In capitalism, corporate boards are one of the most significant institutions. Their role involves policing the relationship between a company’s managers—who are responsible for running the company—and its shareholders—the actual owner of the company. It signifies staying vigilant on managerial incapability and fraud. It also signifies providing strategic input whenever required—be it for buying any competitor or recruiting a new manager.
Their record, however, might be considered mixed. For example, the first decade of the 21st century witnessed some embarrassing oversights, with the infamous Enron and WorldCom scandals in 2001-02 and the financial crisis in 2007-08 being the most glaring examples. Remembering the incidents, the head of a famous investment firm has revealed that these failures weren’t due to the failure of risk management. Instead, he believes, corporate governance failed as the boards failed to ask the appropriate questions.
Problems not only have been deep-rooted but widespread, too. Chief executives have staffed their boards with their cronies. For instance, at Disney, the board of Michael Eisner once had the ex-headmistress of his kids’ school and the designer of his house. They were able to sideline all critics: so in 2000, when a member in the board of the Bank of America denounced the CEO’s compensation, she was bluntly dropped.
Several attempts were made in the past decade to keep boards updated. The Sarbanes-Oxley act (2002) and the Dodd-Frank act (2010) in America, for example, compelled organizations to increase the number of independent directors and reveal more compensation-related details. Going a step ahead, the advocates of good governance have forced organizations not just to select white men as directors and but also disclose more details so that shareholders can take better and sound decisions. Big organizations; however, keep making some unusual appointments: in 2011, 31-year Chelsea Clinton, then a graduate student, was appointed to the board of IAC, a media conglomerate, much to everyone’s utter dismay! Everyone believes that independent directors make for better board members; however, no such academic evidence is available to prove the fact. Eight of the ten directors of Lehman Brothers were independents when the company went bankrupt.
All these reforms have ultimately left the main problem unattended. Organizations have always been almost ruthless in reinventing themselves. They have explored almost every possible organizational form, apart from having contracted out almost everything—right from manufacturing to devising strategy. Still, they have been surprisingly very ‘conservative’ when it comes to boards.
The ultimate truth is that boards are almost the same as they were about fifty years ago: a group of some éminences grises who meet just for a few days every year to provide their wisdom. Now the only difference is that they may comprise some women and minorities and at times, some outsiders too. However, the basic remains unchanged. Board members are only part-timers who are devoid of the knowledge and incentives to keep an ‘effective’ eye on organizations. And they are portrayed to people that they are supposed to stay vigilant on organizations. Boards are therefore showcases for the most severe concerns of capitalism: they are managed by insiders especially at the time when capitalism requires to be more comprehensive and dominated by some part-times at the time when it requires to be more attentive to averting crises in the future.
Now, how to fix such boards? A good suggestion has been provided by a proposal submitted in the Standford Law Review’s May edition by Todd Henderson of the University of Chicago and Stephen Bainbridge of the University of California, Los Angeles. Organizations, they mention, would never opt for any management advice or legal services from the professionals interested in sparing only a few hours every month. Why do they put up with the equal arrangement from all board members? They advocate for the creation of a new division of professional organizations, terming it as “Board Service Providers” or BSPs. Organizations will recruit a firm to offer them “board services” in the similar manner that it recruits a management consultant or law firm. Apart from providing an organization with a full bandwagon of board members, the BSP will enrich it with collective proficiency—right from the capability to process an excessive amount of information to strategic advice on important decisions like mergers.
According to Henderson and Bainbridge, this will need just a minor legal change. However, it has the potential to revolutionize the entire world of boards. It would lead to the creation of a new set of professional director. And it would enable BSPs to capitalize on the economies of scale in order to hire the best-in-class board members, present more extensive training programs, and create the best-of-its-kind proprietary knowledge. This would ultimately enhance the possibilities that any corporate incompetence would be rectified, corporate misdoing revealed, and any corporate self-dealing—coming in the form of excessive pay, countermanded.
The plan proposed by Henderson and Bainbridge; however, drew criticism. It might deny organizations the insights of true outsiders—people having the record to produce some game-changing ideas. The same professionalism that will lead BSPs to monitor corporate performance better may lead them to become more conservative at the time of advising on various strategies. Conflicts of interest is another area of concern, especially if rival organizations opted for the same BSP. Finally, this idea may bar big shareholders from nominating board members.
A hybrid system may be a good answer to all these problems wherein BSP would fill a major part of the board positions, while minority part would be covered by others. Corporate boards have always remained the ‘weakest part’ of the capitalist system. Henderson and Bainbridge have introduced an interesting idea to keep organizations from straying.