The Buffett board and governance reform.

• Author: Fisch, Jill E.
• Position: Berkshire Hathaway Chmn and CEO Warren Buffett

The success of companies that defy popular governance trends should signal reform advocates to proceed with caution.

As institutional investors pressure underperforming corporations to adopt reform proposals (such as those recently offered by the National Association of Corporate Directors), and regulators contemplate imposing mandatory guidelines for director independence or board structure, it becomes important to determine whether the changes are for the best. Toward that end, a growing body of empirical work is exploring the relationship between board structure and company performance. To date, this work has failed to provide clear direction about the ideal board structure and has given some reason to question the merits of popular reform proposals.

Examination of the empirical work suggests an analytic shortcoming in the movement to take boards seriously - the failure of many reformers fully to address the issue of the appropriate function for a corporate board. Although reformers call for greater director independence and involvement, they generally fail to conceptualize the director's role. In particular, the call to increase board independence ignores the extent to which corporate directors may appropriately be required to manage as well as monitor the corporations on whose boards they sit. Greater board independence may enhance the monitoring function of the board at the expense of its ability to manage effectively. Ultimately, this analysis suggests that corporate governance has embraced a particular normative vision of the director's role without considering the degree to which adopting this vision imposes costs as well as benefits.

Recognizing the breadth of potential board function offers one possible explanation why the market has not anticipated the wisdom of greater board independence and why, even in an era of substantial academic, media, and regulatory pressure to take boards seriously, corporations are not uniformly embracing the board "flavor of the month." It may be possible to develop general predictions about the importance of managing and monitoring functions.

More likely, however, the relative value of the managing and monitoring components of the board role may be a function of company-specific characteristics. Corporations differ substantially in a number of ways: ownership structure, regulatory oversight, opportunities for management self-dealing, and industry complexity. The nature of the company is an important...