I've noticed a trend in recent years for companies to provide data on the skill and expertise set of their directors. Frequently they summarize the information in tabular form:
I'm not sure how useful investors will find such presentations when almost every director is claimed to have virtually every skill. In any case, Roy Shapira and Yaron Nili have posted a very interesting paper discussing this phenomenon (Specialist Directors (November 30, 2023), https://ssrn.com/abstract=4648018:
What determines the effectiveness of corporate boards? Corporate legal scholars usually approach this question by focusing on directors’ incentives, such as counting how many directors are independent or whether the roles of the CEO and Chair are separated. Yet on the ground, the focus has been shifting to directors’ skill sets and experience. Investors, regulators, and courts are now pressuring companies to appoint directors with specific types of expertise. In response, more and more companies are adding what we term “specialist directors”: a DEI director, a climate director, a cyber director, and so on. These changes in board composition could reshape corporate governance and impact broader societal issues such as data privacy and environmental degradation. This Article examines the ongoing shift in board expertise and makes the following three contributions.
First, the Article presents evidence on the scope and magnitude of the changes in board expertise. We hand-collect and hand-code data from the proxy statements of S&P 500 (large cap) and S&P 600 (small cap) companies over the 2016–2022 period. We find that over the past few years companies have not only significantly increased their emphasis on expertise disclosure, but also added hundreds of directors with narrower, ESG-related expertise.
Second, the Article analyzes how these shifts in board expertise could affect corporate behavior, and whether they are likely to prove overall desirable from a societal perspective. It is intuitive to think of board expertise as an unalloyed good. But we merge insights from interviews with nomination committee members with insights from the literature on group decision-making, to highlight five realistic concerns arising from the current trend. The injection of new, narrow types of expertise could distort board dynamics, create “authority bias,” overly increase the size of boards, hinder efforts to promote board diversity, and result in “board washing” whereby human capital disclosure camouflages the company’s actual behavior.
Finally, the Article generates concrete policy implications. For regulators, the main lessons concern rethinking the desirability of legal intervention and ensuring more credible and comparable expertise disclosure. For courts, the main lessons revolve around how to assess board behavior in oversight-duty litigation and what to consider when approving derivative settlements.
In it they discuss the proposal for board service providers that Todd Henderson and I made a few years ago in Outsourcing the Board:
Our focus on board expertise makes our analysis closely related to a couple of recent influential accounts. Consider first Bainbridge and Henderson’s thought provoking proposal to outsource the board. Bainbridge and Henderson start their analysis by highlighting a lack of expertise problem. The decades-long emphasis on board independence has rendered current boards with “generalists with little firm-specific knowledge, skills, or expertise,” they argue.To solve this problem, Bainbridge and Henderson suggest allowing companies to hire an outside governance consulting firm to run (be) their board. Outsourcing the board to (non-human) specialized entities would solve the expertise problem, by permitting the board to “insource its development of expertise.” One important difference between our analyses is that Bainbridge and Henderson focus on firm-specific expertise, whereas we focus on the recent shift to ESG expertise. Another distinction is that Bainbridge and Henderson focus on what ought to happen: removing the legal ban on non-human directors would free up companies to experiment with different types of boards. We, by contrast, focus on a shift that is happening.
Without speaking for Todd, my take is that firm-specific (and industry-specific) expertise is more relevant than ESG expertise, but that's driven by my view on the merits of ESG. Second, theory always trumps description. (I joke, of course.)
Seriously, I liked this paper a lot. Recommended reading.
