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.