Hosted by the Millstein Center and Professors Jeff Gordon and Ron Gilson, leading academics from Columbia, Cornell, Harvard, NYU, Oxford, Stanford, and the University of Pennsylvania participated in "A New Model for the Public Corporation Board", which took place on Thursday, May 5, 2016, at Columbia Law School in New York City.
There were two starting premises to the day's discussion. The first is that hedge fund activism is a symptom of the short- comings of the “monitoring board” model that has been central to the governance of the public corporation since the 1970s. By this we do not mean that either boards or activists are systematically either myopic or hyperopic. Rather, the increasing complexity of the business environment raises the question of whether, as the monitoring board model contemplates, directors can meaningfully evaluate company strategy or assess the need for alternatives. One characterization of at least some activists, which will be predictably controversial, is that an activist with a 300 slide deck proposing a strategic initiative serves to make up for this limited capacity. That characterization suggests that one reform vector should be to address the shortcomings of the monitoring board model. If this analysis is correct, the role of directors would change, the time demands would change, as would recruitment patterns, career paths, compensation, and institutional shareholder expectation.
The second premise is that the monitoring board model does not scale. In the 40 years since the monitoring board model began to be implemented, the capacity of directors has, at best, increased linearly, through the increased use of committees and outside advisors to the committees, but the underlying businesses have grown exponentially in size and complexity. To take the most obvious example, a large U.S. financial institution in 1975 had a smaller and dramatically less complex business. Its board would have been composed by perhaps seven independent directors. Forty years later, that financial institution is global, it makes extensive use of derivatives both as an investment and as a risk management device, its regulatory environment has grown exponentially in breadth and complexity, and its revenues have multiplied dramatically. Moreover, the board has become the focus of compliance efforts, beginning with Sarbanes Oxley but not ending there. Each time the board has failed to prevent governance or business failures, the regulatory response has been to assign them even more tasks. On a net basis, the board’s capacity to engage with the company’s strategic questions has been seriously diminished.
The purpose of the event was to discuss this general thesis and directions for possible reform of the public corporation board, including perhaps the shift to a “thickly informed” director model, in which the board would develop deep knowledge about the company and its industry, which would require significant changes in what directors do and how board structure might evolve to support this broader role.
The Center is now considering a follow-up conference on the themes and outcomes of the roundtable.
For more information, please click on the links below.