Lord Boothby, a former Tory member of Parliament, described his experience as a corporate director to TIME magazine in 1962: “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 grave and sage. If you have five of them, it is total heaven, like having a permanent hot bath.”
While much has changed, Boothby’s description still feels apt in the minds of frustrated investors, especially as it applies to professional directors, who make serving on boards their primary obligation. Perhaps the stereotype is someone like Gerald Ford, who served on eight boards (five of which he also worked for as a paid consultant) following his presidency; professional directors tend to be retired CEOs or former high-ranking government officials. The Washington Post once reported that former Secretary of Defense Frank Carlucci averaged a board meeting a day, attending one by phone from his doctor’s office. He served on more than 30 public and private and nonprofit boards but insisted that only half of them required serious attention, an assurance unlikely to give investors much comfort. The days of the 10-company director ended following the Enron and financial meltdown era reforms, but there are still people who make board service their primary professional commitment.
I generally assume that the minimum time commitment for board service is two to three days of research about trends and transactions and study of the company’s strategy, audit, executive compensation, succession plans, investor relations, operational issues and risk management (including ESG) for every day of board or committee meetings. In the event of an emergency, that can quickly expand to full time. Best practice these days for a director without any full-time outside commitment is to sit on no more than three boards, five at the most, according to experts including a Diligent Insights report.
On one hand, those who support the idea of professional directors argue that these board members have the time to devote to their service, without the distractions of a full-time job, plus fewer conflicts of interest due to business connections.
On the other hand, those who think of professional directors more in the Lord Boothby image will reply that professional directors are not sufficiently involved in the day-to-day developments of the business world and that having no other income makes them reluctant to challenge management and risk losing their lucrative board seat for being known as a troublemaker.
They are both right.
As is the case with all generalizations about boards of directors, you do not get very far with prescriptive structural standards. This is why, when I helped set up a system for rating boards of directors like bonds at what was then called The Corporate Library (now GMI Ratings and a part of MSCI), we made it our policy to evaluate boards on the decisions they made, not on the easier to count but less illuminating data points like whether the directors are “independent” according to the required disclosures and whether the governance policies are on the company’s website.
The information in the proxy statement is not as useful in determining independence as the board’s handling of the most difficult questions, especially those that require resolving conflicts of interest between the priorities of the executives and the shareholders. As fiduciaries, the directors should come down on the side of long-term shareholder value. But that is not always the case, as we often see with CEO pay. Executives want less variability in pay and investors want it to be closely tied to performance. A board made up of truly independent directors will set meaningful stretch performance goals and stick to them even when there are unexpected developments like a pandemic, avoiding “participation trophy” bonuses.
We need to change our definition of “professional directors” if we want them to be credible. First, they have to be more directly accountable to shareholders, and that means giving investors more of a role in their selection. As long as director candidates are reviewed exclusively by insiders, their independence is compromised. When U.K. shareholders wanted to improve the independence of corporate boards in the 1980s, they funded their own search firm, called ProNED (“NED” was for “non-executive directors”). By the time the firm was acquired, the number of outside directors had increased significantly.
To professionalize corporate governance, some countries have or are exploring certification programs for directors. Those programs usually include classes in corporate governance, including CEO compensation; evaluation and succession planning; board evaluation and succession; compliance with SEC rules, the Foreign Corrupt Practices Act, any applicable government contracts provisions or other regulatory requirements at the state, local and international level; financial reporting; investor relations; and risk management, including climate change, the Me Too movement, Black Lives Matter, cybersecurity and political contributions. This continuing education could guard against a professional director losing touch with current corporate issues.
D&O liability insurers should work with shareholder groups to reduce premiums for boards that meet a certification and continuing education standard. Ideally, the term “professional director” would no longer refer to those who make boards their profession but to those who meet the highest standards of independence and expertise.
Nell Minow is vice-chair of ValueEdge Advisors and specializes in executive compensation and corporate governance.