At Boardroom INSIDER, I tend not to cover the world of academic research into corporate governance very often. Our emphasis is on the nuts and bolts of board operation, as opposed to concepts such as “agency theory” and reviews of the literature.
But this shouldn’t imply that the world’s academic researchers are not doing important spadework in uncovering how boards function, and how they can better perform their roles. One recent paper offers a bracing reality check on what’s right (and wrong) with our corporate board model. Steven Boivie, of Texas A&M University and a group of researchers have published a paper with the intriguing title “Are Boards Designed to Fail?”
Their view of the board is that it fills an information processing role. It takes in data, results, proposals and indices and gives out monitoring, advice, and decisions. This all sounds good, but Boivie and his co-authors review 50 years of research findings on how boards function and find little consistency in what works and what doesn’t. Theories on what motivates boards to do a good job, characteristics of good directors, and their role in firm governance all seem valid — until they fail. Maybe “there are just too many inherent barriers for directors to monitor managers effectively,” in the words of Boivie and his team.
This seems like a very discouraging conclusion when it comes to corporate governance — we’ve bet on a horse that can never hope to win. But most of us have also learned that the life lessons we’d least like to accept are those most likely to be true. Better still, once we make peace with our corporate board governance model having some inherent, built-in defects, we may be less likely to pursue big, panacea approaches to fixing them. When governance oversight fails, our collective response is to say “Where was the board?” and push for more reporting, higher liabilities, increased director independence and diversity, etc. What if we instead admitted there is no Big Fix for board failure, and focused on little fixes — better corporate controls, improved board materials, meetings and information, and greater use of outside advisors?
The first step in coping with a problem is to accept that there is a problem. But the second is deciding whether there is any alternative. Yes, the corporate board model is flawed. But no, it isn’t going anywhere anytime soon. So let’s try working with what we have.