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Alex Todd’s Comment on: The Big Idea: The Case for Professional Boards by Robert C. Pozen

Alex Todd’s Comment on:  The Big Idea: The Case for Professional Boards by Robert C. Pozen

Although I generally agree with Mr. Pozen’s thesis that a sound case can be made in favour of professional directors serving on corporate boards (see also Roger Martin’s HBR blog posting “Management Is Not a Profession — But It Can Be Taught” to which I comment in support of professional directors, albeit for entirely different reasons – http://t.co/Vr878mO), I have concerns about his prescriptive approach that constrains many viable possibilities.

I acknowledge his argument that larger boards make consensus-making more difficult. However, I take issue with his constraint on board size, and would caution against sacrificing perspective for expediency. Let’s leave the expedient decision-making to management. The board needs to be more deliberative. My recommendations would be to adjust the board size based on several sound and predefined, principles-based parameters, as recommended by the Governance Committee.

Which brings me to his second constraint of allowing for only three primary committees (audit, compensation, and nominating) and thereby not only excluding other possibly valid committees (depending on business requirements), but also explicitly excluding the Governance Committee. Granted, it is customary for boards to have a combined Nominating and Governance Committee, but that should in no way diminish the value of the Governance Committee function. In my view, this is the group of corporate directors whose job is to reflect on how the board functions and provide the leadership to appropriately refine and evolve the board’s structures and practices. I wrote about this in the chapter on corporate governance best practices that I contributed to the newly released Robert Kolb Series in Finance reference book “Corporate Governance: A Synthesis of Theory, Research, and Practices”, published by John Wiley & Sons, October 2010 (see http://bit.ly/eTmH9b).

This takes me to Mr. Pozen’s third constraint that requires all directors to have relevant business expertise, with perhaps one generalist for strategy and one accountant for the audit committee. I would agree that every board requires these skills, but find it difficult to restrict each of the two latter roles to only one person. One reason is that generally, more than one corroborating voice is required a message to be heard and seriously considered by the group. The other is that the role of the each of the cited committees requires more professional than industry expertise. The Governance Committee is no exception. It requires directors who are experts in corporate governance, not so much the business (over which the board presides), because whereas the board directs the activities of management the Governance Committee directs the activities of the board.

Finally, on the matter of director compensation, Mr. Pozen constrains the possibilities for influencing the motivations of directors to compensation, despite generalizing that they are already wealthy individuals. I believe elderly, rich directors would be motivate more by other factors, such as their legacy, than by pecuniary inducements. In general, one would expect that a person approaching the end of their life would be motivated more by shorter term than long term considerations, and compensation schemes that pay out over 4 years would similarly be ineffective. Instead, we need professional directors who are young enough to be motivated by long-term considerations that are more broadly designed to rely on more than just compensation. Perhaps a more fitting motivation might be a formal admittance to the “board” (analogous to lawyers being admitted to the bar), followed by opportunities to be recognized for their career of service on boards (similar to being recognized with a prestigious order of merit for public service) as a high-performing corporate director.

In conclusion, I agree with Mr. Pozen that a dedicated cadre of professional directors would make a valuable contribution to improving corporate governance practices, with favourable implications for both business performance and economic prosperity. However, I believe the evolution of corporate governance is better left to guiding principles and organic adaptation than arbitrarily prescriptive rules.

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