Closing the Information Gap
Posted by Stephen Davis (Harvard Law
School), on Friday, August 30, 2019
Davis is a Senior Fellow at the Harvard Law School Program on
Corporate Governance. This post is based on an article by Dr.
Davis published in the Ethical Boardroom.
It wasn’t long ago that Lord Boothby could
describe a corporate director’s job this way: “No effort of any kind
is called for. You go to a meeting once a month in a car supplied by
the company. You look both grave and sage and, on two occasions, say
‘I agree’, say ‘I don’t think so’ once and, if all goes well”, you get
a hefty annual fee.
Those days are mostly
gone—though not entirely. Board meetings at Nissan Motor under (now-ousted)
chief Carlos Ghosn met for an average of 19 minutes, according to a special
committee investigation, just about enough time for directors to slip in their
“I agree” on each agenda item before adjourning. But at most companies, thanks
chiefly to years of shareholder pressure, crony is out, professional is in.
We would expect such
new-style boards to advance performance, oversight, risk management, ethical
behavior and alignment with investor interests. After all, those are the
outcomes for which advocates of change were fighting for so long. But there
turns out to be one inconvenient hitch, which is becoming ever more evident: the
independent board model isn’t truly workable, at least not without a crucial
Here’s the problem—the
one many of those most deeply involved in the system, directors themselves,
admit to privately but rarely concede publicly: as much as they try, there isn’t
enough help for boards to handle their responsibilities effectively.
part-time, often with other demanding jobs, and meet somewhere between eight and
12 times a year as board members of a specific company. These directors are
charged with representing shareholder interests in testing, approving and
monitoring corporate strategy; hiring, paying, supervising and—if
necessary—firing top management; and ensuring that a vast array of risks and
opportunities are optimally managed. Set aside for now that sclerosis in board
composition—the “pale, male and stale” syndrome—is likely to contribute to
directors missing capacity to handle decisions. Progress on diversity is under
way, albeit too slowly.
But progress is stalled
across markets on efforts to correct another fundamental flaw in governance
architecture: directors must handle their duties at the short end of a massive
information imbalance. Management has a virtual continuous monopoly on data and
insights on how the company performs. Even where directors call in outside
advisors, for instance for transaction, remuneration, or director selection
advice or the audit, agents’ ulterior loyalty may be to executives rather than
to shareholders. By definition, board directors and company executives do not
always share the same perspectives or interests. So policing conflicts requires
robust director vigilance. Generally, a one-sided disparity gives management a
routine advantage in influencing what independent directors discuss and decide.
information imbalance is the fact that the typical company board has no everyday
dedicated staff. Instead, directors rely on an executive—usually a company
secretary or general counsel—who is accountable to and works for management.
These officers are often the silent heroes of corporate life, as they attend to
multiple, sometimes conflicting, constituencies and do so with high ethics and
professionalism. But make no mistake: they are not employed by and for the
board. Indeed, outside observers would find it hard to fathom how companies go
to such lengths to recruit great independent directors—only to make them largely
dependent for help on the team they are supposed to oversee.
To be sure, a handful
of firms have introduced variations on independent board staff. AIG, after the
financial crisis, separated its secretaries, naming one for the board and
another for the corporation. BP, in the wake of the Deepwater Horizon oil spill
in the Gulf of Mexico, expanded the board’s own secretariat to oversee central
BP as well as subsidiaries. Most recently, Nissan, in efforts to recover from
the Ghosn affair, declared that it would establish a dedicated office of the
board. But beyond
these, few companies have equipped their directors with permanent, exclusive
staff. Moreover, most corporate governance codes around the world still only
advocate that directors tap independent advice in special circumstances rather
than as a permanent feature.
Of course, one cohort
of directors does have regular access to rich back-office analysis that is
separate from management: board members nominated by activist hedge funds.
Activists may—and often do—share what they know with other directors. But where
they serve, there is a double information gap: management and activist-named
directors can draw on deep wells of information while garden-variety
non-executives are left dependent on either camp. The result is a troubling
irony: without dedicated help, independent boards are outgunned by activists,
some of whom are short term, and by executive teams that directors are elected
by shareholders to oversee.
Making matters worse,
the lack of dedicated staff has proven no impediment to the ever-rising tide of
guidance calling on corporate directors to do more, smarter. A recent report
from FCLT Global is as good an example as any. The Long-term Habits of a Highly
Effective Board rightly recommends that corporate directors spend more time on
strategy and communicate more. But it omits mention of independent staff to help
make that happen. Directors are trapped in a vice of mounting expectations and
So, it is right to ask:
in our current governance architecture, can outside directors meaningfully
oversee and counsel executives in alignment with shareholder interests? Indeed,
would you hire someone under these conditions and expect an optimal outcome? If
the answer is no, then perhaps the time has come for directors, shareholders,
and others to acknowledge that an empowered board means an information-equipped
board. Without that feature, at many companies, directors will continue to push
uphill in shepherding long-term performance as well as ethical and responsible
There are worthy
arguments against independent board staffing, of course. It could be costly and
therefore an option only for large companies; it could stoke friction with
counterparts in the management team; it could wind up still being reliant on
management. But think of a spectrum of options rather than a one-size-fits-all
template to address the challenge. For instance, a board could go all in by
assembling an independent secretariat group, such as at BP. Or it could have
outside advisors, such as financial experts, lawyers, or compensation analysts
on retainer at the call of the board chair or lead director. Solutions should be
right-sized for each company.
Shareholders can play a
role, first, by routinely probing in their engagements with companies how the
board furnishes itself with ongoing information muscle. Investor stewardship
professionals can then assess responses and, where answers are unpersuasive or
unambitious, champion more effective board-empowerment options. Policymakers,
for their part, can beef up corporate governance codes with a comply-or-explain
principle calling on boards to regularly disclose how they satisfy the need for
ongoing, independent information. Codes can also include new-crafted guidance on
the different models by which independent board staffing might be achieved,
depending on the company’s size, ownership and risk profile.
Market participants can
be proud of having assembled the pieces of a well-functioning system of checks
and balances in boardrooms. Independent information is what is now evidently
missing, and it is a piece with the prospect of unlocking board potential.
Giving directors the tools they need represents “governance 2.0”, the reboot to
move boards from crony to professional to successful.
The author was one of two outside advisors to the Nissan Special
Committee for Improving Governance.(go back)
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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