Directors and Time Management

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.