By: Joseph Anton
Boards of Directors (“Boards”) are anachronistic to major companies in the 21st century. Boards had their origin in an era when oversight was easily executed. The Board directors of many companies were the owners of significant amounts of stock, or their direct delegates. At a later stage the directors were chosen by the Chief Operating Officers and severed as their advisers. In a period of rapid growth, companies needed the resources of outsiders to lend their collective genius in an era when outside knowledge, data and experience were expensive to collect.
As businesses grew larger, the Boards’ responsibility as “watchdogs” representing the shareholders’ interests, became more important. In law, directors were always the fiduciaries of their corporations, and indirectly of their shareholders. But their advisory and supervisory roles were not always distinguished or evaluated. Today, the supervisory role of the directors has become far more important.
The current “Board” model fails for three reasons:
An average Board member probably does not spend more than 60 hours per year (and that’s generous) attending to his duties on the Board – (assume 6 Board meetings per year at 6 hours per meeting, with 4 hours in preparation. The reality is that they probably spend less than 30 hours per year!)
The volume of data that they must review is so large that it is humanly impossible to verify to assure its accuracy or validity. Their review is perfunctory. You can’t consume that much data in that little time unless you suspend the rule of physics.
A current example is helpful. The CFO of Boeing sat on the Board of Sprint (he resigned recently because of other issues.) I can’t think of two companies in the world more complicated than Boeing and Sprint. Boeing produces a product that contains over 300,000 parts, is manufactured in multiple countries, and employs over 150,000 people. Sprint provides a global service that you can’t even “see” and is required by government regulations to provide accounting on tariffs that exceeds 30,000 pages monthly!
The Boeing CFO probably works more than 2,000 hours per year; in fact most top executives work long hours. How much effective time can he really spend on Sprint business given his day job? If you are a Boeing shareholder, you hope not much. If you are a Sprint shareholder, you wish the opposite. This asymmetry can’t work in a country where most of the population has become shareholders of American business by virtue of the revolution in ERISSA, wealth accumulation and the explosion in financial assets.
Rarely is there a requirement to invest a substantial stake in the company’s stock when you are invited to sit on a Board. Quite to the contrary. Many Board members are given stock options as a reward for serving. They have no risk and invest nothing. If the company performs well and the public markets treat the stock kindly, then the Board member has a gain. If the markets don’t take kindly to the stock or the company performs badly, then the Board member has neither a gain nor a loss. There is no incentive when they are playing “with the houses” money.
The Business Judgement Rule is a rule granting directors of public companies immunity from liability if their actions were executed in good faith, using sound business judgement and executed with reasonable care. Director’s and Officer’s Insurance further insulate the Board and provides a fair amount of “wiggle room.”
The vast majority of Boards operate effectively not because the model works, but because the people involved, management and Board members, are honest. It is only the very few which need oversight. But in a world where so much damage can be done by so few individuals it is incumbent upon us to change the system. Shareholders can suffer, investors can suffer and the lives of many long-term employees can be devastated by the misdeeds of just a few. The new model should include three simple revisions:
Each public company should have a minimum number of professional Board Members who dedicate at least 500 hours per year to that company and are restricted from sitting on more than three other Boards. They would be able to devote enough time to render a sufficient review of the business. Each company could continue to maintain a diversified Board encompassing other talents but is required to have at least, say two “full time” professional members. This solves the “physics” problem. The professional directors, who are more responsible for oversight and understanding the more intimate details of the business, may bear a greater burden for which they are compensated. This higher level of liability should relate only to their added responsibility. Otherwise, their duties do not differ from those of the other directors, and neither should their liabilities.