Once upon a time, serving as a corporate board director was a prestigious thing. Today, thanks to the intense burdens of monitoring and governance we’ve piled onto boards generally and independent directors specifically, board service is more like a pain in the backside. And now some clever academics have tried to quantify precisely how much that pain costs corporate operations.
Their paper, “The Cost of Intense Board Meetings,” explores the proper balance of boards’ two primary duties: monitoring corporate behavior, and providing strategic advice. As a whole, boards must find the right mixture of monitoring and advising—but our governance revolution of the last decade has focused almost entirely on the monitoring. That, in turn, has put too much pressure on boards’ monitoring committees (audit, compensation, and nominating and governance) and the independent directors now required to serve on those panels.
The bottom line, according to this paper: yes, zealous attention to monitoring does reduce the potential for corporate abuses, but it also undermines the value of boards’ strategic advice and ultimately hurts company value. Worse, that effect is disproportionate—that is, the better governance you get from intense monitoring don’t make up for the worse strategic advice that comes along with it. In academic-speak: “The negative advising effects appear to outweigh monitoring improvements, resulting in net value losses, especially among firms with greater advising needs.”
I can hear the boardroom enthusiasts grumbling already. Those critics have long said that the Sarbanes-Oxley Act (and now the Dodd-Frank Act, along with several notable court rulings on director liability) put too many governance burdens on directors, to the point that the job is no longer desirable. Providing thoughtful advice to a CEO, after all, can be intellectually engaging and even fun. But if you’re going to face personal liability for mistakes in controls over financial reporting—well, in that case, you might as well face that risk in your own full-time job, not some part-time position on the board of another company.
That’s the argument about board stresses and strains, anyway. And I tend to believe these critics have a good point.
Take directors serving on multiple boards as an example. Directors typically serve on multiple boards because they enjoy the prestige and the extra compensation. But the same is not true of serving on multiple committees on the same board; you might earn a bit more cash in meeting fees, but that’s about all. So if a director serving on the compensation committee spends four hours per week on his duties, and is then assigned to the audit committee as well, he’s not likely to start spending eight hours every week on board service—he’s likely to divide his time into two hours for each committee. That is how higher expectations lead to worse results.
I called up one of the paper’s authors, Rani Hoitash of Bentley University, to talk about his research. (The co-authors were Olubunmi Faleye and Udi Hoitash of Northeastern University.) He readily admitted that his findings run counter to today’s ceaseless calls for more board accountability; fundamentally, he said, board directors need more time and opportunity to think about strategic advice if they want to maximize firm value—and let’s remember, that’s what boards were created to do in the first place.
One practical and immediate solution, Hoitash said, is to expand the size of your board, so you can have plenty of independent directors on monitoring committees and still have enough heads left over to advise the CEO on various matters. (Nevermind that other research suggests boards are growing smaller these days).
I’ll have a podcast of my complete conversation with Hoitash posted later this week with more of his insights. Meanwhile, those of you who like to dig into boardroom theory should give his paper a read. We’re always talking about the value and benefit of monitoring around here; it’s good to remember that monitoring comes with a cost, too.