at the University of Michigan, has found that professionally diverse boards are actually less likely to challenge the C.E.O. One reason is that even “independent” directors are typically nominated not by shareholders but by the C.E.O. or by other board members, who, not surprisingly, tend to prefer directors who will be cheerleaders for the firm and won’t rock the boat. It also doesn’t help that independent directors are sometimes inexperienced, which makes it harder for them to take on management, or that they’re often chosen for name recognition.
This may be the case, but it may well be that despite calls for them to be more pro-active major shareholders have not pushed for change.
Nor am I necessarily convinced that appointing people who have spent their lives in ‘business’ is necessarily going to bring a challenging perspective to the role of director.
Surowiecki for example suggests that the appointment of former general Tommy Franks to the Bank of America board may not add materially to their deliberations. Yet, I can see an argument that a man used to assessing situations, making hard decisions and facing up to circumstances could in fact bring a different and challenging perspective to the board.
Surowiecki seems to favour a class of professional directors from what he writes in his conclusion:-
there are ways to make boards proactive and more than nominally independent. Investors need to be able to play a much bigger role in determining who ends up on boards, nominating candidates themselves, instead of choosing among the C.E.O.’s picks. (The S.E.C. is currently considering a proposal to make it easier for big shareholders to do this, which would be a good start.) On top of that, it’s time to revive an idea that was first floated by the corporate-law scholars Ronald Gilson and Reinier Kraakman, who proposed that big institutional investors create a cadre of full-time directors, people whose only job would be to sit on corporate boards and look after shareholder value. Most board members, accomplished as they may be in their real jobs, are amateurs when it comes to being directors. So it shouldn’t surprise us when they get buffaloed or pushed around by C.E.O.s, who are professionals. Right now, boards are made up of moonlighters. And, if the last few years have shown anything, it’s that protecting shareholder interests is a full-time job.
He as some strong arguments on his side, but I am concerned that at the end of the day we will in solving one problem create others which may in fact be worse.
Personally I am not certain that I want to exchange the current position, which I agree needs improving, for one where boards are stacked with ‘professional director’ beholden to professional investors, rather than to the shareholders at large.
Yet I agree there needs to be more debate on this issue. As part of this debate we might need to consider whether the current way companies are constituted is appropriate in this day and age.