Directors and Time Management

Elizabeth Nowicki —  11 January 2007

I presented my “Not in Good Faith” paper at Cornell this past fall, and Professor Jeff Rachlinski (behavioral wonk, among other things) asked an interesting question that I would like to mention here.  (Let me remind you that my “not in good faith” paper deals with a director’s obligation to act “in good faith.”  My general position is that courts have been sloppy in reviewing a director’s alleged failure to act in good faith.  Rather than asking the complaining shareholder to show that the director did not do what a director acting “in good faith” would do, the court requires the shareholder to prove affirmative bad faith.)

I note in my paper that I think the directors at the helm of Merck, Tyco, Disney, Enron, etc. when those corporations had their “scandals” were totally qualified, and I do not think that they were acting with evil motives when preventable failings struck their corporate charges.  Rather, I take the position that the old-school director, serving on multiple boards in addition to having a “day job,” just does not have the time to do well his job as director.  There are only so many hours in the day.  I take the position that Disney’s Ovitz compensation fiasco, for example, was caused by a time-pressure oversight gap.  The same can be said about many other corporate problems.  They are not aleatory; the people at the helms of these boards almost always have “other jobs.”

In my paper, I take the position that “professional directors” – directors who have no job other than to be the director of a given corporation or two – are worth considering.  Jeff’s response to that position was something to the effect of “great, let’s take people with no experience and first-hand knowledge and give *them* the senior oversight role of director.”  (I mention Jeff’s specific comment because it made me chuckle.  Jeff is incredibly witty, and, not surprisingly, his comment was a good one.)

My response to Jeff was that I would rather have some 33 year old Wharton grad who has done a few years of consulting or auditing and would give 65 hours per week to the director job in the director role than a 63 year-old senior executive at some major corporation or the 58 year old Dean of a law school.  Those folks just do not have *time* to do a decent job.  As studies have shown, there is a point in the work schedule after which one’s effectiveness actually decreases (as opposed to the typical increase in efficiency of the person who has her time tightly booked).  I do not want *that* person serving as the ultimate back-stop for my corporation.  I would rather resort to “professional directors.”  Of course, I am sure the notion of the “professional director” will not be a big hit.  (By the way, I obviously did not coin the phrase “professional director.”  I borrowed it from Gilson, Kraakman, and Wells, though I am not sure if they coined the term.)

Jeff posed a great point, and I am not sure that there is a perfect answer, except to admit that I am really just taking the lesser of two evils by resorting to professional directors who might lack industry-specific managerial experience.

One response to Directors and Time Management

  1. 

    A director who switches between several jobs would only know the reception area, the lifts to the top floor and the board room of the company.

    During my work as an engineer I learned that once you assign a second project to someone, his productivity drops by 50%. So, if the two projects took a month separately, doing them in parallel would take four months instead of two.

    Applying this rule to the directors problem, it would mean that a director who switches between two jobs would be four times less effective compared to a full-time one.

    Bearing in mind that the 50% rule is exponential, you can make your own conclusion how effective a director who serves on 4 or 5 boards (not uncommon) could be.