Outsourcing Corporate Boards?

An interesting proposal by a couple of corporate law professors may cause you to rethink how companies populate their boards. 

Law professors M. Todd Henderson (U. Chicago) and Stephen M. Bainbridge (UCLA) have proposed a novel way to expand further the universe of corporate service providers by allowing the outsourcing of board functions.

The profs note that critics complain that the array of tasks for a board to deal with are too vast for a board to perform effectively.  They also note that “boards fail to police managers adequately or make good decisions” and that they are generalists without the breadth of experts the company may need.

First, boards generally, and exchange listed board committees specifically, have the ability to hire expert advisors directly without relying on company management.

However, this brings up a point that has bothered me for a while.  Before, and particularly after, Sarbanes-Oxley, the corporate governance “experts” have emphasized the need for independent board members, free of the influence of management.  However, with respect to the operations and performance of a company, that responsibility and information resides with management.

In other words, particularly in the post-Sarbanes-Oxley world, the most sensitive and important decisions are under the purview of the people with the least connection to the company and the least access to the information.  I understand the fear of conflicts of interest and the desire for input free of the influence of management, but this seemed to me to be a mismatched solution.

Basically, I’m not sure I agree with the critics.  You can point to specific governance horror stories, but there are thousands of public companies and many thousands more private companies where corporate boards operate adequately or even successfully.  There are actual instances of effective governance that pre-date Sarbanes-Oxley, if you can believe it.  In the case of policing management and making crucial policy decisions, why would you have those responsibilities rest with the individuals furthest removed from the company?

In addition, there are many examples of corporate boards with structures resembling the All Governance Expert Blue Ribbon Panel Paradigm that turned out to be miserable governance failures (*cough*Enron*cough*).

I know this was a bit of tangent, but it was my first reaction to the profs’ article.  There will be more.  It is recommended reading.