Directors&Boards: Digital Advisors & Knowledge Capture

Directors&BoardsDirectors&Boards is one of our “stakeholders.” No, that doesn’t mean they own part of us or that we own part of them and it doesn’t mean we always agree with each other. But they are included in our primary reference groups, those who contribute regularly to our “vocabulary of meaning.” The current edition begins to address two topics that need more attention.

First, the digital age. Directors&Boards addressed the need for recruiting digital directors in the first quarter of 2013. Personally, I think the digital world is so important that just about every board should include some expertise in this field, just like they need a financial expert. However, as Susan Stauberg of PartnerCom and WomenCorporateDirectors points out in this issue:

Corporate directors and senior executives often do not want to allocate a valuable board seat to a digital/IT expert, who is often in his or her 20s or 30s and without financial, management, or regulatory expertise. Instead, they are creating technology, or digital advisory boards.

Several articles in Directors&Boards offer excellent advice in doing just that. If you don’t have a digital expert on your board and don’t have an advisory board, you should at least be reading these articles. If not, you risk being left in the dust. Two billion on social networks, five billion with mobile phones, 2.5 quintillion new pieces of data generated every day. Don’t hide your head in the sand.

The second topic of note is touched on through an important article by Ann C. Mulé and Charles M. Elson of the John L. Weinberg Center for Corporate Governance at the University of Delaware entitled A New Kind of Captured Board. For years, many of us battled to install more independent directors on corporate boards to ensure against the ‘management-captured board.’ Now we run the risk of boards comprised of all outside ‘independent’ directors with little or no industry expertise and one inside expert, the CEO. The authors term this the ‘management knowledge-captured board.’

The authors cite the 2013 battle at Hess Corp. after Elliot Management acquired a 4% stake and began clamoring for board changes… especially the need to independent directors on the Hess board with operating experience in the oil and gas industry.  Several other cases of activism, a court decision and academic studies are also studies.

Independent expertise is positively associated with better monitoring, operating performance and shareholder value.

One cited study really hit home for me. In Do Independent Expert Directors Matter? Ronald Masulus, et al., found that independent expert directors have both the incentives and knowledge to more effectively monitor and advise CEOs than independent non-expert directors. Unfortunately, powerful CEOs tend to avoid independent expert directors. They conclude:

CEOs may like the improved firm performance due to better advising, they do not like the increase in monitoring intensity associated with the appointments of independent expert directors.

It reminded me of a thesis I wrote back in 1978 where I cited an extensive review of Job Satisfaction by Suresh Srivastva and others sponsored by the National Science Foundation. They concluded that although the evidence strongly supports models which encourage

ownership of the workplace as well as the work itself by the workers, organizations have not adopted such models. Creating participatory structures runs contrary to the desires of most current decision-makers, whose status is derived from dominating their subordinates.

Managers, feeling a loss of status, put an end to many experiments where all measures of productivity, profit and employee satisfaction showed that positive results were being achieved. Apparently, most CEOs aren’t much different from middle managers; they are more concerned with their own power and status than they are with productivity. Mulé and Elson warn:

The only way to avoid ‘knowledge capture’ is for one or more of the independent board members to be sufficiently equipped with industry knowledge to be able to appropriately and effectively challenge management… Shareholders are increasingly focused on the importance of independent director industry expertise. Boards that do not focus on this issue run a real risk those shareholders will do it for them. 

Unfortunately, unless shareholders have the right of proxy access, companies with management knowledge-captured boards might lose millions or might be worth more through parting out before a hedge fund decides to intervene.

The first quarter edition of Directors&Boards also contains several other interesting articles, including one by David Larcker and Brian Tayan, Do CEOs Make the Best Directors? Also of note, a 2014 survey of director opinions regarding annual meeting issues, best book bets, board governance and company culture and more. I was happy to see 30% of newly appointed directors reported on the Roster were women. Another board report found 45% of board seats are held by individuals with 10 years or more of tenure and that 88% of these are men. Perhaps they need a little push.

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