Farming Out the Directors

It’s a simple idea: Outsource your board to get a better one.

Law professors M. Todd Henderson of UCLA and Stephen M. Bainbridge of the University of Chicago even have a name for the entities companies could hire to do the job: board service providers.

The pair write in Bloomberg Businessweek that there are plenty of reasons to find a new way of populating and operating corporate boards, which so often “fail to police managers adequately or make good decisions.” For starters, “directors are part-timers with weak incentives and limited information.” What’s more, they’re generalists, “meaning the average board is unlikely to have all the experts it needs at any given time.” And, the professors point out, they don’t have a lot of accountability to shareholders.

“We propose a better way: permitting independent firms (e.g., partnerships, corporations, etc.) to provide board services,” write Henderson and Bainbridge. A company like Microsoft or Altria could “hire another entity, call it Boards-R-Us, to provide director services, instead of the group of unrelated individuals it currently hires to provide these services.” Board service providers would supply experts at the “daunting array of tasks” directors are expected to perform.

Peter Drucker, as we’ve written, found boards to be vexing entities that rarely managed to fulfill all the duties required of them. And finding the right people to serve wasn’t easy. “Board members should have proven their ability as senior executives—whether in a business, in government service, or in other institutions,” he wrote in Management: Tasks, Responsibilities, Practices. “Second, board members should have time for the job.”

So the idea of Boards-R-Us may well have struck Drucker as ideal.  Indeed, he came close to endorsing something similar. “The effective board member has to be a ‘professional director,’” he suggested. “Indeed, board membership should be recognized as a full-time profession for a really first-rate man. And it should be paid as such, i.e., by a fee and not by stock options or a share in the profits.”

The notion of board service providers would be consistent with Drucker’s view that activities without “a career ladder up to senior management” should be farmed out. “To get productivity, you have to outsource activities that have their own senior management,” Drucker said in an interview that appears in Managing in a Time of Great Change. “Believe me, the trend toward outsourcing has very little to do with economizing and a great deal to do with quality.”

What do you think of the idea of hiring “board service providers” to play the role of the traditional board of directors?