Public companies confront wide-ranging and thorny, often technical issues. These range from cyber risk to a wide assortment of other business and enterprise risks, e.g., increased global competition, climate change impacts, pressures from activist shareholders, enhanced bribery and anti-corruption regulations, and challenges to business models posed by new technologies and innovation.
Their boards of directors, as fiduciaries for the companies’ shareholders, are striving to keep up, with the objective of ensuring that, in the face of increasing business complexity, they can continue to effectively oversee company management and ensure that company risks are considered, managed, and disclosed as appropriate.
In response to the specific concern that company boards may not have the technical expertise to oversee their management’s cybersecurity efforts, some Congressional leaders have concluded that the concern should be addressed through “expert-ization” of the board. A bill introduced in the Senate last December, the Cybersecurity Disclosure Act of 2015, would require publicly traded companies to disclose whether any members of their boards of directors are cybersecurity experts, and, if they are not, to report on the steps they are taking to identify and evaluate the cybersecurity expertise of their directors.
We believe that the thinking behind this bill — that today’s board of directors needs to be a collection of subject matter experts — is in fact a threat to good corporate governance.
Our concern is that moving in the direction of assigning board seats by specific expertise will weaken the functioning of company boards. Boards comprised of members who bring to the table a balanced mix of judgment and wisdom, as well as professional accomplishments, experiences, and backgrounds that give them insights into the relevant industry and the issues confronting their companies, and who can operate collegially and welcome challenges to their fellow members’ mindsets and conclusions, are best situated to perform their fiduciary duties on behalf of company investors.
Selecting a particular member for her expertise in one specific technical area may dilute the board’s breadth of expertise and standing. It also may curtail the board’s working together to review with skepticism company management’s reports and representations about areas within the expert’s expertise. Instead, board members would be expected to defer to the opinions of their “expert” member-colleague. This would silo the board. And a board with a specific subject matter expert might conclude that it need not engage expert advisers in that subject matter to assist it, when in fact outside experts potentially could provide more current and more useful advice to the board in respect of the subject matter than their expert member.
We believe that, in lieu of a push to expert-ization of corporate boards, the focus should be on board empowerment — that is, arming board members with the full authority and the resources they need to engage their own experts to assist the board in its efforts to guide and oversee management in an educated and meaningful way. This means making sure that the board has an appropriately sized budget that it can use to ensure it has the appropriate, independent support to provide the constructive but skeptical oversight of company management that investors expect and deserve.
Certainly boards cannot be expected to oversee highly technical areas entirely on their own. They need navigational expertise and should not be forced to rely on management personnel or management-identified experts to frame the issues for them. Perhaps it is not surprising that we as lawyers believe that the board’s first hire in this regard should be an independent legal adviser who can serve as the board’s quarterback and counsel the board on the actions it should take in discharge of its fiduciary obligations to shareholders. Looking to lawyers for primary assistance provides three advantages:
To be clear, the central challenge posed by the complexity of the issues facing boards of directors today is how to ensure that a board is suitably informed about the issues without either overwhelming the directors with factual detail or diluting the board’s effectiveness through the addition of subject matter experts who may have neither judgment nor wisdom, and may lack the standing conferred by breadth of professional accomplishments, experiences, and backgrounds, to act or advise as directors in areas beyond their own subject matter expertise.
We believe that board appointment of an independent counsel and board use of subject-matter experts that counsel retains at the direction of the board represent constructive first steps in addressing the crucial governance concern — how to empower boards, instead of expert-izing them. We should not allow the technical — albeit critical — issues companies are confronting to overtake boards of directors’ primary role in corporate governance.
Michael D. Mann, Eva Marie Carney, William P. Barry, and Jeffrey A. Lehtman, partners in the Washington, D.C., office of Richards Kibbe & Orbe LLP, advise public companies and their boards of directors, audit committees, and senior management on corporate governance matters.