Lipton on Boards of Directors in 2013

Having just completed my first week of teaching Corporations, I thought it might be a good idea to briefly review Martin Lipton’s “Some Thoughts for Boards of Directors in 2013,” which was posted over at The Harvard Law School Forum on Corporate Governance and Financial Regulation on December 31, 2012.  By way of background for anyone not familiar with Lipton, you can find his official profile here, and Wikipedia notes (here):

In 1979 Lipton authored “Takeover Bids in the Target’s Boardroom”, the seminal article advocating the right of a board of directors to take into account the interests of all the constituencies of the corporation, a position adopted by the Delaware Supreme Court in 1985, and in more than thirty other states by statute or judicial decision and in the Companies Act 2006 of Great Britain…. In 1982 Lipton created the Shareholders Rights Plan or poison pill, which has been described by Ronald Gilson of the Columbia and Stanford Law Schools as "the most important innovation in corporate law since Samuel Calvin Tate Dodd invented the trust for John D. Rockefeller and Standard Oil in 1879." 

Lipton starts his post by bemoaning that: “The assault on the director-centric model of corporate governance continues in the shareholder activist and political arenas ….”  He then goes on to note 8 key issues facing boards in 2013:

1. Short-Termism;
2. Shareholder Activism;
3. Balancing the Roles of Business Partner and Monitor;
4. CEO Succession Planning;
5. Board Composition;
6. Special Investigations;
7. Say on Pay; and,
8. Corporate Governance “Best Practices”

While the entire post is clearly worth reading, what caught my attention was the following:

The workload and time commitment required for board service continues to escalate; the 2012 Public Company Governance Survey of the National Association of Corporate Directors reported that public company directors spent on average over 218 hours performing board-related activities, compared to the 155 hours reported in 2003.

First of all, anyone following our Director Compensation Project, wherein we noted that, “More than a dozen public company boards had directors whose compensation averaged more than $500,000 in 2011,” will realize that this equals a very nice hourly rate for at least some directors.  Second, I believe one seriously has to question whether directors, no matter how much expertise and brilliance they bring to the job, can carry out all their monitoring duties by devoting what amounts to roughly 4 hours per week to the job.  Lipton notes that there has been a rise of presumably full-time corporate governance board secretaries, and this may be a step in the right direction, but I continue to wonder whether the complexities of overseeing at least the largest of corporate enterprises might not require us to reconsider the entire part-time director model.  Obviously, this is not a new idea.  For example, Ronald J. Gilson & Reinier Kraakman wrote, in “Reinventing the Outside Director: An Agenda for Institutional Investors,” 43 STAN. L. REV. 863, 885 (1991):

We propose to create a novel position, that of the professional outside director, that would exist prior to, and apart from, the election of other directors to the boards of portfolio companies…. the new position would require a full-time commitment, and would obligate each expert to serve on the boards of perhaps six portfolio companies.

Comments

[James McRitchie]

Great post. For years, CalPERS used to reimburse the agencies of working member-elected directors for 25% of the director's salary... the implication being they would need to spend at least 25% of their workday on CalPERS business.

I'm not sure what has happened to that legal standard but over the years CalPERS directors spent an increasing proportion of time on their work as board members. Like corporate board members, they have thousands of pages of material to review each month. However, unlike most corporate board members, they meet monthly and also spend a lot of time meeting with their constituents.

I'm not saying corporate boards should try to replicate the CalPERS model but I agree with you that being a good corporate director probably takes more than 4 hours a week. Gilson's idea of limiting directors to 6 seats doesn't seem tight enough to me; even four may be too many.