Conglomerate Blog: Business, Law, Economics & Society

We talk sometimes here at the Glom about the promise and illusion of outside directors (this is really Lisa's area). Outside directors may be independent and therefore more willing to not "go with the flow," but they may also be less knowledgeable of the firm, the industry, or the business world generally. And the next question is then who is "outside"? Other industry players? Other executive friends of the inside management? Social friends?

The NYT on Sunday probed another set of outside directors: Presidents and other senior administrative officers of public and private universities. Around half of all university presidents sit on at least one corporate board. Many issues are discussed: time, expertise, money, and conflicts about money.

Time. In this post-SOX (and post-Enron and WorldCom individual director settlements) world, outside directors should plan on working hard for their money. This isn't a cushy gig anymore. Personal liability and reputational hits are lurking around every corner. To add value, outside directors have to invest a lot of time: prep time, travel time, meeting time. The example that makes me hyperventilate is Dr. Shirley Jackson, the president of Renssalaer Polytechnic Institute and a theoretical physicist, who at one time served on the boards of six mega-companies (FedEx, Marathon Oil, IBM, etc.). According to Nell Minow of the Corporate Library, outside directors should figure on working 240 hours a year for that company, or 20 hours a month. Six times 20 hours is a lot of hours a month -- almost a full-time job -- in addition to what I already thought was a 24/7 job. The article mentions that the Board of Regents of the U. of California system just voted to limit board membership for its chancellors to three.

Expertise. What are these academic officers bringing to the table? Well, they are the C.E.O.s of huge enterprises. They know something about managing people (including difficult personalities, like law professors). Depending on the firm, they may add some inside scoop on that all-important 18-25 demographic. Also, the research expertise might be a help: a particular science specialty might meld well with a particular firm; a legal academic can serve as a fount of information about the board's legal responsibilities. But in most cases, the expertise the academic officer has may not match up that well. But, they can think "out of the box"? The article suggests that academics in particular tend to stay quiet when outside their experience (these aren't legal academics, obviously), letting the board operate as usual. But, academic officers can bring diversity (academia is a lot more diverse than Wall Street), prestige and other intangible benefits, particularly signalling benefits. Of course, every company interviewed showered the outside director with glowing praise, but what else can you expect?

Money and Conflicts about Money. These academics make a lot of outside money, and there's nothing that we hate more than academics making money! But, this might bring us back to the time element. If I am bringing home more money being a director than I am from my day job, am I going to allocate my time wisely? The cautionary tale used here is Ruth J. Simmons, the president of Brown, who was a Goldman director who stepped down this year with stock worth around $4.3 million (probably at the low point). I don't know what Dr. Simmons' academic specialty is, but Minow does not seem to think it was financial derivatives.

And finally, conflicts. As university presidents make contacts at these firms, resulting in contracts with their universities or lucrative partnerships and branding opportunities, when does the director stop being outside? In law, we have several legal tests that require votes of the independent directors. I'm not sure that you are independent if your university has just entered into a $100 million partnership with the firm. Just sayin'.

All that being said, I would be an excellent outside director.

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We talk sometimes here at the Glom about the promise and illusion of outside directors (this is really Lisa's area). Outside directors may be independent and therefore more willing to not "go with the flow," but they may also be less knowledgeable of the firm, the industry, or the business world generally. And the next question is then who is "outside"? Other industry players? Other executive friends of the inside management? Social friends?

The NYT on Sunday probed another set of outside directors: Presidents and other senior administrative officers of public and private universities. Around half of all university presidents sit on at least one corporate board. Many issues are discussed: time, expertise, money, and conflicts about money.

Time. In this post-SOX (and post-Enron and WorldCom individual director settlements) world, outside directors should plan on working hard for their money. This isn't a cushy gig anymore. Personal liability and reputational hits are lurking around every corner. To add value, outside directors have to invest a lot of time: prep time, travel time, meeting time. The example that makes me hyperventilate is Dr. Shirley Jackson, the president of Renssalaer Polytechnic Institute and a theoretical physicist, who at one time served on the boards of six mega-companies (FedEx, Marathon Oil, IBM, etc.). According to Nell Minow of the Corporate Library, outside directors should figure on working 240 hours a year for that company, or 20 hours a month. Six times 20 hours is a lot of hours a month -- almost a full-time job -- in addition to what I already thought was a 24/7 job. The article mentions that the Board of Regents of the U. of California system just voted to limit board membership for its chancellors to three.

Expertise. What are these academic officers bringing to the table? Well, they are the C.E.O.s of huge enterprises. They know something about managing people (including difficult personalities, like law professors). Depending on the firm, they may add some inside scoop on that all-important 18-25 demographic. Also, the research expertise might be a help: a particular science specialty might meld well with a particular firm; a legal academic can serve as a fount of information about the board's legal responsibilities. But in most cases, the expertise the academic officer has may not match up that well. But, they can think "out of the box"? The article suggests that academics in particular tend to stay quiet when outside their experience (these aren't legal academics, obviously), letting the board operate as usual. But, academic officers can bring diversity (academia is a lot more diverse than Wall Street), prestige and other intangible benefits, particularly signalling benefits. Of course, every company interviewed showered the outside director with glowing praise, but what else can you expect?

Money and Conflicts about Money. These academics make a lot of outside money, and there's nothing that we hate more than academics making money! But, this might bring us back to the time element. If I am bringing home more money being a director than I am from my day job, am I going to allocate my time wisely? The cautionary tale used here is Ruth J. Simmons, the president of Brown, who was a Goldman director who stepped down this year with stock worth around $4.3 million (probably at the low point). I don't know what Dr. Simmons' academic specialty is, but Minow does not seem to think it was financial derivatives.

And finally, conflicts. As university presidents make contacts at these firms, resulting in contracts with their universities or lucrative partnerships and branding opportunities, when does the director stop being outside? In law, we have several legal tests that require votes of the independent directors. I'm not sure that you are independent if your university has just entered into a $100 million partnership with the firm. Just sayin'.

All that being said, I would be an excellent outside director.

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