Is the governance principle of "noses in, fingers out" becoming archaic--deliberately or inadvertently?
The pressure from regulators, activist investors, public interest groups and academics are pushing directors to be more than "fiduciary directors"--i.e., directors who focus on using their best business judgment to fulfill their fiduciary duties to the corporation and its shareholders. Directors respond by reaching over the line separating governance from business management. We call this "overreach."
Overreach occurs when directors--individually or collectively--take decisions and actions to protect and advance their company's mission which bypass or usurp management responsibilities and prerogatives. Overreach can be triggered when directors are expected to have specialized knowledge of all risks facing their companies and are inclined to individual action to protect and advance their company's mission. Let's call this new archetype the "expert-director."
Expert-directors are expected to know more about business developments, economic risks, and law and regulation.They are expected to know more about strategy, technology, marketing, compliance and the latest governance pronouncements. They are exhorted to play closer attention to the business, engage more with management, protect the enterprise against known and unknown risks, and better connect with shareholders. They are inclined to act beyond their fiduciary boundaries to protect and advance their company's mission. Simply said, these directors are being asked to see more, probe more, and do more.
It's like the old adage, "Keep your nose to the grindstone, your ear to the ground, your eye on the ball, and your shoulder to the wheel. Now try working in that position. "This is the pressure for overreach.
But directors are poorly suited to the job of being the experts on anything--much less everything. Even if a board were to have one or two members with a specialized knowledge, it is doubtful that they would be capable of adding significantly to day-to-day management decisions. As directors, they generally do not have access to the day-to-day resources or the information needed to be experts.
Take cybersecurity, for example. Corporate governance experts have recently paraded the notion that boards need more directors who are expert in cybersecurity matters. Should we have a cybersecurity committee? Should the chief technology officer report to that committee or should a new cybersecurity expert-director oversee the CTO?
The CFO already has dotted line reporting to the chairman of the audit committee. Why stop there? Why not create a legal committee to review the general counsel's legal decisions? Or an expert-director on human resource matters to oversee the director of HR? Or, as some seem to suggest, a risk expert-director who focuses on risk, or a compliance expert-director who oversees the chief compliance officer? At some point, this onslaught of demand for director expertise becomes ridiculous. And, we see directors who are strongly pushing back.
Even assuming that members of the board could suddenly become "expert" in a particular area, it is hard to visualize how that expertise would be used. Without even considering the decision-making difficulties created by having a director as a "backup boss" for each C-suite executive, the management team will likely be made less cohesive, accountability would become diffuse (always a scary possibility), and the CEO will function more like a traffic cop than a decision maker. The outcome...